Five Below Inc (FIVE) 2018 Q4 法說會逐字稿

Good day, and welcome to the Five Below Fourth Quarter and Fiscal Year 2018 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Christiane Pelz, Vice President of Investor Relations.

Please go ahead.

Thank you, Gary.

Good afternoon, everyone, and thank you for joining us today for Five Below's Fourth Quarter and Fiscal Year 2018 Financial Results Conference Call.

On today's call are Joel Anderson, President and Chief Executive Officer; and Ken Bull, Chief Financial Officer and Treasurer.

After management has made their formal remarks, we will open the call to questions.

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 such statements.

Those risks and uncertainties are described in the press release and Five Below's SEC filings.

The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements.

If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our website at fivebelow.com.

As a reminder, the fourth quarter and fiscal year of 2017 included an extra week, the 53rd week.

This extra week added $15.7 million to sales, approximately $3 million to operating income and approximately $0.03 to diluted earnings per share.

This extra week caused a calendar shift in fiscal 2018, which resulted in additional sales in the first and second quarters, which were largely reversed in the third and fourth quarters.

I will now turn the call over to Joel.

Thank you, Christiane, and thanks, everyone, for joining us for our fourth quarter and year-end earnings call.

I will review the highlights of the quarter and fiscal year as well as discuss thoughts on 2019 before handing it over to Ken to discuss our financials and guidance, and then we will open up the call for questions.

We delivered another quarter of very strong performance.

This was up against last year's outstanding fourth quarter, which was one of our best fourth quarters since going public.

Sales increased 23% on a 13-week basis to $603 million, driven by solid results from our new stores and a comp of 4.4%.

Earnings per share grew to $1.59 or growth of 35% on a 13-week basis.

These results capped a terrific year for Five Below, in which annual sales grew 23.5% on a 52-week basis to $1.56 billion, driven by new store unit growth of 20% and a comp sales increase of 3.9%.

This was our 13th consecutive year of positive comps.

The better-than-expected results and momentum created throughout the year allowed us to raise our original guidance and solidly comp the comp, following our spinner-driven 2017.

For 2018, operating margin finished at 12%.

Even after making tax reform-related investments, well, net income and earnings per share grew over 45% on a 52-week basis, benefiting from the strong operating results as well as reduction in taxes over 2017.

These results were driven by strong and consistent performance from our new stores, which remain our most significant growth opportunity as well as the main driver of our 20/20 through 2020 vision.

During the quarter, we opened 5 net new stores for a total of 125 net new stores in 2018.

We ended the year with 750 stores, which represents less than 1/3 of the 2,500-plus store potential we see in the United States.

Like the 2017 class, the 2018 class is diverse geographically, is generating very strong productivity and is on track to be a record class with first year average unit volumes expected to be over $2 million, our second consecutive class to cross this milestone.

Moving on to comps.

Our 4.4% comp for the fourth quarter exceeded our guidance of 3% to 4% and was fairly even split between transactions and ticket increases.

We saw broad-based performance throughout several of our worlds led by Tech, Sports, Create and Candy.

The toy opportunity this holiday season was even better than expected and drove the outperformance in sales.

In addition, other continuing trends like slime, squishy and unicorn also drew customers into our stores.

With respect to merchandising for the holiday quarter, we offered an amazing diverse selection of affordable options for gift-giving such as desktop diffusers and rock salt lamps in Room plus loungewear and facemasks in Style, wireless earbuds in Tech, action figures and board games in Sports as well as craft kits in Create.

Customers shop the broad selection of products across the store and across our worlds.

Our overall assortment continues to get better and better, reflecting the benefits from our growing scale and our philosophy of reinvesting in merchandise to consistently deliver our customers the promised WOW factor.

On the marketing front, we remain focused on increasing our brand awareness, traffic and customer engagement.

We continue to shift our marketing efforts into TV and digital advertising while utilizing e-commerce and e-mail to dynamically feature our holiday campaign and great gift assortment.

This year marked our fifth year of holiday TV campaigns, and we were especially pleased with the results.

In 2018, we expanded our reach to include markets covering approximately 50% of our stores, which is the highest percentage of stores we have reached through TV.

On the digital advertising front, we tested social media influencers this quarter, with fun video content on Instagram and YouTube, and we're pleased with the resulting customer engagement.

We will build upon our influencer testing throughout 2019.

With respect to e-commerce, we saw continued growth this year at fivebelow.com.

Midyear in 2018, we transitioned our e-com fulfillment in-house, and our team did a great job picking, packing, shipping orders to our customers.

While still a small contributor to sales, we believe e-commerce is an important marketing tool that helps us connect with our customers, creates brand awareness and also drives traffic to our stores.

Overall, 2018 was a terrific year on many fronts, and in addition to the strong financial results and record store openings, we achieved several other important milestones.

Number one, 2018 was our first full year at Wowtown, our new home office, which is truly a place where our associates can work hard in a unique and special environment.

The difference in energy and excitement compared to our prior home office is incredible, and it is a selling point in attracting and retaining talent.

We believe that creating a place where people want to work is critical to hiring great associates, especially in a low unemployment environment.

Number two, we successfully completed our store remodel test and are rolling out a formal remodel program in 2019.

Number three, we launched a test within a handful of our stores, offering a limited assortment of higher price point items currently up to $10, which is another example of our continued focus on innovation.

We will continue to test this in 2019.

Number four, we broke ground and built our first owned DC just south of Atlanta, which is expected to officially open this spring, serving nearly 200 stores and eventually up to 500 stores as we expand into the Southwest -- in the Southeast.

Number five, we successfully completed the accelerated rollout of our new POS system on time and on budget.

Number six, we enhanced our technology team, increasing talent and hiring our first CIO.

Number seven, also with regards to talent, we reinvested a portion of our tax reform-related proceeds in our associates to improve their wages, benefits, training and development and helped ensure a solid competitive position in our markets.

Our associates are extremely important to us as they are key to creating the WOW customer experience we are known for.

Number eight, and last but not least, we created partnerships with both local and national organizations to support charitable causes such as autism research to the Philadelphia Eagles, health and wellness through CHOP, the Children's Hospital of Philadelphia, and education through the Kids In Need Foundation.

These are in addition to our ongoing support for Alex's Lemonade, St.

Jude Hospital and Toys for Tots.

Both our customers and our associates have enthusiastically supported these causes, and I'd like to thank them for their efforts in raising millions of dollars in 2018.

As you can tell, we accomplished a lot in 2018.

Now looking ahead.

We believe we are in a great position for 2019.

Overall, we continue to make disciplined investments to further strengthen our foundation and support the growth and scaling of Five Below.

We remain committed to our key strategic priorities, and we'll continue to invest in our stores, merchandising, marketing, people, systems and infrastructure.

Specific to 2019, we are focused on 3 strategic areas.

One, elevating the experience for our customers and associates; two, delivering even better WOW products; and three, enhancing our supply chain.

Let me elaborate further.

At the heart of everything we do is our customer.

Our goal is to continue to innovate and provide an amazing differentiated store experience.

In doing so, we aim to attract and WOW new customers and, just as importantly, increase our existing customers' already strong brand loyalty to Five Below.

Our store teams are critical to our customers' shopping experience, and we are investing in our associates so they can better serve our customers.

I am excited to share with you today the progress we have made in several areas to improve the Five Below experience.

Number one, as you saw from our announcement a few weeks ago, we hired Judy Werthauser to the newly created position of Chief Experience Officer or CXO.

Judy brings a wealth of experience and expertise in leading teams and developing cultures while driving growth, having done so most recently at Domino's Pizza and Target.

She will lead a cross-functional team to improve both our customer and associate experience.

We welcome Judy to Five Below.

Number two, as part of our focus on the customer experience, we have been testing a redesigned front-end.

This reimagined experience includes self-checkout and additional impulse items in the checkout area.

Our customers have enjoyed the new experience and the benefit from speedier checkout and a higher level of associate engagement.

We expect to expand our redesigned front-end experience in over 100 stores this year, including most of the stores in our remodel program.

Number three, based on the successful store remodel test, we now are in a position to roll out a formal multiyear program, beginning with approximately 50 stores in 2019.

The refreshed store is designed to create an even better shopping experience, which we believe will drive more repeat visits and foster even more loyalty among our customers.

These remodels, combined with 145 to 150 new stores we are opening, will bring the total stores in the fresh format at the end of 2019 to nearly half of the chain.

Number four, we also began testing a new offering within our Five Below stores to deliver extreme value at a slightly higher price point, currently up to $10.

Some of the stores have a separate area for these products, while others have only an 8-foot section.

We will continue to source and test exciting new products for this area to give our customers even more value.

Given the initial positive customer reactions that we have seen, we plan to expand the test in 2019 to about 20 more stores.

Number five, as for our associate experience, we are investing in both Wowtown, which is our home office, and our WOW crew, which is the field.

Specific to the WOW crew, we began investing in wages last year as well as in systems, tools and routines to make the job easier.

Our retail operation is led by George Hill, and I'm excited about the progress he is making for our field associates.

I couldn't be more proud of the many teams at Wowtown who have worked tirelessly to bring these initiatives to life so quickly.

We are really excited for our customers and associates to enjoy all of these innovations, from the remodels to the expanded extreme value tests, to the reimagined checkout experience and so much more.

On to our second strategic priority, WOW products.

We are gearing up for Easter with fresh products, including new collectibles and other toys and, as always, a great lineup of Easter baskets and candy to delight teens, tweens and beyond.

In addition, we are seeing a continuation of trends from the fourth quarter that are also helping drive sales.

Easter is later this year, April 21 to be exact, so we have big selling weeks ahead of us, and our teams are ready for them.

New this year, we decided to do a small TV test in Q1, which will cover about 10% of our store base, similar to how we began Q4 TV 5 years ago.

The ad will focus on our Easter product offering and began running this week.

This new TV commercial is another example of the innovation mindset that permeates the organization.

Regarding our third strategic priority, supply chain, we already mentioned opening our new Southeast distribution center this spring.

The Southeast DC outside of Atlanta will supply product to our stores and, thus, our customers more quickly.

We are also close to announcing our next DC in the Southwest to open in 2020 and are beginning to work on strategic plans for our West Coast and Midwest DCs.

We are firmly committed to enhancing our supply chain to ensure our growth continues uninterrupted.

In addition, we are kicking off several new projects in IT to improve e-com, business intelligence and our core merchandising platforms.

The merchandising platform upgrade is a 2-year project.

It is the last leg of the core systems upgrade that remains after having successfully integrated our new financial, planning and POS systems.

We look forward to having robust systems in place that will serve us for the next decade and beyond.

In summary, we are extremely pleased with the performance and core strength of Five Below as demonstrated by our fourth quarter and full year 2018 performance.

Our results continue to reinforce the universal appeal of Five Below and the strength, consistency and flexibility of our model, giving us continued confidence in our 2,500-plus nationwide store potential and ability to achieve 20% top line growth, with 20%-plus bottom line growth through 2020.

We are firmly focused on executing on our 2019 priorities and delivering another strong and exciting year for our customers, our teams and our shareholders.

With that, I will turn it over to Ken to provide more color on the financials.

Ken?

Thanks, Joel, and good afternoon, everyone.

I will begin my remarks with a review of our fourth quarter and fiscal 2018 results and then discuss our outlook for the first quarter and fiscal 2019.

Our sales in the fourth quarter of 2018 were $602.7 million, up 19.4% over the fourth quarter of 2017 or up 23.2% on a 13-week basis.

Sales for the quarter were negatively impacted by the calendar shift by approximately $6 million, which was considered in our guidance.

We opened 5 net new stores in the quarter and ended the quarter with 750 stores, an increase of 125 net new stores over 2017 or 20% unit growth.

As Joel mentioned, we are very pleased with our 2018 new store openings, which are on track to be another record class.

Comparable sales increased 4.4% for the fourth quarter of 2018, driven by a 2.3% increase in comp average ticket and a 2.1% increase in comp transactions.

This compares to a 5.9% comp increase in the fourth quarter of 2017.

Q4 gross profit of $244 million increased 17.6%.

Gross margin finished at 40.5%, deleveraging by approximately 60 basis points, primarily due to the outperformance of Toys and Games sales, which included lower margin opportunity buys.

Q4 SG&A as a percentage of sales deleveraged approximately 60 basis points to 21.2%.

Tax reform-related investments, primarily in store wages and marketing, were offset in part by leverage of other corporate expenses.

Operating income of $116.5 million increased 12.6% or 16% on the 13-week basis.

Operating margin decreased approximately 120 basis points to 19.3% of sales, driven by the factors I just described.

Our effective tax rate for the fourth quarter of 2018 was 24.4% compared to 35.2% in the fourth quarter of 2017.

The decrease in the effective tax rate was driven primarily by the benefit from tax reform.

Net income for the fourth quarter of 2018 was $89.3 million or $1.59 per diluted share, an increase of 32.5% and 31.4%, respectively.

On a 13-week basis, net income and EPS increased 36.5% and 34.7%, respectively.

Q4 2018 EPS included an approximate $0.01 benefit from share-based accounting.

For fiscal 2018, total net sales were $1,560,000,000, an increase of 22% over fiscal 2017 or 23.5% on a 52-week basis.

Comparable sales increased 3.9% as compared to a comp sales increase of 6.5% in 2017.

The comp increase was driven by a 3.1% increase in comp average ticket and a 0.8% increase in comp transactions as we anniversaried the spinner trend from 2017.

Operating income of $187.2 million increased 18.9% over fiscal 2017.

Operating margin for 2018 declined approximately 30 basis points as relatively flat gross margins were accompanied by SG&A deleverage.

Tax reform-related investments were partially offset by leverage of fixed expenses.

On a 52-week basis, operating income increased 21.3%, and operating margin declined approximately 20 basis points.

Our effective tax rate for the year was 22% compared to 35.5% in 2017.

The 13.5 percentage point decrease was due primarily to the benefit from tax reform and includes a 270 basis point effective tax rate benefit from share-based accounting.

Net income for fiscal 2018 of $149.6 million increased 46.1% or 48.9% on a 52-week basis.

Diluted earnings per share for fiscal 2018 of $2.66 increased 44.6% or 47% on a 52-week basis.

Diluted earnings per share for fiscal 2018 included a $0.09 benefit from share-based accounting.

We ended the year with approximately $337 million in cash, cash equivalents and investment securities and no debt.

This is an increase of approximately $65 million versus the end of fiscal 2017.

We continue to generate strong free cash flow from our powerful economic model that delivers an average payback on our new store investment of less than 1 year.

Inventory at the end of the year was $243.6 million as compared to $187 million at the end of fiscal 2017.

Ending inventory on a per store basis increased approximately 8.6% year-over-year.

The increase was due primarily to pulling forward certain spring inventory into 2018 due to the earlier Chinese New Year and to avoid the potential increase in tariffs to 25% that was originally expected to take place on January 1, 2019.

During the fourth quarter, we purchased approximately $2 million of shares, leaving $98 million available on our $100 million share repurchase authorization.

Now I would like to turn to our guidance.

We are assuming the current 10% tariff on a subset of our goods remains in place, the impact of which we have worked to fully mitigate in 2019.

For fiscal 2019, sales are expected to be in the range of $1,865,000,000 to $1,885,000,000, an increase of 19.6% to 20.9%.

The comparable sales increase is expected to be approximately 3%.

We plan to open 145 to 150 new stores and expect to end the year with 895 to 900 stores or unit growth of approximately 19% to 20%.

The majority of new stores will be in existing markets, but we are also entering 3 new states.

We just entered Iowa and Nebraska a few weeks ago, and we'll add Arizona to our state footprint in the second quarter.

We expect to finish 2019 operating in 36 states and the District of Columbia.

We expect to open approximately 50% of our new stores in the first half of 2019 compared to 53% of new stores opened in the first half of 2018.

Total store weeks are expected to grow at approximately 18% to 19% versus the 19% to 20% unit growth.

This slower cadence of new store openings impact sales by approximately $10 million for 2019.

We are assuming new store productivity adjusted for operating weeks of over 90% against record-to-date performance from the class of 2018.

For the full year, our guidance assumes a slight deleverage in operating margin that is due primarily to 2 factors: our new Southeast distribution center and implementing the new lease accounting standard.

We expect to open the new Southeast distribution center, our first owned DC, in the spring of 2019, and the annual deleverage associated with bringing on this new DC is approximately 20 basis points, which is included in SG&A as depreciation on the owned building.

The new lease accounting standard requires certain architectural and legal fees associated with new store leases to be expensed instead of capitalized.

This drag to operating margin begins in the first quarter and impacts SG&A by approximately 20 basis points for the full year.

We expect a full year effective tax rate for 2019 of approximately 24.5%, which does not include any potential impact from share-based accounting.

We will update our guidance quarterly with actual reported results from this accounting standard, but we will not guide to the potential future impact.

In 2018, the share-based accounting standard lowered the tax rate from a normalized 24.5% to 22%, providing a $0.09 benefit to EPS.

Net income is expected to be in the range of $169.9 million to $173.9 million, representing a growth rate of approximately 13.5% to 16.2% over 2018, with diluted earnings per share in the range of $3 to $3.07.

Excluding the tax rate benefit from share-based accounting in 2018, diluted earnings per share are expected to grow by 16.7% to 19.5%.

Our new owned distribution center and the new lease accounting standard negatively impact EPS for the year by about $0.10 in total.

This guidance does not include any potential future impacts from share repurchases.

With respect to CapEx, we plan to spend in total approximately $170 million in 2019 in gross CapEx, excluding the impact of tenant allowances.

This reflects the opening of approximately 145 to 150 new stores, 50 remodels, completion of our new distribution center in the Southeast, initial estimated cost for a new Southwest DC and investments in systems and infrastructure.

For the first quarter ending May 4, 2019, net sales are expected to be in the range of $361 million to $366 million, an increase of 21.8% to 23.5%.

We plan to open approximately 35 new stores in Q1 this year as compared to 33 stores opened in the first quarter last year and are assuming a Q1 comp sales increase in the range of 3% to 4% versus the 3.2% comp increase in Q1 2018.

Diluted earnings per share for the first quarter of fiscal 2019 are expected to be $0.32 to $0.35 versus $0.39 in diluted earnings per share in the first quarter of 2018.

The first quarter of 2018 had a $0.04 benefit to EPS from share-based accounting, which was reflected in the lower tax rate.

We expect substantial year-over-year operating margin deleverage of approximately 175 basis points in the first quarter of 2019, primarily driven by expenses that did not incur in the first quarter of 2018.

These include the tax reform-related investments in SG&A that began in the second quarter of 2018 and ramped through the remainder of the year, the startup cost of our new Southeast DC and implementation of the new lease accounting standard.

Given the cadence of these expenses in 2019, we are expecting differences in leverage and operating margin results between the remaining 3 quarters.

While it remains our practice to provide guidance for the current quarter and full year, I will provide some directional comments on how we are thinking about quarters 2 through 4.

The net impact to operating margin of the expenses primarily related to our new DC and the new lease accounting standard is about 40 to 50 basis points of deleverage in each of the second and third quarters.

This deleverage in the second and third quarters is more than offset in the fourth quarter as we expect to leverage distribution center efficiencies and other corporate expenses.

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.

Joel?

Yes.

Thanks, Ken.

As you can tell from the Q1 guidance Ken just shared, we expect to continue our strong momentum from 2018 into 2019.

2018 was an amazing year for Five Below.

Our teams accomplished a lot throughout the organization.

And I want to thank all of our associates for their hard work and dedication.

Thank you for making Five Below so special for our customers.

We have delivered several years of double-digit revenue and earnings growth, and we look forward to building on this track record in 2019 and the years to come.

We are working on many exciting initiatives and product opportunities in 2019 to drive sales, bring more efficiencies to our business and create an even better customer and associate experience.

Said another way, innovation is alive and well throughout Five Below.

I am energized to lead this great company and excited about the prospects for 2019.

We had a lot to share with you today about the success of 2018 and the many initiatives we expect to accomplish in 2019.

Before I turn the call back over to the operator for questions, let me remind you that we are short on time and to please limit yourself to only 1 question so we can get through everyone.

Operator?

(Operator Instructions) Our first question today comes from Matthew Boss with JPMorgan.

So, I guess, a couple of things.

What's the embedded assumption for merchandise margins this year flowing through the gross margins?

Any headwinds to consider on that line?

And what's the comp needed to leverage occupancy within the gross margin this year?

Yes, Matt, with respect to the merch margins, I mean, similar to what we've spoken about before, any benefit that we would see there coming from scale or otherwise we'll reinvest back into the product itself.

So our assumptions again are that merch margins will be relatively flat, included in terms of -- in 2019.

And then with occupancy, obviously, that depends quarter-to-quarter, but we would expect to get some type of leverage on occupancy on a 3% comp, as we've said before, on an annual basis.

As we've seen in the recent past and we expect at least at this point that at a 3% comp, we start to hit that tipping point for leverage.

The next question comes from Vincent Sinisi with Morgan Stanley.

Congrats to a strong end to the year here and kind of appreciate the color on some of the '19 quarterly cadence there.

So let's just -- maybe for my question, let's just stick on, obviously, the core stories here with some of the newer initiatives.

Can you just, on the remodel, give us a sense for kind of average or remind us kind of just average cost and kind of maybe some color around the yield you're getting?

And then specifically, with some of those front-end tests that you mentioned, is that just the case that it wouldn't go into all remodels just because of the physical stores or anything else there?

Vince, I'll take the first one around the cost of the remodels.

As you know, we spent the last year or so really perfecting that process, and we continue to do that as we move through this program.

But on average, at least at this point, we would expect that the cost of a remodel to be less than what we've invested into a new store at this point.

And in terms of return, that could depend, obviously, on the lift we get from the remodel itself, but it's obviously a return that's meaningful enough for us to be able to go forward with this formal program.

Yes.

It's running about half, Vincent.

And I would say on the second part, as far as the front-end experience, obviously, well, we've got the store tore up for a remodel.

It just makes sense to incorporate the front-end experience at the same time, and that's why I said in my prepared remarks, largely, every one of our remodels will include that, for those that haven't seen one of the new remodels this year.

The next question comes from Michael Lasser with UBS.

Joel, can you clarify your comment about continuation of trend from 4Q that are driving sales?

Does that mean that the comp you're seeing thus far quarter to date is the same that you saw in the fourth quarter?

Or are you talking about product-specific trends?

And as part of that, can you also opine on how you think a later Easter will impact your sales for the first quarter?

Is that a net benefit to you?

Yes.

Obviously, my comments were relative to the guidance we gave you of 3% to 4% for the fourth -- for the first quarter is a continuation of the -- about 4.5% comp we saw in fourth quarter last year.

But we are continuing to see several of the products we saw in Q4 that I highlighted in my prepared remarks still being strong in Q1.

And it's our core worlds that are really driving the business.

I think we called out 4 worlds this year.

And then as far as the cadence for Easter, it's always hard to say.

Weather always plays a factor in the first quarter, but generally speaking, you would usually think that a later Easter is a benefit over an earlier Easter.

But at the same time, as we continue to become more and more nationwide, that smooths out the weather aspect of it.

The next question comes from Karen Short with Barclays.

I just have 1 clarification and then a question.

So, I guess, what was -- what you tried to advertise widely was, obviously, the impact or negative impact on the DC opening in terms of the EPS impact, but what wasn't necessarily known was the lease, the 20 basis point impact from lease accounting.

So I kind of get -- if I -- 20 basis points is about $0.05 to EPS for the year, which gets me to what I think would be a normalized range of like $3.05 to $3.12 in EPS.

So, I guess, the first question is, is that the right way to think about it?

And then, I guess, the bigger picture question I had is just kind of within traffic.

I guess, any sense of the mix of repeat customers versus new customers, just given all the initiatives that you have in place?

Sure.

Thanks, Karen.

I'll take the first one.

As you know, we always try to be as transparent as we can around kind of the puts and takes, especially within the guidance.

And I think the way you're looking at it is accurate around the drag related to the distribution center, weighted a little bit heavier as I mentioned in Q1 and earlier, maybe a little bit more in Q2 also.

But on a full year basis, we see about 20 basis points of a drag related to the new DC, and by the way, that's really related to depreciation down in SG&A.

And then your comment around the impact of lease accounting, I believe that's accurate also, 20 basis point impact for the year, evenly from a dollar perspective as you go through the quarters, but again, on an annual basis, about a 20 basis point drag, which translates to about $0.05 in EPS.

Yes.

I was just trying to get to -- because that's more of a normalized 19% to 22% EPS growth rate.

That's why I was kind of asking that.

Yes.

And traffic was, in fourth quarter, about 50% of the comp.

And obviously, trends are -- as we said many times, are always good for Five Below, the latest trend being the closure of Toys"R"Us last year, a lot of new toy customers out there searching for new destination.

And so between that and many of the initiatives I called out, we expect traffic to continue to be strong.

But any sense of the new versus repeat customers?

Without having our own credit card and without having a loyalty program, it's really hard for us to measure that specifically, but every survey we do continues to show that we're continuing to attract several new customers.

So we're real pleased with the ratio of new customers that we're seeing.

The next question comes from Jeremy Hamblin with Dougherty & Company.

Congrats on the strong results for the year and Q4.

I wanted to ask some questions actually about potential loyalty program.

I know that you've been working on this and thinking through the mechanics.

Can you give us a little bit more color on how this potentially gets implemented here in 2019?

Yes.

Let me just clarify that.

I thought what I said on the last call was we wouldn't start working on the loyalty program until we completed the POS system, and that is the case.

We really spent no time on loyalty in '18.

And then I think as you can tell by my prepared remarks today, we got several great new initiatives coming into fruition here, and we're pushing full steam ahead on beginning to implement many of those, which we think will be great for driving new customers, improving traffic in our stores.

And then as far as specifically loyalty goes, don't expect to see a loyalty test in '19.

We'll begin to work on the strategy in '19 and what we think it might look like, but that's more of something in 2020 and beyond as far as customer-facing goes.

The next question comes from John Heinbockel with Guggenheim Securities.

So, guys, 2 related things.

If you think about marketing spend for the year, right, the idea that, that would grow in line with sales and how many -- what percent of the base do you think you'll reach in the fourth quarter?

And then any update on brand awareness that you might have done in the last 3, 4, 5 months?

Yes.

You're absolutely right, John.

Marketing spend is relatively flat year-over-year on a rate basis.

Obviously, with our huge growth, the absolute dollars are up significantly.

And in one form or another, we pretty much touched the entire store base in the holiday season.

I called out TV specifically.

That particular element is about 50%, but with all the other marketing initiatives we got out there, we're touching everybody, whether it's through digital efforts or TV or something else.

And then as far as brand awareness goes, John, we're doing that once a year now.

And so our last one we did was in late first quarter of '18, and the awareness number was about 61%, up from 58% the year before.

And we'll be back in the market later this quarter again.

So I think as we get -- jump back on the call in June, we'll be able to give you an update on where that trend did this year.

But I don't have any new update.

The next question comes from Judah Frommer with Crédit Suisse.

So maybe back to inventory and tying in the Ten Below concept.

You mentioned that you fully offset any margin impact from 10% tariffs.

Is there a potential to benefit if those tariffs are rolled back over time?

And are you internally as focused as you were, say, 6 months ago on price points above $5?

Or has kind of the planning around that died down a bit?

Well, let me just clarify as a reminder for everybody on the call, we started working on the Ten Below concept or just WOW concept long before tariffs ever was on anyone's mind.

So that was really an offensive strategy of how do we bring extreme value at higher price points to our customers.

So it really had nothing to do with the tariffs.

I might have made some comments in some of my other prepared remarks that we will mitigate tariffs any way possible up to and including raising prices, but at this point in time, what we have forecasted in our guidance is that tariffs would remain at the 10%.

I think it's anybody's guess whether it's going to go up or down, but what we forecasted is it being -- remaining at the 10%.

Should it go down, I think that would be on a case-by-case basis.

But remember, a lot of our inventory is already flowing or in our buildings, and all that is already booked at the plus 10%.

So any of that large benefit would be 2020 and beyond.

The next question comes from Edward Kelly with Wells Fargo.

Anthony Bonadio on for Ed.

I just wanted to dig on Toys a little bit.

Can you help us understand the magnitude, the impact on Q4 and last year overall?

And then looking forward, do you see the same benefit over the next few quarters?

Or putting this another way, could we see a halo effect to the ones from spinners?

Yes.

I guess, it's really hard to tease that one out exactly, Anthony, just as we had the challenge teasing it out when we had the spinner craze.

But, I guess, one way to think about it, prior to giving Q4 guidance, the implied guidance was probably 150 basis points lower than when we guided 3 to 4. And -- so you can assume that increase in guidance that we gave for Q4 largely assumed -- or largely was due to the emergence of the Toy trend, because, clearly, at the beginning of the year, we didn't expect Toys"R"Us to go completely out of business.

So you back into there and it's probably in that 100 to 150 basis points range was the Toy impact.

And then we've said several times, the outperformance was largely due to Toys, so you can add 40 basis points to that.

So it's probably somewhere between 100 to 150 basis points.

And then as far as will it continue, look, we have no reason to think it wouldn't.

Every time we've had a trend, new customers are exposed to Five Below.

They like what they see, and they continue to come back.

And clearly, our marketing team is doing many surveys out there right now, and every indication we've gotten is they had a great experience over the holiday.

New customers got exposed to us and they'll be back shopping in 2019.

So it's -- there's no reason to believe it won't perform just like the spinners did last -- in '17.

Thanks, Anthony.

The next question comes from Brian Nagel with Oppenheimer.

Maybe a little bit longer term in nature, but you talked a little bit in the prepared comments about -- I know it's a small test at this point with products up to $10.

Again, I recognize it's small, but to the extent that this continues, so you push forward with this effort, will it entail some type of significant remarketing campaign?

Or would this be the product category within the sorts that continue to do quietly and really no changing to the overall marketing?

Yes.

I mean, look, to answer that question, Brian, at this early stage, it would probably be pure speculation on my part.

I think you've got to liken it more to -- as we rolled TV out, starting in '14, as we started on the new remodel -- or, excuse me, the new concept, 2 years ago, started on the remodel, the similar cadence that we take at Five Below every time is we go with pace and diligence.

And if it takes us a couple of years to figure this out, we'll take a couple of years, and that was the case with remodels till we got it right.

The case with the new concept, we figured that one out in about a year, and then we flipped it into all new stores starting in 2017.

And so, I guess, what I'd leave you with, Brian, it's -- rest assured, we're going to get this right.

We're going to do it with the right rigor.

I announced in my remarks, we're going to add about 20 stores this year.

And I think it could go every direction you indicated and many others besides that.

But I think the main point is we're innovating, we've got a lot of new initiatives in the pipeline and we're really excited about the growth prospects that rest ahead and up to and including testing products above $5.

The next question comes from Anthony Chukumba with Loop Capital.

You said a lot of really good information.

I just had a quick follow-up question.

In terms of the customer loyalty program or the potential customer loyalty program, just to be clear, one of the precursors to starting that or being able to roll that program was putting the new point-of-sale system.

So now that you have a new point-of-sale system, that could potentially allow you to roll the customer loyalty program.

I just want to be clear about that.

Yes.

You're absolutely right.

And I just was trying to clarify from the earlier call from -- question from Jeremy is we weren't working on the loyalty program last year.

We were concentrating on getting POS out and several other initiatives.

What you should expect is we'll start working on the strategy and what it should be, but our current plans aren't for that to be customer-facing in 2019.

The next question comes from Chris Prykull with Goldman Sachs.

So a quick follow-up to Brian's questions earlier.

I know it's really early so you might not have an answer, but I see that you integrated the $10 items online.

Any initial takeaways from doing so?

And then if you can't answer that, just on the front-end renovations, the self-checkout and impulse items, what are you thinking in terms of any OpEx savings from the self-checkout or sales lift from adding more impulse items?

Yes.

The $10 test online is really new.

It's -- we're talking weeks, not even months, so very, very early to even begin to speculate on that.

I think the bigger takeaway on the front-end -- reimagined front-end experience is just -- it's just another example of how we continue to innovate in the store.

The first and most important goal of that initiative is to improve the customer experience.

We hear from several of you that there's times when there's lines.

This is a great way to reduce lines as immediately always have 7 to 9 checkouts open at any given time.

And so you've got a faster checkout.

It allows us to have more engagement with our associates, with the customer.

And then as far as the products in there, they're larger products that were already inside our store, in other parts.

So, look, we continue to innovate, and we're really excited.

I hope you all get out and see one of the reimagined stores with the new front-end.

The next question comes from Michael Montani with Evercore ISI.

Just wanted to ask on the tariff front.

If we were to see a more Draconian scenario with a 25% tariff, would you all be comfortable saying that you could mitigate most of that impact now?

And just related to that, could you remind us what's the direct import percent and then indirect import percent from China, given some of the work you've done sourcing?

Yes.

Look, it's really early for me to speculate on this one.

I mean, the tariff thing has been all over the map.

It's constantly changing.

I think what you should take away is we may not be able to mitigate it immediately, but we will mitigate it up to and including making price changes if we have to for areas that we can't mitigate.

But in addition to China, what -- we source products from Honduras, from India, from South America and many other countries.

So our overall reliance on China is not exclusive.

And we'll -- over time, we'll have -- if it stays at 25% or it goes to 25%, we'll certainly look at shifting even more product to other countries.

But as for right now, we base the forecast and our guidance, all of it on same, basically, at the 10%.

The next question comes from Scot Ciccarelli with RBC Capital Markets.

Scot Ciccarelli.

I guess it's kind of a financial question regarding the first quarter.

You did provide tenth of the full year impact with the DC and the lease accounting, but can you quantify the impact of those factors in the labor piece for 1Q that's driving the 175 basis points just so we can understand the cadence of those effects a little bit better?

Sure.

Around Q1, you're asking, right?

Exactly, exactly.

Yes.

I mentioned about 175 basis points of expected deleverage in Q1.

That split between gross margin and SG&A, like 20% in gross margin and about 80% of that in SG&A, I mentioned the impact from the new distribution center and those preopening costs.

Those will be up in cost of goods sold.

And then the remaining portion of the nonanniversary of the tax reinvestments around wages and the new lease accounting impact, that would be the portion that's in SG&A in Q1.

I guess, I was asking regarding buckets, meaning labor is X, the DC is Y.

Yes.

I think at this stage, I think we feel comfortable just giving you the breakdown inside of cost of goods sold and SG&A, kind of that 20-80 breakdown in terms of the percentage.

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, operator.

Thanks, everyone, for joining us today.

We look forward to speaking with you again on our first quarter call in early June.

Thanks, and have a great evening.

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