Q2 2019 Earnings Call
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On this call today from management are Mark Butler, Chairman, President and Chief Executive Officer, John Sweigert, Executive Vice President and Chief operating Officer and changed our senior Vice President and Chief Financial Officer.
I will turn the call over to Jean Fontana Investor Relations to get started please go ahead ma'am.
Thank you good afternoon, everyone a press release covering the company's second quarter 2019 financial results was issued this afternoon and a copy of that press release can be found in the Investor Relations section of 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 estimates and that actual results could differ materially from those mentioned on today's call and he said the items, including our outlook for fiscal 2019 and future performance should be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
You should not place undue reliance on these 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 factors that might affect future results may not be in our control and are discussed in our FCC filing. We encourage you to review these filings and the annual report on Form 10-K .
Really reports on Form 10-Q , as well as our earnings release issued earlier today for a more detailed description of these factors 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 that we believe may be important in that.
Important to investors to assess our operating performance reconciliations of the most closely comparable GAAP financial measures to these non-GAAP financial measures measure are included in our earnings release with that I will turn the call over to Mark Thanks Gene and Hello, everyone. Thanks for joining our call today no doubt this was a tough quarter for US we have high expectations that are used to winning as demonstrated by our prior 20 consecutive quarters of great execution and great results I want to emphasize my continued bullishness on the business and confidence in our ability to execute going forward. In fact, the ongoing success of our new stores drove a 16% topline increase and stronger than ever new store payback. However, we faced some challenges in the second quarter that are largely short term in nature and more importantly, our swiftly being addressed we underestimated the impact so these new stores and the rapid pace of openings on the business.
Specifically the drivers of our head wins included the opening up 29 stores in the first half of the year more than doubled the number of stores opened in the same period last year, including 13, former toysrus locations that we Opportunistically acquired.
The exceptional productivity of the stores and the related inventory investments needed.
The incredibly strong first year sales of the 2017 and 2018, New store class is normalizing as they entered the comp store base.
As well as merchandise margin pressures driven from both a rate and a mix perspective, which all speak to shortly.
As you saw in our release, we missed and comp store sales and gross margin I'll start with the sales we saw a bigger than expected impact on comp store sales from cannibalization and the recent classes of new stores as they entered the comp base first new stores opened since late last year included the former towards your off locations have cannibalized sales from stores in existing markets at a higher than historical rate. The toys are up stores in particular, our larger boxes and a great locations. Many within an existing market. Secondly, the 2017 and 2018 New store class is entering the comp base had a higher than normal impact on comparable store sales as these stores performance exceeded 100% productivity in their first year.
The 29 stores that we opened in the first half of the year was an all time high for US we underestimated the demand or the initial inventory investment and replenishment for these snore new stores. This resulted in reduced inventory low levels for our comp stores throughout much of the period.
Even with these pitches were thrilled to see the continued strength in our new stores. We are absolutely committed to our long term growth objectives, driven by highly profitable new stores, we look to broaden our geographic footprint with the opening of our their DC early next year, allowing us to enter both new markets and new states.
Moving on to gross margin, which was impacted by an increase in supply chain expenses and reduced merchandise margin.
Supply chain expenses de leveraged as we needed to boost labor to support the outsized inventory requirements for the new store their larger square footage and the velocity of replenishment post Grand opening due to their strong performance. We are now in a much better position within our supply chain and comp store inventories are back in line were working full steam to stay on top of inventory flow, while better managing supply chain expenses.
Merchandise margin was pressured due to the timing of deal flow, which reduced markup on inventory purchases and a concentration of lower margin products sold during the period as we've always said the deals they're going to vary quarter by quarter. This quarter, we purchased and sold the higher penetrate penetration of products with a lower market I can tell you we have an outstanding deals in the pipeline for the second half of this year and our markup is back on track and in line with our expectations. We are laser focused on the buys and continue to see incredible deals from new and existing vendors deals that will benefit our topline and our gross margin.
So tough quarter to be sure all that said, though we remain incredibly bullish on the proven strength of our model of offering great deal growing our store base and leveraging and expanding Ollie's Army, we're going hard after the toy business once again with bigger buys than even last year. In fact, the deals are as good as I've seen across all departments. The performance of our new stores continues to exceed our expectations and we see a tremendous runway for continued growth with the potential to expand our store base to over 950 locations across the country. Facilitating this store growth is the construction of our third DC, which remains on budget and on schedule for operations in the first quarter of 2020.
Ollie's Army keeps growing as well the bargain battalion is now over 9.7 million strong 13.5% increase year over year. These are our best customers in everything we do is focused on rewarding the tremendous loyalty of the army and keep them coming back.
We have grown our organization over 8000 team members and they are working harder than ever I want to thank everyone for their hard work and their dedication and reinforce how much I appreciate their efforts each and every day. So in closing while this quarter was challenging I'm pleased with how we responded as a team and are making the appropriate adjustments to right. The ship I think our short term pain will become our long term gain as the hard lessons of the second quarter will ultimately make us better I feel good about the business and I'm confident in our ability to continue driving sales and profitable growth this year and into the future. Thank you for your support of all these I'll now hand, it over to Jay and he'll take you through our financial results and the 2019 outlook in more detail.
Thanks, Mark and good afternoon, everyone in the second quarter net sales increased 15.9% to $333.9 million driven by exceptional new store performance comparable store sales decreased 1.7% from a 4.4% increase in the prior year.
As Mark mentioned comp sales were significantly impacted by cannibalization prior year store classes with exceptionally strong productivity normalizing as they entered the comp store base and reduce comp store inventory levels throughout much of the quarter.
Comp store sales can assist did have an increase in average basket offset by a decrease in transactions.
During the quarter, we opened eight new stores for a total of 29 openings in the first half of the year ending with two 332 stores in 23 states.
An increase in store count of 17.7% year over year, our new stores continue to perform perform above our expectations across both new and existing markets and we're very pleased with their productivity and ROI.
Gross profit for the quarter totaled $124 million in gross margin dropped to 190 basis points to 37.2% as both merchandise margin and supply chain cost as a percentage of net sales were unfavorable to the prior year.
We had expected a 20 to 30 basis point decrease in the quarter, which we shared with you on our last call, but as Mark discussed reduced markup on our buys concentrated sales of lower margin products and increased supply chain costs. All puts short short term pressure on margin.
As you know expenses increased to $87.4 million, primarily as a result of additional selling expenses from our new stores SGN a increased by 90 basis points to 26.2% of net sales as the growth in expenses outpaced sales growth.
Operating income decreased to $30.8 million in the quarter operating margin decreased 290 basis points to 9.2% as a result of the decrease in gross margin in the de leveraging and best DNA.
Net income totaled $25.2 million or 38 cents per diluted share included in the 38 cents is a benefit of three cents from tax benefits related to stock based compensation adjusted net income, which excludes these benefits decreased $23.5 million or 35 cents per diluted share from $26.1 million or 40 cents per diluted share in the prior year.
Adjusted EBITDA decreased 6.8% to $37.5 million.
At the end of the quarter, we had $78.5 million in cash and no outstanding borrowings under our revolving credit facility.
Inventory at the end of the quarter increased 23.4% over the prior year, primarily due to new store growth and the timing of deal flow.
Capital expenditures increased to $20.2 million in the quarter compared to $5.5 million in the prior year period due to investments in our third distribution center, new stores and maintenance capital.
Turning to our outlook in light of the challenges in Q2 and expectations for the remainder of the year. We are revising our full year guidance as always we remain prudent in how we planned the business given that we operate in a deal driven environment and the very strong numbers that we are up against in the back half of the year that said in the back half of 2019, we anticipate a return to the metrics of our long term algorithm with mid teens revenue growth and high teens net income growth.
For the full year, we now expect total net sales of $1 billion $419 million to $1.430 billion a year over year increase of 14.8% at the midpoint of the range.
Comparable store sales decrease ranging from negative 0.5% to negative 1.5%.
The opening of 42, new stores with no planned relocations or closures gross margin gross margin rate of 39.5% operating income of 174 million to $178 million.
Adjusted net income of $130 million to $133 million and adjusted net income per diluted share of $1.95 to $2, both of which exclude excess tax benefits related to stock based compensation and an after tax gain from an insurance settlement in the first quarter and capex unchanged from prior guidance at $75 million to $80 million.
A couple of additional points to help you in your modeling we're guiding comp sales in the back half of the of the year in a range from flat to a decrease of 2% due to the exceptional productivity of a recent new store class as we expect the outsized impacts of cannibalization and reverse waterfall to remain a factor for the rest of the year.
We also anticipate some level of continued headwinds from comp store inventories in the back half of the year.
Some thoughts on gross margin, we expect further de leveraging of supply chain costs in the back half. That's why we're guiding to a 39.5% full year margin down slightly from our typical annual target of 40%.
I will now turn the call back to the operator to start the Q and a session operator. Thank you.
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And our first question comes from the line of Matthew Boss with JP Morgan. Your line is now open.
Thanks, Mark maybe just to start off if we broke down the 1.7% comp decline maybe three questions. What exactly was the impact of cannibalization and how long is it is.
Is this with you.
I guess to what was the supply chain impact to comps.
How many quarters to normalize this and then finally, what does the comp trend that you've seen here more near term in August .
Matt This is Jay and I'll start with some of the details and I'm sure.
I will chime in.
But obviously the impact of cannibalization the worst reverse waterfall, we do our best to quantify that in calculating we're estimating approximately a 150 to 200 basis points from cannibalization and the reverse waterfall, we're estimating the impact from the inventory levels in the comp stores from the supply chain pressures to be approximately 150 to 200 basis points.
And look the weathered also during the quarter Wasnt, a friend knew us and resulted in us selling a lot of product towards the end of the quarter at a discount which impacted margin, which we'll speak to more but also impacted the sales and finally I think when we look in the back half we're expecting the headwinds from the cannibalization in the reverse waterfall to stick with us for the rest of this year.
Supply chain as well, we're expecting that to moderate but also be with us maybe in about half of the amount that we experienced in Q2 for the back half yes, Matt. The early start to Q2 weather was just not our friend.
And we took it on the chin on a lot of seasonally related product and then got Cherry picked on the back half by the consumer they're brilliant Theres smart.
So July seem to normalize it was you know.
Much more acceptable and the early results from August .
I'm pleased.
You know, we got our wings clipped here, a little bit, but we're going to be better for it and I still feel good about the business and.
I think the real.
Supply chain management is is.
Something that we could have and should have been able to get a little bit of a head of we didnt anticipate that properly.
But.
You know the margin the margin Miss was it was timing was cherry picking was weather was the amount of deals that we had that were offered to us at lower margin, but most importantly in Paramount is that we offer the consumer a bargain but.
You know, we got our wings clipped and.
I think we're right in the ship.
Great and then just a follow up on gross margin Jay.
How best to think about the third versus fourth quarter gross margin any pockets of excess inventory out of Twoq, you and Mark maybe just higher level with a favorable closeouts backdrop that we talk about what explains the mix of lower margin products.
Yes.
I'll go I'll go first so the lower margin product a first of all Q2 of L Y with exceptionally strong.
I had anticipated us to be able to not only lap that but I had anticipated us to be able to increase that so certainly this year I planned it to be better the timing of the deals and the margin profile of the product that we bought that was presented to US was lower I am you.
Once again.
We still agreed to buy it and get it to the stores and it were lower margin goods with weather impacting us early and Weve generally as you well know don't ever really talk about weather, but it was in it there.
That impacted our seasonal or our early seasonal sales.
You know in particular, we've talked we talked about it up at the Jefferies Conference you know the air Conditioner sales early we weren't getting them when we needed him and then when we when it did get hot it came as a discount.
And Matt This is James as far as the margin in the back half I mean, obviously from a full year basis. We are now guiding to that 39.5 versus right around the 40 and what we have done in the model. We've added some additional supply chain costs primarily related to labor.
So when we look at Q3 and Q4 overall gross margin, we're probably going to de lever 20 to 30 basis points in both of those quarters and getting back to the 39.5 for the full year.
Great that's the block.
Thanks, Matt.
Thank you and our next question comes from Peter Keith with Piper Jaffray. Your line is now open.
Hi, Thanks, and good afternoon.
I did want to dig just a little more into that the cannibalization and the reverse waterfall. So these are certainly in a cannibalization that's been around for years as part of your growth model.
When you are quantifying that that 150 to 200 basis points is that in aggregate or is this maybe incremental to historical trends.
Well keep Peter this is Jay and you don't its not an exact science when we're trying to estimate that but thats, what we believe to be an incremental impact I mean, we are seeing a heavy impact from the tier you sites that we acquired Opportunistically and.
Baltimore as an example, and we've done this in a few of our markets. We opened a good number of tier you sites and some pretty mature markets. So we're seeing an outsized impact as a result of that.
Okay. So it's running I guess it is running above but.
But you've always had it around so it's.
Slightly incremental headwind.
Oh for sure it's incremental yes, I mean, the normal impacts that we see I mean, and you can look at our past results on an annual basis Weve put up comps of three or four and we've absorbed that impact. So we are seeing an outsized and an incremental impact of cannibalization from these T. R U sites.
Okay Fair enough and then just to circle up too on the on the IMU for the quarter. Because you guys are usually really rock solid on on hitting your margin target. So it's just a little bit unusual to see buys coming in at lower IMU or lower than you thought anything unique to the quarter with specifics on close out that you could call out to help us understand that and and is it again its a transitory issue to Q2.
Yes, well I think that.
I think I, probably got to go to the L.Y., whereas last year, we had some super sized margin opportunities a couple of bankruptcies.
And we could we could highlight them even within the sales of of our departments, Peter but I feel really good about the late trend in July on I am you and the early returns in August and with great confidence I'm, telling you we're back on track.
Okay. Thanks, a lot guys. Good luck.
Thank you thanks Peter.
Thank you and our next question comes from the line of Brad Thomas with Keybanc Capital markets. Your line is now open.
Hi, guys. Thanks for taking my question.
Open you could just give us an assessment of inventory as it stands here today.
Obviously.
Didn't have the right inventory, where you wanted it in the stores in the quarter.
But it is up a bit more than than sales and your store base. Today. How are you feeling about the degree of potentially markdown risk and three Q.
Yeah, Brad this is John with regards to our inventory position, we feel pretty good where we're at with the inventory position. The the increase year over year I think we're spending about 23.4% increase in inventory most of that is timing of deals specifically rate related to toys. We brought in earlier this year than last year and that Theres really no issues. We have are worried about from markdown risk perspective, we didnt really get our stores Bakken inventory shape for about the last week of July . So we're still doing some fine tuning, but we feel much better where we're at today in the inventory position, but markdown risk I don't think there is any in Q3 or Q4 from where we sit today.
Great and as you all kind of reflect on this this quarter and think about the pace of growth it's right for the company.
You know it this 40 ish level.
Is is this perhaps a level to start moderating and mute the store growth from that mid teens that we've been doing for years.
Or is it too early to really make that call here at this point, yes, Brad I don't think it's a it's a unit issue I think it was the cadence of our store openings. We opened up 21 stores in the first quarter of this year and.
A lot of those stores, where the TR you sites that we purchased in bankruptcy, which of which about 20% larger than our average store. So there was a lot of stores very rapidly in a very short period of time, which put a little hiccup in the supply chain. So lesson learned from our perspective would be as we don't have an issue handling the number of stores, we want to open I think the cadence of the stores.
We're running with the the two Dcs and getting ready to start the third DC was probably a little overly aggressive in the first half of the year.
But we'll take that and we'll adjust accordingly, but the the cadence of store counts, we feel comfortable with the mid teen unit growth and as we said in the past, we'll when we get to the 50 stores per year, we'll reevaluate as we think 50 per store feels about right one a week.
But right now, where we feel comfortable being able to still deliver will be delivered in the past.
Gotcha Thats helpful. Thank you guys.
Thanks, Brad.
Thank you and our next question comes on line of Scot Ciccarelli with RBC capital markets. Your line is now open.
Hi, good afternoon, its actually Gustavo and dollars on for Scott today.
Thanks for taking our questions just wanted to touch on.
Tariffs little bit here.
First even though you guys you know really work on second hand good.
Close out inventory have you historically seen any price elasticity as price and higher for whatever reason and if so how would you sort of describe the magnitude and then you've previously stated.
Under the 10% tariff regime.
You haven't really seen any or.
Cancri outsized opportunities for deals from any disruption or retail.
The terrorists going at 25% and then sort of the new tariff set to begin in September has that dynamic changed at all.
Yeah, well as far as the pricing, we've only seen modest price adjustments vis-a-vis the tariffs thus far.
I think it's our experience what were hearing and for the relative amount of product that we're bringing in for the most part weve been able to go back and negotiate to get.
Money from the manufacturers to mitigate.
The increase in the tariff and or the exchange rate.
So we have not seen a lot of change there have been some things that have changed in the market and weve made a modest adjustment, but I think it's still.
From our perspective is still very very new.
For everybody and we just haven't seen a big shift in that.
The second part of your question deals.
Deal to have we seen any deals that have come up.
There hasn't been anything of any magnitude there have been some minor canceled orders, although I will tell you that things happened very very slowly when it happens overseas and.
Yeah, we would expect to see some uptick and calls on that.
Have not yet thank you very much.
Thank you.
Thank you and our next question comes on line of Simeon Gutman with Morgan Stanley . Your line is now.
Hi, guys. This is the unsi on for Simeon.
Just wondering it sounds like the supply chain issues are continuing and they may step up a bit but how do we think about merchandise margins kind of under underlying that.
Yes. So Simeon this is Jay and from a modeling standpoint, when we're looking at the back half.
Weve largely kept our merchandise margin plan intact really the change ultimately was actualizing Q2.
Which we've talked about the margin pressure there and then adding some costs on the labor side on supply chain. So unlike mark expressed I mean based on what he's seeing in the deals we're seeing the margin the merchandise margin plan.
Is intact basically with when it was originally.
Got it makes sense and then just thinking about kind of the underlying trends of the business for the all the spend per always member how's that been trending or is there anything you can point to there.
The Ollie's Army customer, we're glad to say has been been very consistent very strong the overall spend and the frequency of visit continues to remain very constant the ollie's Army shopper as we said earlier.
His spending over 40% more than a non ollie's army shopper that continues to be one of our strengths in the business and we have year over year growth of about 13.5%, which is for us very positive in nature. So we're excited about how the army's responding to us.
Okay. Thanks, guys.
Thank you.
Thank you and our next question comes from the line of Paul Lejuez with Citigroup. Your line is now open.
Hey, Thanks, guys.
Mark I think gives a term saying you are back on track and I was just curious what does that mean, what what exactly are the issues that you saw in Twoq, two which are back on track and which ones do you still need a little bit more time to kind of get there and then second less last quarter I think you used the term.
Appropriately over bought in them and I guess I'm just wondering as we look back at this quarter.
Do you look back and say that you didnt have the right stuff in the stores or was it that you simply couldn't get product that you that you thought you needed and I guess in which categories did you feel maybe were not as well stock in stores and then just last wondering how we should be thinking about the long term comp rate did this quarter change your view at anyway. Thanks.
Paul This is John I'll take the first part with regards to.
The the impact with supply chain in the quarter. We obviously had mentioned we underestimated the impact of the new store openings and the cadence of the openings of the pressure that put on the supply chain.
What happened with that as we got behind the eight ball on the supply chain front, and we're not able to get as much inventory out of the boxes as we needed to and the comp store inventory suffer because of that.
That that existed for most most all of Q2 and was was corrected basically in the last week of the quarter, so that definitely impacted our sales and our ability to get the inventory out of this out of the distribution centers into the stores and at some level impacted our ability to get the goods into the distribution centers out to the stores as well. So there was definitely a bottleneck issue, we had dealing with supply chain, but that definitely has been corrected and addressed and we feel pretty good where we stand today and will be will be good shape for the back half of the year.
Yes, as far as the merchandise margin Paul last year as I said, a little earlier on the call merchandise margin in Q2 was exceptionally strong United even planned it to be a little bit better this year.
The timing of the deals and the margin profile of the of the product that was offered to us and we subsequently bought.
Was lower margin than what we had anticipated.
Again, most importantly.
To make sure that it was a his and was a bargain to the consumer in it is.
The margin was also pressured by the seasonally related products.
And we had a lot of it left in the stores late late in the quarter and Unfortunately, the consumer came in and Cherry picked us and bought it at a discount in particular.
Maybe through all these days and some clearances that we had throughout the quarter.
What is back on track, we feel good about the supply chain.
Any initiatives weve taken to strengthen our supply chain and then the recent.
Opportunities and offers and buys that we've made have been very strong I'm very pleased that happened late in the quarter and early this quarter.
And the visibility to the extent of the deals that we are working on now I feel very or that are subsequently coming in I feel really good about the margin and we're back on track to our original plan for the rest of the year.
And then on the long term comp outlook, yes long term. Thanks.
Yes so.
I mean, Paul basically you know we view these headwinds and like we've talked about we think theyre going to persist through the rest of this year the supply chain lessening versus the cannibalization or reverse waterfall, but you know.
Theres nothing wrong with the model or different with the model from our perspective and when we get when we look at next year, we anticipate get right back to the one to two comp that we've talked about for many many corners.
Gotcha. Thank you. Good luck guys. Thank you thanks Paul.
Thank you and our next question comes from the line of Judah Frommer with Credit Suisse. Your line is now.
Hi, Thanks for taking my question.
Maybe also just kind of rolling the Q2 and back in 2019 issues forward. It does sound like you feel like 2020 should be back to the.
Kind of usual algorithm, but you've talked in the past not having a ton of insight into comps more than a few months.
Head of achieving them. So is there anything about the back half of the year beyond the cannibalization that tells you deal flow might not be as solid.
Where are you just kind of staying in your tonnage kind of typical conservative guidance range on the on the comp, especially for.
Q4 this year.
Yes. This is Jay and I can start really from a back half planning standpoint.
There is nothing unusual and mark can speak to the deal flow I think you feel good about that it's really we see the headwinds from the cannibalization in the reverse waterfall continuing.
And we see the supply chain like John said the inventories are back back in line overall, we've got some fine tuning to do so we think that is going to moderate but we think we could have a little bit of a headwind. So we really think with our guidance to the flat to negative two for the back half driven by those headwinds and not something underlying or bigger with the business and mark can speak to on the deal flow Judah I feel good about where we're at I like our inventory I like our position on the toys.
Toys are going to be a big part of our.
You know, what we're coming up against but we're locked in were loaded to battle that and I feel good about where we're at.
That makes sense and then maybe just following up on that is in your mind is there any way that 2019 setting up as a relatively easier comp year for 2020 or is it that you still have the toys R. Us still well in fact cannibalization that's you're opening a DC next year like there are other aspects of the business that are still somewhat headwinds next year I think Judy that's a that's an interesting question, but obviously, we think that the last 20 quarters have been pretty pretty stellar quarters for us as well and just this little bump in the road doesn't necessarily make next year a lay up year. So the one to two is going back to our algorithm that we set out for a long long period of time, and we still do have some headwinds to deal with with the towards Aristides Annualizing. So we we do believe that we can get to the one to two.
We don't believe that's a lay up either so it's just something we feel comfortable with them.
Okay. Good luck guys.
Thanks.
Thank you and our next question comes from the line of Edward Kelly with Wells Fargo. Your line is now.
Hey, guys Anthony bond deal on for Ed Thanks for taking the question.
I just wanted to dig on the question of deleverage little bit that's historically been pretty impressive for you guys as I look back over the last few years.
Can you just help us understand what exactly changed this quarter outside of the softer comp.
Mostly labor related or should we be thinking about something else in the back half.
Yes, Anthony this is Jane.
To your point I mean, the biggest reason for the de leverage was the change in the drop in the sales.
And like you said it really was labor related and one of the reasons why we really couldn't take our foot off the gas more than what we did was the fact that we are starting to ramp up receipts into the comp stores, especially.
On product late in the quarter, so that required that we had staffing in the stores to be able to handle the freight that was coming in so kind of a double edged sword with the sales drop and then the increased freight flow late in the quarter.
That's helpful for us thanks.
Thanks, Anthony Thank you and again, ladies and gentlemen, if you have a question at this time. Please press the star in the one key Touchtone telephone.
And our next question comes from the line of Jason Haas with Bank of America Merrill Lynch. Your line is now open.
Hi, Thanks for taking my question. So I think you said in the past that about 3% to 4% of your products are direct imports on tower 123.
Could you say what percentage of products on lists for and then just.
Guidance now includes what we know about tower, so far so for 25 percentile reps.
In the 10% almost four.
Right. So we are.
From a guidance standpoint, really what we've baked in to our guidance for margin is really up to list three.
And even at that we don't necessarily have the full 25% baked in we're expecting that we're going to be able to be effective in getting.
Some of that back on the buy and potentially some of that back on the price from a list for standpoint, the biggest impacts to us would be on toys and things that are Christmas related.
What you are going to be coming now later in December .
And you know we don't it's not like we have a huge exposure to that just the way we go to market a lot of our purchases are domestic like you said, we only had about 3.5%.
Previously, we don't see anything more.
We're going to have some impact from was four but we haven't calculated the exact impact, but we don't expect it to be material.
Okay. Thank you and then I wanted to focus in on on toy specifically I'm. Just curious if you could speak to maybe the quality of inventory you're seeing this year versus last year and then we saw in the fire that you you bought to be.
Well you did last year as you guys had said.
So I'm just curious now with kind of the results in the quarter and the restated guidance. I mean is there any is there any risk here of that you might have to take.
Higher markdowns or anything like that related to that toy inventory that seems to be.
Maybe a little aggressive now given that the lower comp guidance.
I don't think its aggressive at all I think its proper planning I think were spot on and I think I'm going to do it. So I don't think I have any risk as far as the quality of the product.
I think that the merchant did a great job I think.
We're going to see some some pretty doggone good results.
And I'm really really happy with where we're at I don't see any markdown risk whatsoever, any anything greater than what we had last year or any of the previous decades before.
Alright, great. Thank you.
Thank you.
Thank you and that does conclude todays question and answer session I would now like to turn the call back to Mark Butler for any further remarks.
Thanks, everyone for participating in our call and your support of volleys, we remain confident and excited for continued growth in 2019, we look forward to sharing our results with you on our third quarter call in December . Thank you and have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program. You may all disconnect everyone have a wonderful day.