Q3 2019 Earnings Call
Good afternoon, and welcome to the five below third quarter 2019 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then to.
Please note this event is being recorded.
I would now let's turn the conference over to Christiana Pelton, Vice President of Investor Relations. Please go ahead.
Thank you Gary good afternoon, everyone and thanks for joining us today for five below third quarter 2019 financial results Conference call on today's call, our Joel Anderson, President and Chief Executive Officer, and Campbell, Chief Financial Officer, and Treasurer. After management has made their formal remarks, well open the call to question.
I need to remind you that certain comments made during this call may constitute forward looking statements and are made pursuant to and within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 as amended such forward looking statements are subject to both known and unknown risks and uncertainties.
That could cause actual results to differ materially from set statements. Those risks and uncertainties are described in the press release and our SEC filings.
Forward looking statements made today our acid the date of this call and we do not undertake any obligation to update our forward looking statement.
He does not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our website at five below Dotcom I will now turn the call over to John .
Thank you Cristiana and thanks, everyone for joining us for our third quarter earnings call.
I will review the highlights of the quarter before handing it over to Ken to discuss our financials and our outlook and then we'll open the call up for questions.
We're pleased to have delivered a strong Q3 sales came in above our outlook, increasing 21% to 377 million.
And earnings per share of 18 cents beat our guidance range by a penny.
We saw continued outperformance of our new stores and comp growth of 2.9%.
Driven by increases in both basket and transactions.
New store performance was again, a highlight of our third quarter results. During Q3, we opened 61, new stores, which is six more than planned and the most stores we've ever open in a single quarter.
Our new store count to 144 stores at the end of Q3, and we have sense opened six more to complete our planned 150, new stores for the year.
We opened in diverse markets across 24 states and seven of these Q3, new stores made our top 25, all time ball Grand opening list.
New markets ranged from Lincoln, Nebraska, Tulsa, Oklahoma, as well as Fresno, California, illustrating yet again, the breadth of five Belows appeal.
With an industry, leading less than one year average payback period on our new store investment.
New stores remain the best use of our capital.
During the third quarter, we once again experienced broad based performance across our eight worlds led by style Tech Candy and room.
In addition to a strong back to school season, a variety of trends contributed to our results, including journaling and gaming as well as movie related trends.
We set our frozen to displays at the beginning of October in preparation for the much anticipated movie release on November 22nd.
Our merchandising teams did an excellent job sourcing this assortment with exclusive items and incredible deals and the displays are truly impressive.
The range of products is quite broad with kids teas styling accessories, and jewelry as well as plus.
We are different company since last movie debuted in 2013, we have tripled our size generating substantial scale benefits.
Our merchandising group led by Michael Remanco has developed a direct relationship with Disney with access to exclusive products and we have increased brand awareness through targeted marketing, including social media.
All of this has enabled our teams to prepare for and capitalize on this exciting trend.
Moving on to pricing on October 18.
Our tech World pricing went from $5 to 555 for most tech products.
As we previously mentioned breaking the $5 price point was a decision we did not take lightly.
We tested the idea in three major metro markets for several months before rolling it out to the chain.
As we discussed on the second quarter call during the testing period, we listen to our customers and based on their feedback we made additional changes to be as transparent as possible.
While prices have gone up slightly by sense not dollars. The vast majority of skews remain at $5 and below.
And the elasticity results have been inline with our expectations.
Our goal remains to continue to source and deliver extreme value products to our customers without compromising on quality.
Our growing scale, expanding vendor relationships and strong sourcing teams further strengthen our ability to do this.
In addition, we are continuing to execute against our key strategic initiatives, namely marketing people systems and infrastructure as we continue to ensure we have a solid foundation to support future growth.
We're also focused on elevating the customer and associate experience through innovation.
Which is a top priority for us.
Several of our innovation initiatives are focused on the store experience, namely the remodel program.
The Reimagine front end or RFP.
The 10 below test.
As well as our recent investment and a gaming company called Nerd Street gamers.
First with regards to our remodel program.
We are on track to complete 50 Remodels for 2019.
The feedback from our customers in the store teams about the difference in the shopping experience continues to be very positive.
And our Remodels of generated a mid single digit comp lift in their first full year post remodel.
We still expect to remodel a total of approximately 300 stores over the next few years.
The higher number of Remodels next year as compared to this year.
Second the Reimagine front end experiences now in about 160 stores.
Including most of the new stores and Remodels.
The benefits of the new RFP include shorter lines and expanded imposed section and better associate engagement, which all combined should translate into an improved customer experience during the upcoming peak holiday shopping weeks.
The third area of innovation, we are developing is 10 below.
Our in store test, providing extreme value merchandise at price points above $5 and up to 10.
The concept is now in about 25 stores.
The customers are responding very positively to this test.
As they see the extreme value tableau provides.
The higher price points create an opportunity to expand our offering.
To provide even more value to our customers.
In addition.
This test has generated valuable learnings that we use to develop the chain wide 10 below gift shop for holiday that I will discuss in a moment.
Fourth and our newest innovation is our investment in nursery gamers.
This is an example of how we continuously look for opportunities to enhance the store experience.
I've enjoyed getting to know John Fazio, their CEO and I'm excited about the many capabilities nursery gamers offers as we begin to position ourselves to capture this growing gaming trends.
There are over 64 million gamers under the age of 17 in the United States and we believe nursery gamers has a real potential to be not only a longer term traffic driver to our stores, but also a standalone leader any sports.
We plan to test a handful of nerd Street local hosts and our store in store format next year.
The space will be available for gamers to play on pro level equipment and will also include an assortment of relevant by below products for sale, such as gaming headphones and snacks.
We will have more to share in this exciting new partnership after we opened the pilot stores next year.
Onto the all important Q4.
Those of you know our business well know that the largest volume weeks lie ahead.
We believe we are well position with our assortment and marketing plan heading into these peak holiday weeks.
In addition to the frozen to offering I discussed earlier.
At the beginning of the fourth quarter, we added an eight foot holiday 10 below gift shop in the new and now area to all of our stores for the first time ever.
This new while wall as we call it displays a dozen or so incredible brand new products and unbeatable quality and value in the six to $10 range.
The items are perfect for gift, giving and are largely toys and games focus.
With branded items from several of our key vendors, which we showcased in our black Friday add last week.
While we're very excited to offer these new high value items, which we previously would not have been able to sell at $5 and below.
We also have a great lineup of one to five dollar toys and games, including items exclusive to buy below.
We are constantly thinking ways to our customer.
Even further and believe this new offering reinforces by below as the go to destination for amazing holiday gifts and stocking Stuffers Adam beautiful values.
On the marketing front.
We've extended our TV reach to over 60% of our stores, adding 12 new markets.
We also broaden our digital presence and are running campaigns across more markets part of our digital strategy includes testing social Influencers and we're thrilled to announce our new holiday Influencer Noah's snap from Stranger things.
So to summarize.
We feel great about our product assortment, our marketing plan in the store experience, we will provide customers in the fourth quarter.
In closing we were very pleased with our third quarter performance on many fronts, including exceeding our sales and EPS outlook, while executing our pricing changes and preparing for the all important Q4.
Well, we're anniversarying the first holiday season, without Toysrus, which benefited our traffic in sales last year, our merchants have done a phenomenal job assuring we have new exciting and even exclusive product for Q4 to continue to Wow our customers.
I want to thank our entire organization and vendor partners for their hard work and commitment to providing fresh high quality trend right products at amazing values, Dan and day out as well as a critical contributions to our tariff mitigation strategies.
Through their efforts, we've been able to deliver offsets to mitigate the dollar impact of tariffs and we expect to continue to do so.
I also want to thank our customers for their continued support as we evolved our approach to pricing.
We are deeply appreciative of their loyalty and want them to know.
That what we will never change of five below is our unwavering commitment to a variety our customers extreme value on fresh high quality trend right products in a fun differentiated shopping experience with that I'll turn it over to Ken Ken.
Thanks, Joe and good afternoon, everyone.
I will begin my remarks with a review of our third quarter results and then discuss our outlook for the fourth quarter and full year.
As a reminder, we adopted the new lease accounting standard at the beginning of this year, which requires us to now record operating leases on our balance sheet and also requires us to expense certain architectural and legal fees, which we previously capitalized.
Our sales in the third quarter 2019 were $377.4 million.
Up 20.7% from $312.8 million reported in the third quarter of 2018.
We opened 61, new stores during the quarter with over half completed in the last five weeks of Q3 compared to 53, new stores opened in the third quarter of 2018.
We ended the quarter with 894 stores, an increase of 149 stores or 20% versus 745 stores at the end of the third quarter of 2018.
Comparable sales increased by 2.9% with an increase in comp ticket of 1.9% and a comp transaction increase of 1%.
As I mentioned on our last earnings call, we expected approximately 175 basis points of operating margin de leverage in the third quarter.
Our actual operating margin for the third quarter declined by approximately 160 basis points over the third quarter of 2018.
Gross profit for the third quarter increased 16.3%.
To $118.7 million from $102.1 million reported in the third quarter of 2018.
Gross margin decreased approximately 120 basis points to 31.4%.
Primarily due to net unmitigated tariff costs and the shift of certain other merchandise costs from Q2 Q3.
As a percentage of sales SGN a for the third quarter of 2019 increased approximately 40 basis points to 21, I'm sorry, 28.1%.
SGN a expenses as a percent of sales were higher than last year due primarily to depreciation costs of our new southeast distribution center and the new lease accounting standard impact.
Labour and signage costs related to the pricing changes, we implemented as part of our tariff mitigation strategy were offset by corporate expense savings.
As a result operating income decreased 18.4% to $12.7 million versus.
Versus $15.5 million in the third quarter of 2018.
Our effective tax rate for the third quarter of 2019 was 24.2% compared to 18.6% in third quarter of 2018.
Our tax rate last year was favorably impacted by share based accounting.
Net income decreased 24.6% to $10.2 million versus $13.5 million last year.
Earnings per diluted share for the third quarter was 18 cents compared to last years 24 cents per diluted share driven primarily by the margin factors I just described.
Last year's third quarter had a share based accounting benefit of approximately two cents.
We ended the third quarter with $132 million and cash cash equivalents and investments and no debt.
We repurchased approximately 191000.
Of our shares at a cost of $28.3 million during the third quarter.
To date in 2019, we have repurchased approximately 338000 shares at a total cost of $36.9 million.
Inventory at the end of the third quarter was $419 million as compared to $340 million at the end of the third quarter last year.
Average inventory on a per store basis increased 2.8% versus the third quarter last year.
Due primarily to the timing of fourth quarter merchandise receipts.
We're pleased with a leveling quality of our inventory exiting the third quarter and heading into the holiday selling season.
Now I would like to turn to our guidance as a reminder, our guidance does not include any future impact from share based accounting or share repurchases.
We will update our guidance quarterly with actual reported results, but as is our practice, we will not guide to the potential future impact from these items.
Based on our year to date performance, we are raising the low end of our guidance range for fiscal 2019.
Our guidance includes all announced Harris as detailed in our press release and also includes the benefits of our mitigation efforts.
For fiscal 2019, we expect sales to be in the range of $1.877 billion to $1.892 billion, an increase of 20.4% to 21.3%.
The comparable sales increase as expected to be approximately 2.5%.
We have now completed our planned 150, new store openings for 2019 and expect to end the year with 900 stores or unit growth of 20%.
The majority of these new stores were opened in existing markets.
Our full year guidance still assumes the slight operating margin declined due primarily to the cost of opening our new owned southeast distribution center and the new lease accounting standard both of which impact SGN a.
We expect a full year effective tax rate for 2019 of approximately 22%.
Which reflects the year to date benefit from share based accounting through the third quarter.
Net income is expected to be in the range of $175.4 million to $179.9 million, representing a growth rate of approximately 17.2% to 20.2% over 2018 with diluted earnings per share in the range of $3, an 11 cents to $3 in 90.
Defense.
Diluted earnings per share are expected to grow by 16.9% to 19.9%.
With respect to Capex, we plan to spend in total approximately $210 million in 2019 in gross capex, excluding the impact of tenant allowances.
This reflects the investment in the new Southeast distribution center payments on the New Texas distribution Center and the costs of opening 150, new stores 50, Remodels and investments in systems and infrastructure.
For the fourth quarter ending February Onest 2020, net sales are expected to be in the range of 717 million to $732 million.
An increase of 19% to 21.5%.
We are assuming a Q4 comp sales increase of 2% to 3% versus the 4.4% comp increase in Q4 2018.
Net income for the fourth quarter fiscal 2019 is expected to be in the range of $110.7 million to $115.2 million.
Diluted earnings per share for the fourth quarter fiscal 2019 is expected to be in the range of $1.97 to $2.05 versus $1.59 cents in diluted earnings per share in the fourth quarter of 2018.
The fourth quarter of 2018 had a one cents benefit to EPS from share based accounting.
Our fourth quarter outlook assumes an operating margin increase of over 100 basis points driven by improved merchandise margin on twin product versus last year slight leverage from the new distribution center and the benefit of our tariff mitigation efforts, including reduced corporate expenses.
Yes.
These benefits will be offset in part by the depreciation of our new southeast distribution center and the new lease accounting standard.
For all other details related to our results and guidance. Please refer to our earnings press release.
And with that I would like to turn the call back over to Joel to provide some closing comments before we open it up for questions. Joe. Thanks, Ken We successfully made a lot of changes and progress. This year and are very pleased with the position we are in to execute this holiday season.
We are confident that our business model and the flexibility of our eight worlds as well as the strengths and agility of our leadership team will drive continued success.
I'm proud to lead a team that has committed to achieving the impossible and while we are customers and I am so grateful for their efforts, we remain focused on providing our customers with extreme value and an amazing shopping experience and continue to innovate our customer in associate experience.
We believe that with all the work we have done throughout 2019, five below as become an even stronger retailer and brand we remain committed to our long term strategy of delivering 2020 to 2020.
With that I'd like to turn the call back over to the operator for questions operator.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
Please limit yourself to one question. If you have further questions. You may recall answer the question in queue. At this time, we will pause momentarily to assemble our roster.
The first question is from Jeremy Hamblin with Craig Hallum. Please go ahead.
Thank you. So I wanted just come back to the price increases for a second you've taken several steps as you mentioned.
Some of its not the one $4 item help of its on the five dollar to $5.55 items and then you have the below gift shop as you mentioned.
In terms of thinking about.
Which has been the most helpful and sales margin.
Can you give any additional color on on those various pricing changes that you've taken.
And which ones have maybe been the least helpful.
Yes, yes, thanks Jeremy.
I would say that.
As of the three lifted the tech change from five to 555.
Probably has the biggest impact of the three.
The gift shop in person and perspective isn't a margin accretive initiatives.
That's more about the opportunity to sell different product that we've never been able to sell in the past in fact, I think even mentioned my prepared remarks that a lot of what we learned in the 20 510 below tests helped inform as soon as we rolled out that gift shop to the entire chain.
But thats kind of how it breaks out thanks Jeremy.
Thank you.
Your next question is from Simeon Gutman with Morgan Stanley . Please go ahead.
Thanks. Good afternoon, everyone can you can you give us some sense on the initial uptake from the frozen merchandise I know you mentioned the product looks great and then whether you.
Do you think about your guidance for the fourth quarter, whether you're already running within that range I don't know if you can comment on that thank you.
Yes, Thanks Simeon.
As far as frozen goes as we said, we we said it in October when when the Street date had hit but.
The reality like most movies, you don't see a huge uptick in the product until the movie breaks and so that movie just.
Broke a little over 10 days ago, or so and I think the best way to think Atlanta, it's pretty much right on plan for us.
We think there's the bulk of the frozen sales are largely in front of us, though and then as far as range I mean, as we gave guidance.
Our guidance factors in what we've seen.
To date in the quarter and how we're forecasting it.
For the for the rest of the year in just a reminder to everybody. This was a a late Thanksgiving as opposed to other years. So.
Clearly you would expect.
November to be lower in December to be higher and now that was our plan going into the ended the quarter in has still our plan in the in the guidance we gave everybody.
Thanks, Simeon Thanks, Good luck.
Good day.
Excuse me. The next question is from Matthew Boss with Jpmorgan. Please go ahead.
Great Thanks, and congrats on the nice quarter I.
Thanks, Matt Joel Joel So can you speak to the breadth of strength that you continue to see across your world and I guess, maybe to circle back with pricing elasticity inline with expectations and like you said frozen on plan is it fair to say the change in the for Q comp forecast is more primarily just driven by the volume of business.
It remains on tap rather than any real change and underlying business confidence that you have.
Yes.
On the the any goods are those are kind of will enter into related there and I think the the breadth of strength that you referred to is it.
Again, it goes back to the the strength of the business model was eight worlds and I think.
As every trend emerges.
Different world pulls customers in into our stores and as they like what they see you know they.
They tend to.
Ill pick up Candy you know, it's really the flexibility that the eight worlds provides a since then.
I think.
The the you're asking me about the the sales in the in the quarter.
Yeah. So basically the Fourq you comp forecast of two to three versus it was a little bit higher before but frozen is on plan pricing elasticity is in line is it yes. The volume of business that remains ahead or is there any change in your confidence.
No no no change at all in fact, we didnt.
We didn't change the full year from what we guided at the beginning of Q3 and and in fact, I think the signal I'd give you as the fact that we took the low end up.
So as you know Thats just continuing to say we've got confidence in the pricing strategy, we implemented and I think when you start looking at two and three year stacks.
This is going to be one of the best Q4's, we've had a long time and at the same time, if you look it at Q4 s in general, it's a pretty tight.
Bandwidth between somewhere.
That 3% to 4% range when you start looking at those two and three year stacks.
Great good into an average annual but thanks, Matt.
The next question is from Judah Frommer with credit Suisse. Please go ahead.
Hi, Thanks for taking my question, maybe first just circling back on elasticities rank any further color you can give us there are clearly traffic was positive in Q3 anyway, you could break it down by price test for us and Furthermore is there any chance that the holiday six to 10 dollar task.
For for Tech and toys, potentially stays in stores or or last longer than the holiday season.
If it goes well.
Yet due to thanks.
Look I think the elasticity, it's really hard to break the quarter down.
How much traffic or it was driven because of the price changes, it's just kind all.
You know kind of melt melds together, there, but look the elasticity of the rollout to the chain was.
Right there in line with what we saw when we did the three test markets and so no surprises to us on that and.
You know as far as six to 10 goes I think like anything we do a five below we're going to we're going to anything we do something new we're going to test it.
But what we've got out there right now is specifically designed for holiday. So that will go away after holiday, but I think you should expect us to see us.
Try another testing in 2020 and as long as those test continue to really resonate with the customer and we can deliver extreme value.
You will start to see us do more and more of it but at this point in time, especially given where our biggest weeks are still in front of us.
Really too early to speculate on how much more will do in 2020, but there'll be some sort of test in 2020 for sure.
Thanks, Judy thanks.
Your next question is from Chuck Grom with Gordon Haskett. Please go ahead.
Hey, guys.
I guess, we'll thoughtful in laying out all the that's helpful. Tom drivers that you have at your disposal. Just curious when you look at the 2020 I guess, how would you force rank some of the best opportunities in terms of the Remodels, which look like they're going to be uptick RFP.
10 below loyalty.
Commerce, I guess that anything else out there that you guys want to point too. Thanks.
Yes, Thanks Chuck.
I think of the ones you pointed to.
I think you'd just you got to go back and put it in the category of innovation as we talked about it several times on our core.
And.
I don't think Theres any one single one that is a driver, but probably the one you missed was product I mean, we still are merchandise driven company and so.
Michael's team does a great job of staying on trend and.
Youre going to see us continue to test and learn but all the ones you just called out.
Especially the.
The RFP the 10 below tests and the Remodels are all great headwind as we as we head into 2020 and beyond but I think with what we continue to do is deliver more and more new ideas and you put them all together and.
It continues to drive positive comps.
Thanks, Joel Thanks.
Thanks Chuck.
Next question is from Michael Lasser with U.S. Please go ahead.
Hi, Mike Good Hey, Joe Thanks for taking my question, so with the third quarter.
Let's start with the second quarter, you guided to a 3% comp for the year and a 2% to 3% comp for the third quarter due to 2.9. So that was in line with what you saw it and now you're guiding to a full year comp no longer threed, but a 2.5, so implicitly the guidance for the fee.
Fourth quarter is lower than what Youve previously expected to can you give us a sense for whats different now than what you anticipated 90 days ago.
Yeah.
I think whats.
Answer your question, but I think you've got to put it in the perspective, Michael of the bigger picture and the bigger picture is that over 80% of our growth continues to come from new stores and so what hasn't changed is.
Our overall total sales that we guided to at the end of Q3 and what we're guiding to at the end of Q4, so that Hasnt change does.
Implicitly approximately 3 million now to two and a half we were.
Probably on the lower end of the approximately three back in summertime and and I think the the only visibility. We didnt have then that we do now is.
We knew there'd be headwinds from cycling.
The closing of toys R. US as that was if you recall last year, we twice took up or once in guide and then the second time, when we actually be I think we called out that our beat in Q4 last year was attributed to.
The success, we hadn't toys.
The outperformance and so I think as we've gotten into Q4 here and we know how big toys R.
We can see the quarter, that's where there's a slight impact to comp but did today, we're talking about a quarter that 700 million and we probably move the comp down three or $4 million. So it's it's a really.
Small small number overall in the total didn't change on Ken anything that yet in the only other piece Michael is to Joe's point again, we didnt move the top end of our full year sales guidance the comp moved a little bit on a full year basis, but it also does reflect and you've heard it in our prepared remarks.
The strength of our new stores and how that continues to perform so we factored that into to the guidance also as we kind of move forward here through through the fourth quarter.
Remember new stores don't Newstar don't have any impact on the toys R us impact from year ago, because they weren't open.
Yes, so based on the Toysrus impact is it fair to say that it's just a bit a little slower to start the fourth quarter than you expected.
No. It's not there has been slower I think we just didnt, we didnt have a trend lines to look at and it's why we only give guidance a quarter at a time and back in August we were only a kind of a month past the toysrus closings from a year ago.
So it's more that than than anything else. We just have more visibility now than than we did a little over 90 days ago. That's very helpful. Thank you and have a good. Thanks, Hey, Thank you Michael Michael.
Your next question is from Paul Trussell with Deutsche Bank. Please go ahead.
A good evening.
Im.
On margin and.
Theres, obviously, a lot of moving parts this year quarter to quarter.
Maybe just circle back and dig a bit more into the details as we think about the puts and takes in your third quarter results.
Versus your expectations and what we should be thinking about and keep in mind.
In Fourq Q on both gross margins.
And on the expense from thank you.
Sure. Thank thanks, Thanks, Paul.
If you go to Q3 as I noted we finished at about 160 basis points at the leverage.
In our guidance for the third quarter, we had estimated 175 basis points. So we.
We performed a little bit better than our guidance.
The breakdown between.
Gross margin and SGN, a was pretty much in line with with what we expected. If you remember we guided to about 75% of that deleverage was going to occur in gross margin it and it did and really the two key drivers there was the impact of those tariff costs that we didnt have the ability to mitigate because the pricing and.
Creases had not going into effect yet.
We also had.
Some other merchandise costs that shifted.
Out of Q2 into Q3 that we spoke about on our Q2 call.
If you go into SGN, a we've been saying this for the most part of the year. The two key drivers there.
Our depreciation around the new southeast distribution center.
And the new lease accounting standard.
And we also had some other costs.
Related to our pricing increased labor costs and signage costs in the third quarter. They were though they were offset though by reduced corporate expenses. So again, the overwhelming majority about three quarters of the.
The leverage in Q3 was happening at the gross margin line and then if you move forward quickly to Q4 as I mentioned, we would expect to see greater than 100 basis points of leverage and operating margin and again the majority of that will come in at the gross margin level and a small maybe slight leverage in SGN a the key.
Drivers there the toy margin improvement given the opportunity buys that we placed last year. So we expect to see merch margin improve we do expect to see some DC efficiency.
Which is all included up in cost of goods sold in the fourth quarter.
And then again for the most part in SGN, a it's the depreciation de leverage for the Atlanta distribution Center.
And the new lease accounting.
Impact so those are kind of the puts and takes in Q3 Q4.
Thanks, Paul Thanks.
The next question is from Michael Montani with Evercore ISI. Please go ahead.
Hey, guys. Thanks for taking the question. So first off just on the elasticity side wanted to ask from our survey work we saw.
Almost two thirds of the consumers seem to say that to be just as likely are more likely to shop at five.
And when we thought about the product that was impacted we were thinking probably 10% raised about five bucks and then another 10% that would've been mixed up under five so kind of 20% assortment.
I'm wondering if you can comment on either of those two pieces and then it ties into the tariffs, which we're hearing that Ford be may not take hold December 15th So thats in fact the case.
Does that provide upside to guidance and also does it change in any way your desire to potentially holds the price increases that you've already taken.
Yes, Thanks, Michael I think you got it about right on the.
On the breakdown of.
10% in the 10% and then honestly I'm not going to start speculating on what tariffs are going in and what aren't I mean, I never guests, we leased up at the 25% and that.
Really continued to have.
Continued to move forward and then you specifically asked about for B and I think it's it's important to remind everybody that for B is not material to 2019 as the large majority of what we're bringing in and we will sell in 2019 is already here that's more of a 2020 discussion and so.
So I think at this point.
What's factored in our guide is really Doesnt really have much to do with poor be either way and.
We're not ready to speculate on.
Thats going to be held off or not.
But thats kind of where we're at.
Thanks, Michael.
The next question is from Scot Ciccarelli with RBC capital markets. Please go ahead.
Hey, guys Scot Ciccarelli.
Hi, I know that in general efficacy has been in the range of your expectations. You guys have commented about this but I guess I was curious if theres any examples of skews, where elasticity did proved to be higher than you'd expected or more negative and then how did you react to that in other words could you just strong with it because you need to protect margin or would you pulled back on the price increase because of.
Demand destruction.
Yeah, I honestly, we're where we saw the.
Perform differently than we expected was was largely in in certain branded product and I think in those cases, where where we didn't like the elasticity results.
We rolled back the pricing, but most of that we discovered Scott during the the testing.
Series of those the three markets that we've been testing for several months prior to rolling out to the chain, we didn't see anything different when we rolled out the chain.
So we pretty much work through all that way back earlier this summer, but it was largely in branded stuff, where there's a lot of visibility out there to what what the prices in the marketplace.
Got it thank God that Phil Hi, Thanks.
The next question is from Paul issuers with Citi Research. Please go ahead.
Hey, guys. Just curious can you talk about your thoughts about number of stores you're planning to open next year and then also just curious what happened to the overall sales trajectory.
The business in Threeq you once you did roll out the pricing.
The entire Jay and I guess I think it was October 18th.
It all rolled out just curious what you saw.
The first for the quarter versus the last couple of weeks and beyond.
Yeah.
Look.
We.
Aren't thinking about the on this call anyways guiding for for 2020, but what I did say AMRI prepared remarks is that.
No. There is we see no signs of.
I'm not following through on our long term strategy of 20% topline and 20% bottom line.
Through 2020, so that includes next year and so I think with that it's pretty easy to kind of back into the range you should see for for new stores for US and then you know I think on on the elasticity in general we see.
A slight.
Decline in unit demand, but thats more than.
Offset by the.
The.
The price increase that we put through and it was in line and expected as we saw as I said earlier in the test stores and we saw the same thing happened when we rolled it out to the chain.
Thanks, Paul So let me tell accelerated happy that the buzzed about.
Did what accelerate.
Did you did you say that does that mean sales accelerated ones. What did you. Just did you say that unit know why I was just have more.
I am I was talking about the I think the question you asked me was about what impact I saw on the product we took prices too and on on any given product would you'd see a slight decline in in the unit demand and then that was offset by by the price increase so it was net positive.
But.
Overall that was.
Factored into our Q3 guidance as you can see we came in at the the high end of our guide both in total sales, beating and then comp at two nine.
Okay. Thank you goodbye.
Thanks, Paul.
Next question is from John Heinbockel with Guggenheim Securities. Please go ahead.
So.
Maybe Joel can you speak to remind us the relative importance of for B.
Relative to the other lists and then how you would attack mitigation differently.
Right then no this past year, particularly Oh, you you more wary about taking pricing.
On for be items because of.
Some of the modest backlash on.
Some of the other items in the last couple of months.
Yeah, John I'll I'll take the first piece of that around the costs associated with tariffs if you look at.
At four be as you Gotta look at it on an annualized basis right because given the differences in timing and then obviously theres different rate rates related to the to the various lift but if you look at a list one to three if you look at for a and you look at four B.
And the rates in the rules that are currently in effect when you look at our business.
It's pretty much split in terms of the tariff cost impact across those three so probably about a third each.
For list one to three for a and then for B.
Yeah, and then then the often than John in terms of mitigating for B.
We're we're taking the same approach on for B as we as we did on the others.
We've actually had a lot longer lead time to prepare for that one.
Whereas in some of the other ones they got implemented pretty quick and so that's why there was a lot of shifts. This year, we were behind in Q3, we're actually catching up in here in Q4 to have a full year mitigation.
But a lot of four be we'd already been working on mitigating through vendor negotiations, we brought in a lot of product early.
And then.
The reality is the the price increases we've already taken will start to cover some of four be in 2020 as well. So we still believe we are on a path that will fully mitigate for b as well based on what we've already seen from vendor negotiations on the like so we're in good shape.
Okay. Thanks.
Thanks, John Thanks, John The next question is from Karen short with Barclays. Please go ahead.
Hi, I had one clarification and then my real question just in terms of 2020, I think you made the comment that.
You were still is clear or you are still committed to the 20% topline, 20% bottomline, but I thought there was maybe a little gray and that specifically 20 plenty as it relates to tariff. So maybe just clarify but then specific question is on a comparable.
Obviously, many stores open up much well to be the strongest openings that you've had how do you think about how should we think about the comp waterfall I know, it's very very strong store openings are they kind of the same as some of the other like the average chain or just some color there.
Yeah.
Look if I implied any gray area in 2020, I didn't intend to.
No were.
We're fully seems top line of 20% and on the bottom line, 20% growth. So I'm not sure what I said Karen but.
No no gray area on our side for for next year and then it look on the comp waterfall.
It's a little too early to speculate the that the class of a large portion of the class of 2018 isn't in comp yet even and.
And of course 2019.
None is in comp yet, but you know I think thats why.
What's so unique and different about this this model as we have such a quick payback seven months, but what we don't have as a more traditional.
Comp maturation curve that traditional retailers have of high teens mid teens low teens and then so on and so forth. Its these stores open pretty close to the averages the chain and.
This continues to be a low single digit comping model and with that.
We've we've actually had an incredible.
Consistency throughout the years and.
Only one quarter when the negative comps since we went public in in fact, when you start looking at three year stacks.
It's amazing the on an annual basis.
No for the last five years, the lowest through your average stack has been 3% and the highest.
We would be this year in the low fours. So it's a pretty consistent path and I think is certainly 18 starts to comp and we get into 19 will now the COVID-19 will have more clarity on it but.
It certainly with them opening stronger I wouldn't expect them to have a stronger comp.
Maturity curve than previous classes.
Great. Thanks, Karen you bet.
Next question is from Edward Kelly with Wells Fargo. Please go ahead.
Hi, guys good at that.
Joe I wanted to ask you just about.
Customer response, the pricing I mean, obviously.
If the postal Instagram kind of caught some people's attention can.
Can you talk about.
Maybe what went wrong on that portion of the maybe that's not even right way to talk about or ask about it but the decision to put something out in hindsight would you have done anything different.
Is there anything that incrementally a concern from your standpoint about the pricing with the five branding, including sort of like how does any of this impact the way you would think about initiatives like 10 below.
Yes no.
Good question Ed in.
What I said it on the Q3 and say it again here.
No we are committed to being transparent with our customer and we are committed to bringing them on along with us on the journey I think as it relates specifically to the the social media policy <expletive> .
Where we saw some confusion and what was different.
With the chain roll out that wasn't there with the test rollouts is that.
After we put in the 10 below a while wall the gift shop.
We just saw some customers kind of getting it wrong and so look we thought it was important to.
You know kind of clarify for the customers what we what we are intention was and that's the reason we put the social media post out but in terms of the actual reaction from the customers.
Quickly dissipated right after we.
Put that social media post out and it's just another sign of US, we're not going to shy away from being just transparent with the customer but.
Yes, hindsight tough to guess on that one.
But I think when we when we did roll out the six to 10 dollar.
Gift shop.
From customers just actually thought we are raising prices.
On stuff, we'd had prior to six to $10 I was actually new product that that Weve never had and quite honestly. The performance. We're seeing in the in the gift shop wall has been amazing, we're really pleased with it and customers have recognized the value and.
Just to add a lot of positive things to say with it.
And you also remember you're just reading the social media, both what we hear in the stores is at a much bigger scale than than whats out on social media and overwhelming part has been very positive.
Thats great. The hearing failure, Yeah you bet. The next question is from David Buckley with Bank of America Merrill Lynch. Please go ahead.
Hi, guys. Thanks for taking my question so across your urban suburban and rural markets. What differences are you seeing new store productivity in traffic levels.
Do you see the great growth opportunity moving forward.
Yeah.
Honestly.
Yes.
It is part of the reason David Thanks. Good morning, I don't know I have to go back to what quarter, we havent called out.
Some stores opening in our respective top 25, we look at three seasons spring summer and fall and we always you know measure the top 25, and the fact that a store keeps opening in the top 25.
Means that the the bar is getting higher and if you'll notice in the ones we call out.
Sometimes we're calling out rural sometimes we're calling out urban sometimes we're calling out suburban and the the message we're trying to get across urea is.
You know this concepts working in all three and I will tell you from my side, if I go back five years ago, when I was here.
And just starting I Didnt think we build to push a five below into some of the smaller markets that we have.
Calls these county seats.
And we've called out a lot of county seats.
In the last couple of years that have been successful. So that's probably been the biggest surprise for me personally, but I think the bigger message has been that it works in all three.
Thanks, Joel Thanks, David you bet.
The next question is from Joseph Feldman with Telsey Group. Please go ahead.
Yes, thanks, guys.
Kind of more.
Capital question.
You guys just been buying back a little more consistently it seems buying back shares.
Just wondering how we should think about that.
Fourth quarter and really even into 2020 is that something that is just going to become now more stable part of the businesses. We we go forward.
Yes, thanks, Thanks, Joe.
If I mentioned it in the prepared remarks.
You did purchase over $35 million for this year.
In terms of repurchases.
Actually the majority that was done earlier in the year.
We had opened up a program a couple of years back.
A multiyear program that we spoke about.
But we still continue to be opportunistic in terms of of the.
The purchases that we're making so we're we're not on any type of prescribed the plan.
But we're going to maintain flexibility there in the key is being opportunistic in any buys repurchases go forward, we really just been buying back the dilution I think thats been the right thing commitment there.
Thanks, Thank you Joe.
Thanks, Joe.
This concludes our question and answer session I would like to turn the conference back over to Joel Anderson for any closing remarks.
Thank you and thanks, everyone for joining US today, we look forward to speaking you again I see our in early January and of course as always encourage you to get out and visit our stores.
We got a great holiday season in front of US. These next three weeks or big weeks. So.
It out there and enjoy yourself and thanks again for the support have a great evening.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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