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 29, 2018 (our fiscal years 2018, 2017 and 2016). 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 (the “Company” or “we” or “our” or “us”) is the largest rural lifestyle retailer 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 29, 2018, we operated 1,940 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 Company 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, including leverage of technology, 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 1,276 stores at the end of fiscal 2013 to 1,940 stores (1,765 Tractor Supply and Del’s retail stores and 175 Petsense retail stores) at the end of fiscal 2018, and in net sales, with a compounded annual growth rate of approximately 8.9%. 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 700 additional opportunities for new Tractor Supply stores. We also believe that there is opportunity for up to 1,000 Petsense stores.

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Executive Summary

In fiscal 2018, we opened 80 new Tractor Supply stores in 33 states and 18 new Petsense stores in 14 states. In fiscal 2017, we opened 101 new Tractor Supply stores and 25 new Petsense stores. This resulted in a selling square footage increase of approximately 4.9% in fiscal 2018 and approximately 6.3% in fiscal 2017.

Net sales increased 9.0% to $7.91 billion in fiscal 2018 from $7.26 billion in fiscal 2017. Comparable store sales increased 5.1% in fiscal 2018 versus a 2.7% increase in fiscal 2017. Gross profit increased 8.4% to $2.70 billion in fiscal 2018 from $2.49 billion in fiscal 2017, and gross margin decreased 18 basis points to 34.16% of net sales in fiscal 2018 from 34.34% of net sales in fiscal 2017. Operating income decreased 59 basis points to 8.87% of net sales in fiscal 2018 from 9.46% of net sales in fiscal 2017. For fiscal 2018, net income was $532.4 million, or $4.31 per diluted share, compared to $422.6 million, or $3.30 per diluted share, in fiscal 2017. 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 $86.3 million in cash and outstanding debt of $407.4 million, after returning $496.9 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 the 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 inventory impairment reserve as of December 29, 2018, would have affected net income by approximately $0.8 million in fiscal 2018.

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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 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 29, 2018, would have affected net income by approximately $2.2 million in fiscal 2018.
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 2018. If a 10% reserve had been applied against our outstanding vendor funding due as of December 29, 2018, net income would have been affected by approximately $1.7 million in fiscal 2018. 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 29, 2018, net income would have been affected by approximately $11.7 million in fiscal 2018.

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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 29, 2018, would have affected net income by approximately $5.1 million in fiscal 2018.
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.

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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 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.

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Quarterly Financial Data

Our unaudited quarterly operating results for each fiscal quarter of 2018 and 2017 are shown below (in thousands, except per share amounts):

		First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total
2018		(13 weeks)				(13 weeks)				(13 weeks)				(13 weeks)				(52 weeks)
Net sales		$	1,682,901			$	2,213,249			$	1,881,625			$	2,133,271			$	7,911,046
Gross profit		563,649				769,414				653,132				716,333				2,702,528
Operating income		94,749				273,458				153,148				180,382				701,737
Net income		71,433				207,289				116,784				136,851				532,357
Net income per share:
Basic		$	0.57			$	1.70			$	0.96			$	1.12			$	4.34
Diluted		$	0.57			$	1.69			$	0.95			$	1.11			$	4.31
Comparable store sales increase (a)		3.7		%		5.6		%		5.1		%		5.7		%		5.1		%

		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		%

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

Results of Operations

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

	Fiscal Year
	2018			2017			2016
Net sales	100.00	%		100.00	%		100.00	%
Cost of merchandise sold (a)	65.84			65.66			65.70
Gross margin (a)	34.16			34.34			34.30
Selling, general and administrative expenses (a)	23.05			22.60			21.95
Depreciation and amortization	2.24			2.28			2.11
Operating income	8.87			9.46			10.24
Interest expense, net	0.23			0.19			0.09
Income before income taxes	8.64			9.27			10.15
Income tax expense	1.91			3.45			3.70
Net income	6.73	%		5.82	%		6.45	%

(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 facility network in cost of merchandise sold and others (like our Company) exclude a portion of these distribution facility 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 the Consolidated Financial Statements, included in Item 8 Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

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Fiscal 2018 Compared to Fiscal 2017

Net sales increased 9.0% to $7.91 billion in fiscal 2018 from $7.26 billion in fiscal 2017. Comparable store sales for fiscal 2018 were $7.63 billion, a 5.1% increase over fiscal 2017. This compares to a 2.7% comparable store sales increase in the prior year. The comparable store transaction count increased 2.2% and comparable store average ticket increased 2.8% for fiscal 2018.

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 broad-based across all merchandise categories and all geographic regions. The growth in comparable store sales was led by strength in everyday merchandise, including consumable, usable, and edible (“C.U.E.”) products, along with strong demand for seasonal merchandise in each quarter of the year.

In addition to comparable store sales growth in fiscal 2018, sales from stores opened less than one year were $300.5 million in fiscal 2018, which represented 4.1 percentage points of the 9.0% increase over fiscal 2017 net sales. Sales from stores opened less than one year, including acquired Petsense stores, were $405.0 million in fiscal 2017, which represented 6.0 percentage points of the 7.0% increase over fiscal 2016 net sales.

The following table summarizes our store growth during fiscal 2018 and 2017:

		Fiscal Year
Store Count Information:		2018			2017
Tractor Supply
Beginning of period		1,685			1,595
New stores opened		80			101
Stores closed		—			(11	)
End of period		1,765			1,685
Petsense
Beginning of period		168			143
New stores opened		18			25
Stores closed		(11	)		—
End of period		175			168
Consolidated end of period		1,940			1,853
Stores relocated		4			3

The following table indicates the percentage of net sales represented by each of our major product categories during fiscal 2018 and 2017:

		Percent of Net Sales
		Fiscal Year
Product Category:		2018			2017
Livestock and Pet		47	%		47	%
Hardware, Tools and Truck		22			22
Seasonal, Gift and Toy Products		19			19
Clothing and Footwear		8			8
Agriculture		4			4
Total		100	%		100	%

Gross profit increased 8.4% to $2.70 billion in fiscal 2018 compared to $2.49 billion in fiscal 2017. As a percent of net sales, gross margin decreased 18 basis points to 34.16% for fiscal 2018 compared to 34.34% for fiscal 2017. The decline in gross margin resulted primarily from an increase in freight expense driven by higher carrier rates and increased diesel fuel prices as well as a

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negative impact from a mix shift of products sold during the fourth quarter, partially offset by strength in the Company’s price management program and strong sell through of seasonal merchandise throughout the year.

Total selling, general and administrative (“SG&A”) expenses, including depreciation and amortization, increased 10.8% to $2.00 billion in fiscal 2018 from $1.81 billion in fiscal 2017. SG&A expenses, as a percent of net sales, increased 41 basis points to 25.29% in fiscal 2018 from 24.88% in fiscal 2017. SG&A expenses increased as a percentage of net sales due principally to higher incentive compensation from the strong year-over-year growth in comparable store sales, along with planned investments in infrastructure, technology, and team member wages at both the stores and distribution centers, to support the Company’s long-term strategic growth initiatives. These SG&A increases as a percent of net sales were partially offset by leverage in occupancy and other costs from the increase in comparable store sales.

Our effective income tax rate decreased to 22.1% for fiscal 2018 compared to 37.2% in fiscal 2017. The decrease in the effective income tax rate was primarily related to the U.S. Tax Cuts and Jobs Act (the “TCJA”) that was signed into law in December 2017 which made 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% for years beginning after December 31, 2017. To a lesser extent, the effective income tax rate in fiscal 2018 also incrementally benefited from state investment credits and share-based compensation. The tax legislation also increased the effective income tax rate in fiscal 2017 due to the revaluation of the Company’s existing deferred tax balances at the lower federal income tax rate.

Net income in fiscal 2018 was $532.4 million, or $4.31 per diluted share, compared to $422.6 million, or $3.30 per diluted share, in fiscal 2017. Excluding the impact of the revaluation of the Company’s net deferred tax asset in fiscal 2017 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 2018, we repurchased approximately 5.0 million shares of the Company’s common stock at a total cost of $349.8 million as part of our $3 billion share repurchase program. In fiscal 2017, we repurchased approximately 5.9 million shares at a total cost of $369.4 million.

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 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 acquired Petsense stores, were $378.9 million in fiscal 2016, which represented 6.1 percentage points of the 8.9% increase over fiscal 2015 net sales.

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

		Fiscal Year
Store Count Information:		2017			2016
Tractor Supply
Beginning of period		1,595			1,488
New stores opened		101			113
Stores closed		(11	)		(6	)
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

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
		Fiscal Year
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.

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. As a result of the TCJA, we made a reasonable estimate of the effects of the tax legislation on our existing deferred tax balances as of December 30, 2017, and recognized a one-time, non-cash charge of $4.9 million, which is included as a component of income tax expense from continuing operations in fiscal 2017. Excluding the impacts of the TCJA, our effective income tax rate in fiscal 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 in fiscal 2017 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

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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.

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 2019.

Working Capital

At December 29, 2018, the Company had working capital of $856.3 million, which increased $50.1 million from December 30, 2017. The shifts in working capital were attributable to changes in the following components of current assets and current liabilities (in millions):

	December 29, 2018				December 30, 2017				Variance
Current assets:
Cash and cash equivalents	$	86.3			$	109.1			$	(22.8	)
Inventories	1,589.5				1,453.2				136.3
Prepaid expenses and other current assets	114.5				88.3				26.2
Income taxes receivable	4.1				4.8				(0.7		)
Total current assets	1,794.4				1,655.4				139.0
Current liabilities:
Accounts payable	620.0				576.6				43.4
Accrued employee compensation	54.0				31.6				22.4
Other accrued expenses	232.4				201.7				30.7
Current portion of long-term debt	26.3				25.0				1.3
Current portion of capital lease obligations	3.6				3.5				0.1
Income taxes payable	1.8				10.8				(9.0		)
Total current liabilities	938.1				849.2				88.9
Working capital	$	856.3			$	806.2			$	50.1

In comparison to December 30, 2017, working capital as of December 29, 2018 was impacted most significantly by changes in our inventory, accounts payable and other accrued expenses.

•

The increase in inventory is principally due to new store growth and the investment in additional inventory to support the new northeast distribution center in Frankfort, New York, which began receiving merchandise in the fourth quarter of fiscal 2018, and is expected to begin shipping merchandise to our stores in the first quarter of fiscal 2019. To a lesser extent, the increase in inventory was also impacted by commodity inflation. We actively manage our inventory balances and in-stock levels at our stores.

•	Accounts payable increased primarily as a result of the increase in inventory and new store growth.

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

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As discussed in Note 15 to the Consolidated Financial Statements, the Company will adopt new guidance related to lease accounting in the first quarter of fiscal 2019 which will result in the Company recognizing a right-of-use asset and a corresponding lease liability on its balance sheet. The Company expects the adoption of this new guidance to have a negative impact to working capital of approximately $250 million to $300 million due to the recognition of a current portion of operating lease obligations. The guidance will be adopted on a prospective basis in fiscal 2019 so prior periods will no longer be comparable.

Debt

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

		December 29, 2018				December 30, 2017
Senior Notes		$	150.0			$	150.0
Senior Credit Facility:
February 2016 Term Loan		165.0				180.0
June 2017 Term Loan		93.8				97.5
Revolving credit loans		—				—
Total outstanding borrowings		408.8				427.5
Less: unamortized debt issuance costs		(1.4		)		(1.4		)
Total debt		407.4				426.1
Less: current portion of long-term debt		(26.3		)		(25.0		)
Long-term debt		$	381.1			$	401.1
Outstanding letters of credit		$	33.5			$	39.6

For additional information about the Company’s debt and credit facilities, refer to Note 5 to the Consolidated Financial Statements. 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 Senior Credit Facility.

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 fiscal years 2018, 2017, and 2016 (in millions):

	Fiscal Year
	2018				2017				2016(a)
	(52 weeks)				(52 weeks)				(53 weeks)
Net cash provided by operating activities	$	694.4			$	631.5			$	650.7
Net cash used in investing activities	(276.3		)		(238.0		)		(369.3		)
Net cash used in financing activities	(440.9		)		(338.3		)		(291.3		)
Net (decrease) increase in cash and cash equivalents	$	(22.8	)		$	55.2			$	(9.9	)

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

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Operating Activities

Operating activities provided net cash of $694.4 million, $631.5 million, and $650.7 million in fiscal 2018, 2017, and 2016, respectively. The $62.9 million increase in net cash provided by operating activities in fiscal 2018, compared to fiscal 2017, was due to changes in the following (in millions):

	Fiscal Year								Variance
	2018				2017
	(52 weeks)				(52 weeks)
Net income	$	532.4			$	422.6			$	109.8
Depreciation and amortization	177.4				165.8				11.6
Share-based compensation expense	28.9				29.2				(0.3		)
Deferred income taxes	11.9				26.7				(14.8		)
Inventories and accounts payable	(92.9		)		(26.5		)		(66.4		)
Prepaid expenses and other current assets	(26.2		)		2.3				(28.5		)
Accrued expenses	58.8				(3.9		)		62.7
Income taxes	(8.4		)		4.2				(12.6		)
Other, net	12.5				11.1				1.4
Net cash provided by operating activities	$	694.4			$	631.5			$	62.9

The $62.9 million increase in net cash provided by operating activities in fiscal 2018, compared to fiscal 2017, primarily reflects incremental profitability, partially offset by the increase in inventory, net of accounts payable, to support new store growth and the net impact of changes in our operating assets and liabilities which fluctuated due primarily to new store growth and the timing of payments.

The $19.2 million decrease in net cash provided by operating activities in fiscal 2017, as compared to fiscal 2016, was due to changes in the following (in millions):

	Fiscal Year								Variance
	2017				2016(a)
	(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, excess tax benefits on stock options exercised are no longer presented as a separate line item in the Consolidated Statements 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.

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Investing Activities

Investing activities used cash of $276.3 million, $238.0 million, and $369.3 million in fiscal 2018, 2017, and 2016, 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 2018, 2017, and 2016 were as follows (in millions):

	Fiscal Year
	2018				2017				2016
	(52 weeks)				(52 weeks)				(53 weeks)
Information technology	$	86.7			$	82.1			$	40.5
Distribution center capacity and improvements	82.0				45.8				21.0
New and relocated stores and stores not yet opened	68.0				79.3				111.2
Existing stores	41.5				43.0				53.1
Corporate and other	0.3				0.2				0.2
Total capital expenditures	$	278.5			$	250.4			$	226.0

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 program, and other long-term strategic growth initiatives.

Spending for distribution center capacity and improvements increased in fiscal 2018 and 2017 related to the construction of the new northeast distribution center in Frankfort, New York, and the expansion of our distribution center in Waverly, Nebraska. The new northeast distribution center in Frankfort, New York is nearing completion as it began receiving merchandise in the fourth fiscal quarter of 2018 and is expected to begin shipping merchandise to our stores in the first fiscal quarter of 2019. The expansion of the Waverly, Nebraska distribution center was completed during fiscal 2018.

The above table reflects an investment in 80 new Tractor Supply stores, 18 new Petsense stores, and four store relocations during fiscal 2018. In fiscal 2017, we opened 101 new Tractor Supply stores, 25 new Petsense stores, and had three store relocations. In fiscal 2016, we opened 113 new Tractor Supply stores, began operating 143 Petsense stores (including 8 new stores after acquisition), and had three store relocations.

Spending on existing stores principally reflects routine refresh activity. Spending in fiscal 2016 was higher than spending in fiscal 2018 and 2017 due to the investment in the chain-wide LED lighting retrofit, which began in fiscal 2016 and was completed in fiscal 2017.

Our projected capital expenditures for fiscal 2019 principally include a plan to open approximately 80 new Tractor Supply stores and 10 to 15 new Petsense stores, continued improvements in technology and infrastructure at our existing stores, and ongoing investments to enhance our digital and omni-channel capabilities to better serve our customers.

Financing Activities

Financing activities used cash of $440.9 million, $338.3 million, and $291.3 million in fiscal 2018, 2017, and 2016, respectively.

The $102.6 million increase in net cash used in financing activities in fiscal 2018, compared to fiscal 2017, was due to changes in the following (in millions):

	Fiscal Year
	2018				2017				Variance
	(52 weeks)				(52 weeks)
Net borrowings and repayments under debt facilities	$	(18.8	)		$	152.5			$	(171.3	)
Repurchase of common stock	(349.8		)		(369.4		)		19.6
Net proceeds from issuance of common stock	79.6				16.3				63.3
Cash dividends paid to stockholders	(147.1		)		(133.8		)		(13.3		)
Other, net	(4.8		)		(3.9		)		(0.9		)
Net cash used in financing activities	$	(440.9	)		$	(338.3	)		$	(102.6	)

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The increase in net cash used in financing activities in fiscal 2018, compared to fiscal 2017, is largely due to a decrease in borrowings, net of repayments, under our debt facilities, partially offset by an increase in proceeds from the issuance of common stock associated with the exercise of share-based compensation awards.

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):

	Fiscal Year
	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, excess tax benefits on stock options exercised are no longer presented as a separate line item in the Consolidated Statement of Cash Flows. The presentation of fiscal 2016 has been adjusted to conform to the current presentation.

The increase in net cash used in financing activities in fiscal 2017, as compared to fiscal 2016, is 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.

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 5.0 million, 5.9 million, and 4.4 million shares of common stock under the share repurchase program at a total cost of $349.8 million, $369.4 million, and $331.7 million in fiscal 2018, 2017, and 2016, respectively. As of December 29, 2018, the Company had remaining authorization under the share repurchase program of $520.0 million, exclusive of any fees, commissions, or other expenses.

Cash Dividends Paid to Stockholders

We paid cash dividends totaling $147.1 million, $133.8 million, and $122.3 million in fiscal 2018, 2017, and 2016, respectively. In fiscal 2018, we declared and paid cash dividends to stockholders of $1.20 per common share outstanding as compared to $1.05 and $0.92 per common share outstanding in fiscal 2017 and fiscal 2016, respectively. These payments reflect an increase in the quarterly dividend in the second quarter of fiscal 2018 to $0.31 per share from $0.27 per share and an increase in the quarterly dividend in the second quarter of fiscal 2017 to $0.27 per share from $0.24 per share.

It is the present intention of the Company’s Board of Directors to continue to pay a quarterly cash dividend; however, the declaration and payment of future dividends will be determined by the Company’s 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 Company’s Board of Directors deem relevant.

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Significant Contractual Obligations and Commercial Commitments

The following table reflects our future obligations and commitments as of December 29, 2018 (in thousands):

		Payment Due by Period
		Total				2019				2020-2021				2022-2023				Thereafter
Operating leases		$	2,700,814			$	344,836			$	635,161			$	544,845			$	1,175,972
Capital leases (a)		43,064				5,215				10,528				7,152				20,169
Long-term debt (b)		483,442				37,280				80,181				184,747				181,234
		$	3,227,320			$	387,331			$	725,870			$	736,744			$	1,377,375

(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.

At December 29, 2018, there were $33.5 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

The Company adopted new accounting guidance related to revenue recognition in the first quarter of fiscal 2018 using the modified retrospective transition method. The adoption of this guidance did not have a material impact on our Consolidated Financial Statements and related disclosures.

Refer to Note 15 to the Consolidated Financial Statements for recently adopted accounting pronouncements and recently issued pronouncements not yet adopted as of December 29, 2018.

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