Q3 2019 Earnings Call
2019.
This time, all participants I know listen only mode.
Later, we will conduct a question and then answer session and instructions will follow at that time.
Please be advised reproduction of this call in whole or in part is not permitted without written authorization from all these and that's what our mind. There. This call is being recorded.
On the call today for management are John <unk>, President and Chief Executive Officer, and Jay Stasz, Senior Vice President and Chief Financial Officer.
I'll now turn the call over to jeans on 10 Investor Relations to get started please go ahead ma'am.
Thank you and good afternoon, everyone. A press release covering the company third quarter 2019 financial results was issued this afternoon any copy of that press release can be found at the Investor Relations section on the company's website I want to remind everyone that management's remarks on this call may contain forward looking statements, including but not limited to predictions.
Expectations are estimates and the actual results could differ materially from those mentioned on today's call any such items, including our outlook for twins fiscal 2019, and future performance should be considered forward looking statements, but the meat, but then the meaning of the private Securities Litigation Reform Act of 1995, you should not place undue reliance on forward looking.
Statements, which speak only as of today and we undertake no obligation to update or revise them for any new information or future events doctors that might affect future results may not be in our control and are discussed in our SEC filings you encourage you to review these filings, including our annual report on Form 10-K , <unk> quarterly reports on form 10.
Q if those our earnings release issued earlier today by more detailed description of these factors, we will be referring to certain non-GAAP financial measures on today's call such as adjusted EBITDA adjusted net income and adjusted net income per diluted share. We believe maybe important to investors to assess our operating performance reconciliations of the most closely comparable.
GAAP financial measures to these non-GAAP financial measures are included in our earnings release with that said I will turn the call over to John .
Thanks Gene and Hello, everyone.
Thanks for joining our call today before we begin to review of the quarter I want to thank everyone for your sympathy and support of marks unexpected passing NR tragic loss as many of you know Mark was a passionate talented and highly regarded leader as well as an exceptional person loved by the entire all these family.
He will be sorely missed.
I had the privilege of working very closely with Mark for almost 16 years and now have the privilege of leaving the company.
We'll be supported by the entire always team and extremely talented and dedicated group as well as our board of directors.
Mark shoes are impossible to fill but I know that each and every one of US is more committed endeavor to do our best to make im proud as we carry as legacy forward.
As Mark would say.
We are colleagues.
Now onto our result.
We delivered a strong quarter across the board strong deal flow.
And ongoing success for our new stores drove a 15% topline increase comp sales were in line with our expectations decrease you, 1.4% compared with 4.6% increase in the prior year.
As we stayed on our last call the outsized cannibalization impact to the T. R. U sites in the record performance of our new stores entering the comp base are expected to remain headwinds for the remainder of this year.
However, our long term growth algorithm remains the same.
Merchandise margin rebounded and we regained efficiency levels at our distribution centers and proven and these carry key areas along with tight expense control contributed to a 28% increase and adjusted net income as well and our prior call. We had visibility into Q2 issues to be addressed and we did just that.
As always we remain bullish on the proven strength of our model of offering great deals growing our store base and leveraging that expanding ollie's army.
We have a deep bench of experienced and talented merchants, who have done an outstanding job building longstanding relationships with our vendors as a result, we can to use the exceptional deals.
As we said before we leaned into toys, and our our buys or even bigger than last year.
We're very pleased with how these and other deals allow us to give customers more of the name brands and bargains they've come to expect tamales.
Our pipeline is very full and we're confident that weren't in great position to capitalize on our robust close out environment.
Our store growth in merchandising strategies continue to work very well together.
The more we grew our store base the greater the prospects for opportunistic buys for our customers to say even more money.
At the same time are strong deal flow can easily support our expansion plans for the foreseeable future.
As we've said many times in the past our new stores are in fact, the biggest driver of our growth their performance continues to exceed our expectations with stronger than ever new store payback, we had another busy quarter opening 13 stores and entry into new States, Oklahoma, Massachusetts.
We opened a total 42 stores this year and we are well underway to having a full pipeline for the coming year with a normalized opening cadence.
We look to support the expansion of our geographic footprint with the opening of our third distribution center, which is located in the Dallas Fort worth area.
This will enable us to enter both new markets in new states construction remains on budget. It on schedule for operation in the first quarter of 2020.
Ollie's Army continues to grow accounting for over 70% more sales in the quarter.
The Army is now 10 million strong one of our biggest events of the year Ollie's Army night that this Sunday December 15th and we are excited once again to welcome Ollie's Army members to an exclusive evening of shopping a special rewards if you're not and always argument remember, there's still time to enlist and join us for a great time.
We hope to see you, there and sharing the fun and savings.
During the quarter, we completed our first ever share buyback demonstrating our confidence in the company's long term growth prospects are consistent cash flow generation allows us the opportunity to strategically buyback shares and as another vehicle for us to drive shareholder value.
I want to take a moment to thank our almost 8700 team members for all of their extra efforts required during this tactic holiday season.
We are grateful for all you do not only at this time of year, but each and every day.
So to wrap it up I'm very pleased with our results. This quarter. Many of the challenges we faced in Q2 were short term in nature as we had anticipated.
We course corrected where necessary and delivered strong results.
We're pleased with our performance quarter to date and the trends are in line with our previous guidance that said, we have a lot of big days ahead of us, including Ollie's Army night. This Sunday.
Under Mark's outstanding leadership, we achieved remarkable growth and success without Mark Ali surely won't feel the same.
What will be the same as how we execute this incredible business model, there's no doubt he will be missed.
Well, we have a tremendous opportunity ahead of us and the entire team has rallied together and its determination to make mark proud.
It's the strength of marks legacy together with our team that give me confidence in our ability to stay focused and continue driving profitable growth and shareholder value now and into the future.
I'll now hand, the call over to Jay to take you through our financial results in 2019 outlook in more detail.
Thanks, John and good afternoon, everyone as John said, Mark was a remarkable person on all fronts and I share all the sentiments John just expressed.
We're very pleased to have delivered a strong quarter with mid teens topline growth effective management of gross margin and expenses, resulting in adjusted EPS of 41 cents per diluted share.
In the third quarter net sales increased 15.3% to $327 million driven by exceptional new store performance comparable store sales decreased 1.4% from a 4.6% increase in the prior year.
Comp store sales consisted of an increase in average basket offset by a decrease in transactions.
Nearly half of our merchandise categories comp positive in the quarter best performing categories included floor coverings clothing hardware candy and bed and Bath.
During the quarter, we opened 13, new stores ending with 345 stores in 25 states, a 16.2% year over year increase in store count.
These latest openings complete our lineup for this year with a total of 42 new stores. These stores continue to perform well above our expectations and we're very pleased with their productivity in ROI.
Gross profit increased 15.5% to $133.3 million in gross margin increased 10 basis points to 40.8%.
The increase in gross margin is due to increased merchandise margin driven by improved markup, partially offset by higher supply chain costs as a percentage of net sales.
SGN expenses increased to $90.5 million due to additional selling expenses from our new stores tight expense control resulted in an SGN a rate flat to the prior year at 27.7% despite the drop in comp sales.
Preopening expenses related to new stores decreased to $3.3 million due to the comparative timing in number of new store openings in the quarter.
As a percentage of net sales preopening expenses decreased 70 basis points to 1%.
Operating income increased 22% the $35.7 million in the quarter operating margin increased 60 basis points to 10.9% driven by the increase in gross margin and the reduction of Preopening expenses as a percentage of net sales.
Net income increased 8.6% to $27 million or 41 cents per diluted share adjusted net income, which excludes tax benefits related to stock based compensation increased 28.3% to $26.8 million or 41 cents per diluted share from $20.9 million or 32 cents per diluted share in the prior.
Our year.
Adjusted EBITDA increased 22.5% to $42.6 million.
At the end of the quarter, we had $10.1 million in cash and no outstanding borrowings under our revolving credit facility inventory at the end of the quarter increased 15.9% over the prior year, primarily due to new store growth and the timing of deal flow.
Capital expenditures totaled $24.2 million in the quarter compared with $52.5 million in the prior year period.
Year over year decreases in the net result of investments in our third distribution center offset by our $42 million purchase of the toys R. Us sites in the prior year.
During the quarter, we invested $40 million to repurchase approximately 689000 shares of our stock we have $60 million of capacity remaining under our current share repurchase program and we will consider additional buybacks if determined to be the best use of capital.
Turning to our outlook based on Q3 results and our expectations for Q4, we are reaffirming the full year guidance that we provided on our prior call which is detailed in our earnings release.
I'll now turn the call back to the operator, just start to Kunaev session operator.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question pressed upon key.
Please standby will be compared to Q Monday roster.
Our first question comes from Matthew Boss with Jpmorgan. Your line is now open.
Thanks, and Suncors announcing helps our NIM for the last summer was clearly a London.
Thanks, Matt. Thank you, Matt I guess, I guess, Nick maybe to not can speak to that so Tom.
Through the third quarter and then looking.
I will comment on November maybe versus plan and just how best to think about the prescription or.
Mr waterfall, cannibalization and supply chain wins.
The timeline to returning to one thats your comps.
Sure, Matt, let Jay take the first part and I may chime in here a little bit on it yeah man, sorry, you're breaking up a little bit on her phone, but I think I got most of it.
In terms of the third third quarter I think you asked about the cadence I mean, we don't we don't talk about it.
Each of the months were pretty good October was a strong months that was good to see.
And as far as returning.
As to our normal growth algorithm like we've talked about we would expect that to return next year in 2020, and I think you asked also about some of the headwinds regarding cannibalization and reverse waterfall as well supply chain and much like Q2, the cannibalization or reverse waterfall as about a 150 to two.
100 basis point impact on comp the supply chain headwind is like we said on in the last call. It ended up being about half of what we experienced during Q2 in Q3, so call. It 75 to 100 basis point impact.
Great and maybe follow up.
Hello.
Very.
Yes.
Became 100% this quarter can you speak to the strength that you're seeing from next year, maybe two or four of over time.
Yes, and Matt the new store productivity has been very strong like you said, we're north of 100%.
Like we said the 2017 class you know as our strongest year 18, it was not far behind it and so far what we're seeing in 19 is a very strong class again. It is early with a number those stores. So we've still got a long way to go but we're very pleased with the results were seeing so far yes, Matt and keep keep in mind that 2019 class, where we're not surprising.
How strong the class is.
Due to the fact that we.
We had that the 14 or so to your you sites. So we actually acquired in bankruptcy that we knew there would be strong stores, there, obviously larger boxes and required larger volumes, but thereafter, they are actually performing quite well as as we expected.
Great John Congrats on the role also.
Now ill agree merchant fourth.
Appreciate it Matt Thank you.
That's good luck.
Thanks, Dan.
Our next question comes from Brad Thomas with Keybanc Capital markets. Your line is now open.
Thanks, Good afternoon, and let me add my condolences on the loss Mark.
Regarding the fourth quarter outlook I was hoping.
You all could give us a little sense of how the toy business is performing haven't been out in the stores you clearly got great selection of quality name brand products, but admittedly a difficult comparison, you're up against can you tell us a little more about how that categories performing.
Yes, as you know Brad we don't normally talk about specific categories, and we definitely will talk about sales than when within the quarter, but as we've previously we're locked and loaded with the toys, we bought into the toys heavily for the business that we expected to do for the back half a year.
We are pleased with what we're seeing right now, but as we said earlier in the call Ollie's Army night, which is our largest.
Toy sales event of the year or is this coming on Sunday and there's still many days to go through.
We're finished the quarter. So we'll we'll hold and reserve the right to give you some additional color as we complete the seasonal we feel good where we're at today.
Great and then and then I just thought maybe we could have reflect a little bit more stepped back.
Thinking about the.
How this year is playing out.
Clearly you gave us a lot of color around the toysrus.
Cannibalization that reversal waterfall.
Some of the supply chain issues last quarter, I guess as you have another quarter reflect on that.
Have you had any learnings about maybe how the industry or the businesses evolving or feel like.
Uh huh.
This is as good place to get back to normal next year.
Yes, I would say Brad I think the business gets back to normal next year as we annualize that use the toysrus sites that we opened up during 2019 business remains very strong the deal flow is very strong the merchants are eckstein at a very high level. So we don't foresee any reason not to get back to our long term algorithm in 2020.
Very helpful. Thank you so much.
Thanks, Brett Thanks, Brad.
Thank you.
Next question comes from Peter kits with Piper Jaffray. Your line is now open.
Hi, Thanks, My condolences on Mark as well.
It is one of our favorites I think you will be missed.
I wanted to just take a kind of big picture view on the current status and the team. So we know Ali said abnormally low turnover and Mark shoes can't be replaced but I think there's some questions out there on what his responsibilities have been recently and maybe.
His involvement in the merchandising decisions and who's leading up merchandising today.
Yeah, obviously, Peter we're as we've said, we're not going to build a replace mark in a way shape or form. So he will he was he was the founder I mean this was his baby he knew each everything about at about the company in the overall merchant business.
But what do you did do he invested significantly in the team our merchant team is a very very stable team our top for merchants, which we know that does not include mark today.
They have combined to all these experience of about 73 years of time at Ali. So we definitely have a very solid team and we have we have a lot of folks who are behind these these four individuals as well who have been training for many years under mark under them and one thing we've always talked about in our prior calls with everyone.
This is one team it's always been one team we don't have Individualisms. We all are very collaborative nature. So the this the team as you would imagine is more committed than ever.
To to carry marks legacy on it to execute this at the highest level possible to make I'm proud of us. So the team has all in.
The team is ready to move forward and we are confident that we've continued to deliver and we can continue to get great bargains to our customers as we've we've come to growth to do.
Okay, that's helpful, John and and maybe.
Just to help help us understand I know the the management structure had changed a little bit.
Nearly two years ago, where you've moved into the COO chair.
Could you talk about kind of how your responsibilities have evolved in recent years, and maybe where you would you have picked up some increase responsibility and took some off of marketplace.
Sure I ever since Jay came here and I moved into the COO role.
Obviously relinquish the accounting affinity functions to.
Jay So that free me up in order to really spend a lot more time with mark.
In the merchandising team and the marketing team just to get more familiar with that aspect of the business was those were the two pieces I had knowledge of but I'm not intimate knowledge. So for basically the last three years I've really spent a lot of time with mark in the merchants to get a better understanding of what what makes us special and how to make index in how to execute it so thats been.
Something that's been transitioning fraud for a couple of years now I feel comfortable or at.
The merchant team is very solid Peter and they are ready to move forward.
Okay. Thanks, a lot guys. Good luck and we've got a lot confidence in yes.
Thank you.
Thank you. Our next question comes from Randy Konik with Jefferies. Your line is now open.
Yes, Thanks, a lot and I also wanted to pass along my condolences.
Two.
Until you're always team and marks families, whilst I really sad and momentum.
I guess Jay question for you can you just give us some just all over the the impact and the supply chain again, just repeat the numbers in the second quarter third quarter.
Well, what the impact should be in the fourth quarter, and then going into the first quarter next year should we continue to see like.
Half step down.
Since August .
Second place just over that math less please first.
Yes for sure so I mean, obviously.
Q2.
Order that was an aberration the supply chain costs year over year, we missed margin my 190 basis points supply chain was 110 of that.
And what we talked about going forward when we guided at the end of Q2 in that same guidance is largely intact. We're looking at a 39 and a half.
Full year margin and what we said was we probably at about 20 or 30 basis points of headwind in each of Q3 in Q4 to get to that 39 and a half.
So for the third quarter, we're a little bit favorable to that merchandise margin was actually up 20 basis points.
Supply chain costs were up 10 basis points as well. So net net we came in 10 basis points favorable when we think about it for Q4 in the full year.
What we expect probably we expect still the hit that 39 and a half on the merchandise margin side. Some of that favorability is really just timing related to the buying of deals and like John said on his remarks, we've got a lot of big weeks.
Ahead in Q4, so it's too early to really give indication.
From a from a sales standpoint, our markdown standpoint for Q4, but when the way we think about it for full year is still at that 39.5, and really probably merchandise margin.
Not too dissimilar to what we had planned kind of close to flat.
On a full year basis, and then the headwind coming in the form of the supply chain costs. So maybe 60 basis point 50 basis point increase on supply chain cost for the full year.
That's super detailed and very helpful. I guess next question.
The continued theme, we keep getting John is raised new store productivity.
Great payback, you talked about new markets, Oklahoma, Massachusetts.
How should we be thinking about next year.
The pursuit of new markets versus existing marketing.
Our plan for next year, one next couple of years.
Yeah, Randy obviously as you as you know we're going to be opening up our third DC in the Dallas Fort worth area, So putting a strategic asset to work in that market is going to be the fuel for growth in those new markets. So we would probably expect that of the 40.
47 to 49 stores, we opened next year, probably half of those stores will come out of what we called new markets and then the beer did the remaining stores have come out of existing markets and keep in mind Theres still lot of new markets, Florida being one of them that we start a lot of lot of growth potential. There. So we still consider that a relatively new market, but is will be serviced out of a.
The Texas, DC, but what kind of the 80 20 rule in terms of where the new store growth comes from from and then we backfill in existing markets.
Helpful. Thanks, again, guys I'm very sorry about market.
Thanks, Randy Thank you.
Thank you and next question comes from Edward Kelly with Wells Fargo. Your line is now open.
Yes, hi, guys. Good afternoon that also like that obviously expressed by sympathies here you know the thing that I wanted to ask about as on the yesterday side, you are able to sustain esh DNA margins on a comp decline this quarter. That's a lower rate I guess said you know what what you said it would have thought from the long term algorithm.
So were there any unusual items in here and then how do we think about the potential pressure DNA de leverage in Q4.
There was a pretty wide comp range out there. So I'm just kind of curious as to.
How we should be thinking about that line item.
Yes, this is Jay and.
Yes, you know you're right. We just we worked hard to keep the costs.
Under control I mean, this the store labor, we squeeze it about as good as we could given the volumes they were doing in the receipt theyre getting on the Frank freight side. So kudos to the store teams I know that wasn't easy, but most of the leverage that you're seeing in the quarter is really on the DNA side.
From a labor standpoint, and any a slight impact some favorable impact from.
Our incentive compensation.
So then when we talk about Q4 really probably I see it to be flat to 10 basis points.
We're not going to get a ton of leverage on an annual basis for our SGN a the way we think of it would probably pretty close to flat year over year.
All right and then just a question on the new DC opening next year, just trying to get a sense as to how that would impact the piano.
Is there any color that you could provide at this point that would that would just sort of help us help us frame that for next year.
Yeah for sure. So the way, we think about it and John mentioned. This next year 2020, we plan to get back to than the typical long term algorithm I think one nuance to that is our typical long term gross margin target is about 40%.
And with the new DC coming online we tend to say, we're going to have a headwind of about 20 to 30 basis points. So when we think about margin for next year, it's probably closer to 39.8% or 39.7%.
Great. Thank you because.
And our de right just to be clear DC flows through our margin.
Gotcha. Thanks, Thanks, Ed.
Thank you.
Thank you and our next question comes from Judah Pharma with Credit Suisse. Your line is now open.
Hi, or our condolences on mark as well and thanks for taking the questions. Maybe you could help us dig into the gross margin strength, a little bit, which which categories, which which deals may have driven that and or is there any conservatism in the Q4 gross margin expectation given how well Q3 performed.
Yeah, Judah we as you know, we don't give a lot of color on departmental margins and but as you as you can probably tell on the last call Mark gave a lot insight that we felt pretty good about our margin for Q3, when we have the called as there were certain deals and timing that occurred.
Between the end of the the end of Q2 in the call we had in August so.
We we the deal flow was lined up pretty good I think that the Q4 I think the the number that we laid out I don't think theres a lot of conservatism built in there I think thats a number that's pretty pretty solid we feel comfortable we can meet at though.
Okay, Great and you've said a few times that you feel like goes back to the normal algorithm in 2020, clearly the there'll be some cannibalization from the new stores that impacts the comp early in the year, but as you lap that.
Does the back half of 2020 set up as a relatively easy compare or are there.
Comes within the comparison that we should be thinking about that'll keep you in that one to two comp range, yes, I would I would say that having 20 quarters of comps and looking at probably a four year stacked with some pretty big numbers that nothing lay up I.
I would say that the back half in theory should be a little bit.
Easier than the front half, but keep in mind. Our last four years of Q4 comps are pretty large to go up again. So I don't think anything is necessary a lay up I think the one to two is it realistic number.
That's not with our continued growth in than the Annualization of the the tier you sites from Q1 in Q2, they're open in 2019, we started a drag that we have to deal with on the first half of the year and make that up so I think that that that's the number would stick with and.
And come out with.
Okay, Thanks, and best of luck in the role.
Thanks Jude.
Thank you and next question comes from Rick Nelson with Stephens. Your line is now open.
Okay all right.
Condolences as well on Mark and congrats to John in her new role.
Thank you Rick.
40, 749 stores you talked about for next year. How many are committed at this point and if you could discuss the cadence of opening I know this past year was more front end loaded how do you see that shaking out next year.
Direct from a commitment perspective, we're pretty close to two Don we have a few more stores that are still on our radar for real estate team to execute and complete but we've got ahead of it pretty well and we're in good shape for the the 2020, new store openings I'll, let Jay cover the cadence with you and Rick like you mentioned I mean the.
This has been shifting on us from year to year I mean.
I mean was probably 40% in the first half 60 back half 19 was like the flip of that about 70% in the first half and we'll have 30 in the back half 20, it's not it's not in stone, yet, but will be much closer to kind of a 50 50 split.
First half second half kind of cadence, maybe it skews up a little bit in the first half if we get some things going our way, maybe 50% to 55%.
Okay, thanks for that to them and over the long haul.
Maintained that is mid teens.
Growth rate in terms of store growth, how how many years to think that can be stand now before.
Starting to plateau or or pull down one percentage terms.
Rick we started to talk about this little bit in the last year year and a half that we think at about 50 stores per year.
That feels like the right number for us to open and execute on the new store plan. So.
We will probably 2021, you'll you will serve the mid teens unit growth and then you'll start to see it slowed down a little bit, but the double digits will be therefore for quite some time, but really then we'll look we'll reevaluate it if we need to but we think 50 to 52 stores the right number for us to opened on a on annual basis.
Yeah.
Thanks, and good luck.
Thanks Richard.
Thank you. Our next question comes from Paul switches with Citi Research. Your line is now open.
Hey, guys, hi, thoughts or what you guys.
For the loss.
Curious.
Numerous.
Yes, if you're seeing outsize product availability specific categories as a result.
Hi, Alex.
You could give a little bit more color.
But outperformance or underperformance by category for for the quarter also curious if you could give a little bit more color on the comp metrics maybe.
However, CPT.
You could provide any color there. Thanks.
Sure Paul I'll start on the on the comp side.
The average basket was up about 150 basis points in the quarter. So the rest was a transaction shortfall and then.
I apologize, you're breaking up a little bit but in terms of the deals.
I think we're talking about Q3, the strong performance I mean, and like we outlined the floor coverings did grade and we had a big carpet deal.
That was a good deal for us in the quarter as well as the waterproof laminate continued strong clothing was very strong for US which was part of that was a big apparel, Neil which was great in pretty unique getting some branded names there.
And then find the hardware was strong for us, which I know in the last call. We're talking about ceiling fans and some other things that are just come in.
And if more generally I'll turn it over to John Yes, Paul those those were our best our top three performing departments for the quarter and then if you. Then obviously you said about half our department departments comp positive, which was basically pretty consistent and how our model works because were deal driven.
Our two who.
Weaker departments are less performing departments I'm, just a comp basis was our electronics department on our Housewares Department. Both of those were deal driven those are the departments are doing just fine. The volumes are great out of those departments, but they just doing the same deals for the quarter from al why if you look back those those are were strong performing departments last year as well.
Thanks.
The pick up in availability.
We will occur.
Well I would.
I don't know if we've seen a big pickup related to tariffs at this point in time I know the pipeline is very full and our merchants have a significant flow products. Some some of that stuff takes time to flush out of deals or cancel them people are stuck with them. It just it takes time for that to to play out no different than normal close out so.
So we're looking for for for deals each and every day. So if those if those items were cancelled.
By other companies, we maybe able to capitalize on but right today, we haven't seen a ton of that yet.
Gotcha does look guys.
Thanks, Paul.
Thank you and our next question comes from Simeon Gutman with Morgan Stanley . Your line is now open.
Hi, guys. This is Michael Tessler on for Simeon. Thanks for taking my questions and first of course, let me offer on my sincere condolences on Mark's passing.
Thank you so I wanted to circle back to the DC network, So you've talked about Texas DC opening next year.
Curious how at what point you might need to look to open another DC and I guess, how how many stores the network with Texas will support going forward.
Sure Michael right now with the three Dcs open we can we can support right around 500 to 550 stores.
Without any further expansion that we have two of our buildings that we currently control that are expandable, which could add probably another 100 stores to the overall network that we could service if we expanded those buildings.
We would expect that we're probably going to add the fourth building. Some time in 2023, our 2024, that's going to be a mid west distribution center, which will allow us to to cover without getting too far the stem miles cover half the United States and we've told US about that's about the right thing we need to do to continue to fuel the expansion.
Got it thank you and I just wanted one follow up on the the share buybacks. I guess was was the the buybacks. This quarter was that more situation, where you were taking advantage of the pullback in the stock price or is this now something that maybe you should expect on a more consistent basis.
No it's absolutely taking advantage of the stock price on an opportunistic nature.
Got it okay, great. Thanks, guys.
Thanks, Mike Thank you.
Thank you.
Next question comes from Jason half with Bank of America. Your line is now open.
Thank you and I'd like to add my condolences as well and from my question I wanted to focus on the supply chain issues have those been fully rectified and can you talk about what changes you've made and then exactly what's causing there to be this lingering pressure to comps in Threeq and Fourq you. Thanks.
Sure Jason I'll take the supply chain and then myself in jail answer the the lingering issue on comps for the back half of the year.
The supply chain issues, we had really started at the very tail end of Q1 and into Q2 and we just didn't.
We didnt have the right staffing levels on the distribution centers in order to throughput the goods from the the vendors into the stores and we got a bottleneck created when that occurred in it took us almost all Q2 to work through that.
What we had to do there as we added additional labor we changed a few of our processes.
And we're very comfortable as you can see with our results, we corrected that and that was a very short term in nature issue that we had to deal with.
Caused a little bit of pressure on the stores with the significant freight that the dcs put into the stores, but they have worked through that and we feel pretty good where we sit today. So the the DC components that we struggle within Q2 are largely.
Not almost completely rectified, we've had to invest a little bit more in the labor side of the business, but we're comfortable we believe that was well worth the investment with regards to cost we've talked about that earlier, we opened up a lot of a tier use sites that we got a bankruptcy court that had significant cannibalization impact on our overall store base plus we had the.
Strong store classes coming into the comp that a larger drag than our normal.
Drag on the comps from reversed waterfall and we had said earlier that we believe that would continue for Q3 in Q4, and then we'll be back into long term algorithm for 2020, Joe you want to any color that are yes, no I think that's spot on the removed the cannibalization and reverse waterfall are going to stick with us the entire back half like we talked about the impact on.
The comp from the supply chain in Q3 like John said, we did get the product after the stores but.
Took a while for those stores to handle that volume of product. We didnt have to do some balancing by department and by store to get the Assortments proper. So thats kind of why we continued to have the headwind during Q3.
Largely in Q4.
We're not going to have a headwind so much on the comp from the supply chain aspect, that's largely a Q3 item and in the rear view mirror.
I think the headwinds ever going to have in Q4 will continue to me the reverse waterfall and the cannibalization and of course like John alluded to we are going up against some pretty big.
Stacks, whether it's a two year three year for your basis, just our own success comping that in Q4.
Got it Thats really helpful and then for a follow up on the reverse waterfall do you expect that to continue to be a headwind into 2020 based on how the new stores are performing I guess at the end of last year in the beginning of this year.
Or or should that headwind start to dissipate next year. Thanks.
Yeah, sure, Jason and for sure it's going to its always going to be there I think we had a bit of an outsized impact we have had an outsized impact this year with the 17 class being so strong and then the 18 class being right behind it I think as we look to 19 again to your point. It is another strong class, but as we grow our comp base gets bigger.
So we think we'll be able to absorb that and get back to our typical long term growth algorithm in 2020, and like we said on the cannibalization front a large part of that will anniversary in Q1 in Q2 of next year.
Thank you next question comes from Jeremy Hamblin with Craig Hallum Capital. Your line is now open.
Thanks of I'd like to add my deepest components is on the loss of Mark.
I wanted to just follow up I think related to supply chain.
And.
In terms of thinking about ways to address that moving forward.
Their investments that you might look to on the technology side to help have that process be a little bit move there going forward.
Yeah. Jeremy This is John I think from a technology standpoint, there automation standpoint, our buildings or state of the art.
We don't really have a lot of needs.
From an automation perspective, I think the thing that we were a little short change on we Didnt staff up properly.
In the buildings and then we had some processes that we needed to tweak a little bit and as well as I said earlier the B DC network is moving very very well. It's we're very proud to say, it's back to normal operations and their throughputs very very strong. So there's really nothing that we need to do or invest in from a technology standpoint.
As we move forward our oldest distribution centers 2011, so were we don't have a lot of.
Outdated.
Non automated processes in our building so we feel good where we're at today and moving forward.
Okay and related can you comment at all it looks like some of the industry rate.
I think costs have started to fall just a little bit.
Is that something that might be a little bit of a benefit here heading into 2020.
It could it could be a little bit of benefit Jeremy we do have contracted rates with our.
Customers broker, but we do have some spot rate opportunity. So there is some up there is some potential upsides the rates continue to drop from an import perspective.
Okay, and then last one from me.
In terms of winter storm Harper last year I know ahead.
And the impact to the end of Q4.
Can you just quantify for us what that impact was comp Andrew or sales from last year.
Yes, well, we don't quantify weather impacts generally so I know, we didn't quantify last year and I don't even have my notes on that in front of me. So I can't quantify Jeremy the only thing I would add to hang my hat on and we did not and don't have that number with us but as you may recall when we were reported our holiday sales, we had about a 7% cost through the holiday.
We ended the quarter with about a five four so January obviously was a tougher month than we we really believe most all of that was related to to the winter storm. So that was kind of the delta you should kind of take note of.
Thank you next question comes from Scott sister Valley with RBC. Your line is now open.
Hi, This is actually $1000 on for Scott. Thanks for taking my question.
Then my sincere condolences on March thing.
Just following up on sort of the cannibalization headwinds I know that's sort of always there, but can you remind us of sort of what kind of the run rate cannibalization that you have we seen sort of normalized year.
Yes, we've typically seen 40 60 basis points.
And like we've talked about before.
On especially on the Q2 calls we're seeing an outsized impact now this year largely because of the toys R. Us stores in the way they were weighted toward some very mature markets and the way that they opened.
Pretty close to each other and pretty close to some other stores. So it's an outsized impact again, we expect to get back to standard growth algorithm in 2020.
Got it. Thank you and then just just maybe a bigger picture question.
So sort of an environment, where cost, particularly IP and labor rising for most other retailers and you've kind of had this sort of tight expense control, especially in this quarter and then kind of low SGN nay growth first over the last few years, that's something that's kind of sustainable you think in today's environment and how should we think about sort of future that shouldnt Ashley.
Growth in that context.
Yes, I can we can't really answer on a forward looking because we do adjust market by market gustava. So it just depends we we don't make universal changes across the entire.
Fleet of stores like a lot of other places do but we look at it competitive wise when we go into markets approved to pay a fair wage to track that the overall employee base. So as wages continue to rise our wages will continue to rise accordingly, but we'll try to make changes in the adjustments to our overall model to offset some of the the cost pressures, but if the.
Cost pressures are greater than than what we can sustain with our 1% to 2% comp store growth. We may have little deleveraging, but if that were to case, we would be out in front of it and let you know.
Got it thanks, so much guys.
Thank you. Thank you.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to John So I guess for closing remarks.
Thank you operator.
Thanks, everyone for test for participating in our call and your continued support wish you a very happy and safe holiday season, and look forward to shared our results with you on our fourth quarter fourth quarter call in late March.
Ladies and gentlemen, this concludes today's conference call. Thank you for submitting you may now disconnect.