Five Below Inc (FIVE) 2019 Q3 法說會逐字稿

Good afternoon, and welcome to the Five Below Third Quarter 2019 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 thanks for joining us today for Five Below's Third Quarter 2019 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 our 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.

I will now turn the call over to Joel.

Thank you, Christiane, and thanks, everyone, for joining us for our third quarter earnings call.

I will review the highlights of the quarter before handing it over to Ken to discuss our financials and our outlook, and then we will open the call up for questions.

We are pleased to have delivered a strong Q3.

Sales came in above our outlook, increasing 21% to $377 million and earnings per share of $0.18 beat our guidance range by $0.01.

We saw continued outperformance of our new stores and comp growth of 2.9%, driven by increases in both basket and transactions.

New store performance was again a highlight of our third quarter results.

During Q3, we opened 61 new stores, which is 6 more than planned and the most stores we've ever opened in a single quarter.

Our new store count totaled 144 stores at the end of Q3, and we have since opened 6 more to complete our planned 150 new stores for the year.

We opened in diverse markets across 24 states, and 7 of these Q3 new stores made our top 25 all-time fall grand opening list.

New markets range from Lincoln, Nebraska, to Tulsa, Oklahoma as well as Fresno, California, illustrating yet again the breadth of Five Below's appeal.

With an industry-leading less than 1 year average payback period on our new store investment, new stores remain the best use of our capital.

During the third quarter, we once again experienced broad-based performance across our 8 worlds led by Style, Tech, Candy and Room.

In addition to a strong back-to-school season, a variety of trends contributed to our results, including journaling and gaming as well as movie-related trends.

We set our Frozen 2 displays at the beginning of October in preparation for the much anticipated movie release on November 22.

Our merchandising teams did an excellent job sourcing this assortment with exclusive items and incredible deals, and the displays are truly impressive.

The range of products is quite broad, with kids' tees, styling accessories and jewelry as well as plush.

We're a different company since the last movie debuted in 2013.

We have tripled our size, generating substantial scale benefits.

Our merchandising group, led by Michael Romanko, has developed a direct relationship with Disney with access to exclusive products, and we have increased brand awareness through targeted marketing, including social media.

All of this has enabled our teams to prepare for and capitalize on this exciting trend.

Moving on to pricing.

On October 18, our Tech world pricing went from $5 to $5.55 for most Tech products.

As we previously mentioned, breaking the $5 price point was a decision we did not take lightly.

We tested the idea in 3 major metro markets for several months before rolling it out to the chain.

As we discussed on the second quarter call, during the testing period, we listened to our customers.

And based on their feedback, we made additional changes to be as transparent as possible.

While prices have gone up slightly by cents, not dollars, the vast majority of SKUs remain at $5 and below.

And the elasticity results have been in line with our expectations.

Our goal remains to continue to source and deliver extreme value products to our customers without compromising on quality.

Our growing scale, expanding vendor relationships and strong sourcing teams further strengthen our ability to do this.

In addition, we are continuing to execute against our key strategic initiatives, namely, marketing, people, systems and infrastructure as we continue to ensure we have a solid foundation to support future growth.

We are also focused on elevating the customer and associate experience through innovation, which is a top priority for us.

Several of our innovation initiatives are focused on the store experience, namely, the remodel program, the reimagined front end or RFE, the Ten Below test as well as our recent investment in a gaming company called Nerd Street Gamers.

First, with regards to our remodel program, we are on track to complete 50 remodels for 2019.

The feedback from our customers and the store teams about the difference in the shopping experience continues to be very positive and our remodels have generated a mid-single-digit comp lift in their first full year post remodel.

We still expect to remodel a total of approximately 300 stores over the next few years, with a higher number of remodels next year as compared to this year.

Second, the reimagined front end experience is now in about 160 stores, including most of the new stores and remodels.

The benefits of the new RFE include shorter lines, an expanded impulse section and better associate engagement, which all combined should translate into an improved customer experience during the upcoming peak holiday shopping weeks.

The third area of innovation we are developing is Ten Below, our in-store test providing extreme value merchandise at price points above $5 and up to $10.

The concept is now in about 25 stores.

The customers are responding very positively to this test as they see the extreme value Ten Below provides.

The higher price points create an opportunity to expand our offering and provide even more value to our customers.

In addition, this test has generated valuable learnings that we use to develop the chain-wide Ten Below Gift Shop for holiday that I will discuss in a moment.

Fourth, and our newest innovation, is our investment in Nerd Street Gamers.

This is an example of how we continuously look for opportunities to enhance the store experience.

I have enjoyed getting to know John Fazio, their CEO, and I'm excited about the many capabilities Nerd Street Gamers offers as we begin to position ourselves to capture this growing gaming trend.

There are over 64 million gamers under the age of 17 in the United States, and we believe Nerd Street Gamers has the real potential to be not only a longer-term traffic driver to our stores, but also a stand-alone leader in esports.

We plan to test a handful of Nerd Street local hosts in our store-in-store format next year.

The space will be available for gamers to play on pro-level equipment and will also include an assortment of relevant Five Below products for sale such as gaming headphones and snacks.

We will have more to share in this exciting new partnership after we open the pilot stores next year.

On to the all-important Q4.

Those of you who know our business well know that the largest volume weeks lie ahead.

We believe we are well positioned with our assortment and marketing plan heading into these peak holiday weeks.

In addition to the Frozen 2 offering I discussed earlier, at the beginning of the fourth quarter, we added an 8-foot holiday Ten Below Gift Shop in the New & Now area to all of our stores for the first time ever.

This new WOW wall, as we call it, displays a dozen or so incredible, brand-new products and unbeatable quality and value in the $6 to $10 range.

The items are perfect for gift-giving and are largely toys and game-focused with branded items from several of our key vendors, which we showcased in our Black Friday ad last week.

While we are very excited to offer these new, high-value items which we previously would not have been able to sell at $5 and below, we also have a great lineup of $1 to $5 toys and games, including items exclusive to Five Below.

We are constantly thinking of ways to wow our customer even further and believe this new offering reinforces Five Below as the go-to destination for amazing holiday gifts and stocking stuffers at unbeatable values.

On the marketing front, we've extended our TV reach to over 60% of our stores, adding 12 new markets.

We also broadened our digital presence and are running campaigns across more markets.

Part of our digital strategy includes testing social influencers, and we are thrilled to announce our new holiday influencer, Noah Schnapp from Stranger Things.

So to summarize, we feel great about our product assortment, our marketing plan and the store experience we will provide customers in the fourth quarter.

In closing, we are very pleased with our third quarter performance on many fronts, including in exceeding our sales and EPS outlook while executing our pricing changes and preparing for the all-important Q4.

While we are anniversary-ing the first holiday season without Toys"R"Us, which benefited our traffic and sales last year, our merchants have done a phenomenal job assuring we have new, exciting and even exclusive product for Q4 to continue to wow our customers.

I want to thank our entire organization and vendor partners for their hard work and commitment to providing fresh, high-quality, trend-right products at amazing values day in and day out as well as their critical contributions to our tariff mitigation strategies.

Through their efforts, we have been able to deliver offsets to mitigate the dollar impact of tariffs, and we expect to continue to do so.

I also want to thank our customers for their continued support as we evolved our approach to pricing.

We are deeply appreciative of their loyalty and want them to know that what will never change at Five Below is our unwavering commitment to providing our customers extreme value on fresh, high-quality, trend-right products in a fun, differentiated shopping experience.

With that, I'll turn it over to Ken.

Ken?

Thanks, Joel, and good afternoon, everyone.

I will begin my remarks with a review of our third quarter results and then discuss our outlook for the fourth quarter and full year.

As a reminder, we adopted the new lease accounting standard at the beginning of this year which requires us to now record operating leases on our balance sheet and also requires us to expense certain architectural and legal fees which we previously capitalized.

Our sales in the third quarter of 2019 were $377.4 million, up 20.7% from $312.8 million reported in the third quarter of 2018.

We opened 61 new stores during the quarter, with over half completed in the last 5 weeks of Q3 compared to 53 new stores opened in the third quarter of 2018.

We ended the quarter with 894 stores, an increase of 149 stores or 20% versus 745 stores at the end of the third quarter of 2018.

Comparable sales increased by 2.9%, with an increase in comp ticket of 1.9% and a comp transaction increase of 1%.

As I mentioned on our last earnings call, we expected approximately 175 basis points of operating margin deleverage in the third quarter.

Our actual operating margin for the third quarter declined by approximately 160 basis points over the third quarter of 2018.

Gross profit for the third quarter increased 16.3% to $118.7 million from $102.1 million reported in the third quarter of 2018.

Gross margin decreased approximately 120 basis points to 31.4%, primarily due to net unmitigated tariff costs and the shift of certain other merchandise costs from Q2 to Q3.

As a percentage of sales, SG&A for the third quarter of 2019 increased approximately 40 basis points to 28.1%.

SG&A expenses as a percent of sales were higher than last year, due primarily to depreciation costs of our new Southeast distribution center and the new lease accounting standard impact.

Labor and signage costs related to the pricing changes we implemented as part of our tariff mitigation strategy were offset by corporate expense savings.

As a result, operating income decreased 18.4% to $12.7 million versus $15.5 million in the third quarter of 2018.

Our effective tax rate for the third quarter of 2019 was 24.2% compared to 18.6% in the third quarter of 2018.

Our tax rate last year was favorably impacted by share-based accounting.

Net income decreased 24.6% to $10.2 million versus $13.5 million last year.

Earnings per diluted share for the third quarter was $0.18 compared to last year's $0.24 per diluted share, driven primarily by the margin factors I just described.

Last year's third quarter had a share-based accounting benefit of approximately $0.02.

We ended the third quarter with $132 million in cash, cash equivalents and investments and no debt.

We repurchased approximately 191,000 of our shares at a cost of $20.3 million during the third quarter.

To date, in 2019, we have repurchased approximately 338,000 shares at a total cost of $36.9 million.

Inventory at the end of the third quarter was $419 million as compared to $340 million at the end of the third quarter last year.

Average inventory on a per store basis increased 2.8% versus the third quarter last year, due primarily to the timing of fourth quarter merchandise receipts.

We are pleased with the level and quality of our inventory exiting the third quarter and heading into the holiday selling season.

Now I would like to turn to our guidance.

As a reminder, our guidance does not include any future impact from share-based accounting or share repurchases.

We will update our guidance quarterly with actual reported results.

But as is our practice, we will not guide to the potential future impact from these items.

Based on our year-to-date performance, we are raising the low end of our guidance range for fiscal 2019.

Our guidance includes all announced tariffs, as detailed in our press release, and also includes the benefits of our mitigation efforts.

For fiscal 2019, we expect sales to be in the range of $1.877 billion to $1.892 billion, an increase of 20.4% to 21.3%.

The comparable sales increase is expected to be approximately 2.5%.

We have now completed our planned 150 new store openings for 2019 and expect to end the year with 900 stores or unit growth of 20%.

The majority of these new stores were opened in existing markets.

Our full year guidance still assumes a slight operating margin decline, due primarily to the cost of opening our new owned Southeast distribution center and the new lease accounting standard, both of which impact SG&A.

We expect a full year effective tax rate for 2019 of approximately 22%, which reflects the year-to-date benefit from share-based accounting through the third quarter.

Net income is expected to be in the range of $175.4 million to $179.9 million, representing a growth rate of approximately 17.2% to 20.2% over 2018, with diluted earnings per share in the range of $3.11 to $3.19.

Diluted earnings per share are expected to grow by 16.9% to 19.9%.

With respect to CapEx, we plan to spend in total approximately $210 million in 2019 in gross CapEx, excluding the impact of tenant allowances.

This reflects the investment in the new Southeast distribution center, payments on the new Texas distribution center and the cost of opening 150 new stores, 50 remodels and investments in systems and infrastructure.

For the fourth quarter ending February 1, 2020, net sales are expected to be in the range of $717 million to $732 million, an increase of 19% to 21.5%.

We are assuming a Q4 comp sales increase of 2% to 3% versus the 4.4% comp increase in Q4 2018.

Net income for the fourth quarter of fiscal 2019 is expected to be in the range of $110.7 million to $115.2 million.

Diluted earnings per share for the fourth quarter of fiscal 2019 is expected to be in the range of $1.97 to $2.05 versus $1.59 in diluted earnings per share in the fourth quarter of 2018.

The fourth quarter of 2018 had a $0.01 benefit to EPS from share-based accounting.

Our fourth quarter outlook assumes an operating margin increase of over 100 basis points, driven by improved merchandise margin on toy product versus last year, slight leverage from the new distribution center and the benefit of our tariff mitigation efforts, including reduced corporate expenses.

These benefits will be offset in part by the depreciation of our new Southeast distribution center and the new lease accounting standard.

For all other details related to our results and guidance, please refer to our earnings press release.

And with that, I would like to turn the call back over to Joel to provide some closing comments before we open it up for questions.

Joel?

Thanks, Ken.

We successfully made a lot of changes and progress this year and are very pleased with the position we are in to execute this holiday season.

We are confident that our business model and the flexibility of our 8 worlds as well as the strength and agility of our leadership team will drive continued success.

I'm proud to lead a team that is committed to achieving the impossible and wowing our customers, and I'm so grateful for their efforts.

We remain focused on providing our customers with extreme value and an amazing shopping experience and continue to innovate our customer and associate experience.

We believe that with all the work we have done throughout 2019, Five Below has become an even stronger retailer and brand.

We remain committed to our long-term strategy of delivering 20/20 through 2020.

With that, I'd like to turn the call back over to the operator for questions.

Operator?

(Operator Instructions) The first question is from Jeremy Hamblin with Craig-Hallum.

So I wanted to just come back to the price increases for a second.

You've taken several steps as you've mentioned.

Some of it's on the $1 to $4 items.

Some of it's on the $5 to $5.55 items.

And then you have the Ten Below Gift Shop as you mentioned.

In terms of thinking about which has been the most helpful in terms of sales margin, can you give any additional color on those various pricing changes that you've taken and which ones have maybe been the least helpful?

Yes.

Thanks, Jeremy.

I would say that of the 3 you listed, the tech change from $5 to $5.55 probably has the biggest impact of the 3. The gift shop in perspective isn't a margin accretive initiative.

That's more about the opportunity to sell different product that we've never been able to sell in the past.

In fact, I think I even mentioned in my prepared remarks that a lot of what we learned in the 25 Ten Below test helped inform us as we rolled out that gift shop to the entire chain.

But that's kind of how it breaks out.

The next question is from Simeon Gutman with Morgan Stanley.

Can you give us some sense on the initial uptake from the Frozen merchandise?

I know you mentioned the product looks great.

And then the way you think about your guidance for the fourth quarter, whether you're already running within that range, I don't know if you can comment on that or not.

Yes.

Thanks, Simeon.

As far as Frozen goes, as we said, we set it in October when the street date hit.

But the reality, like most movies, you don't see a huge uptick in the product until the movie breaks.

So that movie just broke a little over 10 days ago or so.

And I think the best way to think about it, it's pretty much right on plan for us.

We think the bulk of the Frozen sales are largely in front of us, though.

And then as far as range, I mean as we gave guidance, clearly our guidance factors in what we've seen to date in the quarter and how we're forecasting it for the rest of the year.

And just a reminder to everybody, this was a late Thanksgiving as opposed to other years.

So clearly, you would expect November to be lower and December to be higher.

And that was our plan going into the quarter and is still our plan in the guidance we gave everybody.

The next question is from Matthew Boss with JPMorgan.

Joel, so can you speak to the breadth of strength that you continue to see across your worlds?

And I guess maybe to circle back, with pricing elasticity in line with expectations and like you said, Frozen on plan, is it fair to say the change in the 4Q comp forecast is more primarily just driven by the volume of business that remains untapped rather than any real change in underlying business confidence that you have?

Yes.

Look, I think that those are kind of all interrelated there.

And I think the breadth of strength that you referred to is, again, it goes back to the strength of the business model, of 8 worlds.

And I think as every trend emerges, a different world pulls customers into our stores.

And as they like what they see, they tend to pick up candy.

It's really the flexibility that the 8 worlds provides us.

And then I think you were asking, Matt, about the sales in the quarter.

Yes.

So basically, the 4Q comp forecast of 2% to 3% versus it was a little bit higher before.

But Frozen's on plan, pricing elasticity is in line.

Is it just the volume of business that remains ahead?

Or is there any change in your confidence?

No, no, no change at all.

In fact, we didn't change the full year from what we guided at the beginning of Q3.

And in fact, I think the signal I'd give you is the fact that we took the low end up.

That's just continuing to say we've got confidence in the pricing strategy we implemented.

And I think when you start looking at 2- and 3-year stacks, this is going to be one of the best Q4s we've had in a long time.

And at the same time, if you look at Q4s in general, it's a pretty tight bandwidth between somewhere in that 3% to 4% range when you start looking at those 2- and 3-year stacks if you break it into an average annual.

The next question is from Judah Frommer with Crédit Suisse.

Maybe first, just circling back on elasticity, is there any further color you can give us there?

Clearly, traffic was positive in Q3.

Any way you could break it down by price test for us?

And furthermore, is there any chance that the holiday $6 to $10 test for tech and toys potentially stays in stores or last longer than the holiday season if it goes well?

Judah, thanks.

Look, I think the elasticity, it's really hard to break the quarter down, how much traffic was driven because of the price changes.

It's just kind of all kind of melds together there.

But look, the elasticity of the rollout to the chain was right there in line with what we saw when we did the 3 test markets.

And so no surprises to us on that.

And as far as $6 to $10 goes, I think like anything we do at Five Below, anytime we do something new, we're going to test it.

But what we've got out there right now is specifically designed for holiday, so that will go away after holiday.

But I think you should expect us to see us try another test in 2020.

And as long as those tests continue to really resonate with the customer and we can deliver extreme value, you'll start to see us do more and more of it.

But at this point in time, especially given our biggest weeks are still in front of us, really too early to speculate on how much more we'll do in 2020, but there'll be some sort of test in 2020 for sure.

The next question is from Chuck Grom with Gordon Haskett.

You guys have been real thoughtful in laying out all the self-help comp drivers that you have at your disposal, just curious when you look ahead to 2020.

I guess how would you force rank some of the best opportunities in terms of the remodels which are quickly going to be upticked, RFE, Ten Below, loyalty, e-commerce?

I guess anything else out there that you guys want to point to?

Yes.

Thanks, Chuck.

I think of the ones you pointed to, I think you got to go back and put it in the category of innovation, as we've talked about several times on our calls.

And I don't think there's any one, single one that's a driver, probably the one you missed was product.

I mean, we still are a merchandise-driven company.

And so Michael's team does a great job of staying on trend.

And you're going to see us continue to test and learn.

But all the ones you just called out, especially the RFE, the Ten Below test and the remodels are all great headwinds as we head into 2020 and beyond.

But I think what we continue to do is deliver more and more new ideas and you put them all together and it continues to drive positive comps.

The next question is from Michael Lasser with UBS.

So with the third quarter -- sorry, with the second quarter, you guided to a 3% comp for the year and a 2% to 3% comp for the third quarter.

It is at 2.9%.

So that was in line with what you thought.

And now you're guiding to a full year comp no longer 3% but at 2.5%.

So implicitly, the guidance for the fourth quarter is lower than what you had previously expected.

So can you give us a sense for what's different now than what you anticipated 90 days ago?

Yes.

I'll answer your question, but I think you got to put it in perspective, Michael, of the bigger picture.

And the bigger picture is that over 80% of our growth continues to come from new stores.

And so what hasn't changed is our overall total sales that we guided to at the end of Q3 and what we're guiding to at the end of Q4.

So that hasn't changed.

Implicitly, approximately 3% and now to 2.5%, we were probably on the lower end of the approximately 3% back in summertime.

And I think the only visibility we didn't have then that we do now is we knew there'd be headwinds from cycling the closing of Toys"R"Us as that was, if you recall, last year, we twice took up 4, once in guide and then a second time when we actually beat.

I think we called out that our beat in Q4 last year was attributed to the success we had in toys, the outperformance.

And so I think as we've gotten into Q4 here and we know how big toys are and we can see the quarter, that's where there's a slight impact to comp.

But at the end of the day, we're talking about a quarter that's $700 million and we probably moved the comp down $3 million or $4 million.

So it's a really small number overall and the total didn't change.

I don't know, Ken, anything you'd add?

Yes.

And the only other piece Michael is, to Joel's point, again, we didn't move the top end of our full year sales guidance.

The comp moved a little bit on a full year basis.

But it also does reflect -- and you've heard it in our prepared remarks -- the strength of our new stores and how that continues to perform.

So we factored that into the guidance also as we kind of move forward here through the fourth quarter.

Remember, new stores don't have any impact on the Toys"R"Us impact from a year ago because they weren't open.

Yes.

So based on the Toys"R"Us impact, is it fair to say that it's just a little slower to start the fourth quarter than you expected?

It's not that it's been slower.

I think we didn't have a trend line to look at.

And that's why we only give guidance a quarter at a time.

And back in August, we were only kind of a month past the Toys"R"Us closings from a year ago.

So it's more of that than anything else.

And we just have more visibility now than we did a little over 90 days ago.

The next question is from Paul Trussell with Deutsche Bank.

On margins, Ken, there's obviously a lot of moving parts this year quarter-to-quarter.

Maybe just circle back and dig a bit more into the details as we think about the puts and takes in your third quarter results versus your expectations and what we should be thinking about and keeping in mind in 4Q on both gross margins and on the expense front?

Sure.

Thanks, Paul.

If you go to Q3, as I noted, we finished at about 160 basis points of deleverage.

In our guidance for the third quarter, we had estimated 175 basis points, so we performed a little bit better than our guidance.

The breakdown between gross margin and SG&A was pretty much in line with what we expected.

If you remember, we guided to about 75% of that deleverage was going to occur in gross margin, and it did.

And really, the 2 key drivers there was the impact of those tariff costs that we didn't have the ability to mitigate because the pricing increases had not gone into effect yet.

We also had some other merchandise costs that shifted out of Q2 into Q3 that we spoke about on our Q2 call.

If you go into SG&A, we've been saying this for the most part of the year, the 2 key drivers there are depreciation around the new Southeast distribution center and the new lease accounting standard.

And we also had some other costs related to our pricing increase, labor costs and signage costs in the third quarter.

They were offset, though, by reduced corporate expenses.

So again, the overwhelming majority, about 3/4 of the deleverage in Q3, was happening at the gross margin line.

And then if you move forward quickly to Q4.

As I mentioned, we would expect to see greater than 100 basis points of leverage in operating margin.

And again, the majority of that will come in at the gross margin level and a small, maybe slight leverage in SG&A.

The key drivers there, the toy margin improvement given the opportunity buys that we placed last year.

So we expect to see merch margin improve.

We do expect to see some DC efficiency, which is all included up in cost of goods sold in the fourth quarter.

And then, again, for the most part, in SG&A, it's the depreciation deleverage for the Atlanta distribution center and the new lease accounting impact.

So those are kind of the puts and takes in Q3 and Q4.

The next question is from Michael Montani with Evercore ISI.

So first off, just on the elasticity side, I wanted to ask, from our survey work, we saw almost 2/3 of the consumers seem to say that they would be just as likely or more likely to shop at Five.

And when we thought about the product that was impacted, we were thinking probably 10% raised above $5 and then another 10% that would have been mixed up under $5, so kind of 20% assortment.

I'm wondering if you can comment on either of those 2 pieces.

And then it ties into the tariffs, which we're hearing that 4B may not take hold December 15.

So if that's in fact the case, does that provide upside to guidance?

And also, does it change in any way your desire to potentially hold the price increases that you've already taken?

Yes.

Thanks, Michael.

I think you got it about right on the breakdown of 10% and the 10%.

And then honestly, I'm not going to start speculating on what tariffs are going in and what aren't.

I mean I never guessed we'd stop at the 25%, and that really continues to move forward.

And then you specifically asked about 4B, and I think it's just important to remind everybody that 4B is not material to 2019 as the large majority of what we're bringing in and we'll sell in 2019 is already here.

That's more of a 2020 discussion.

And so I think at this point, what's factored in our guide doesn't really have much to do with 4B either way.

And we're not ready to speculate on whether that's going to be held off or not, but that's kind of where we're at.

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

Scot Ciccarelli.

I know that in general elasticity has been in the range of your expectations.

You guys have commented about this.

But I guess I was curious if there's any examples of SKUs where elasticity did prove to be higher than you had expected or more negative?

And then how did you react to that?

In other words, did you just go with it because you needed to protect margin or would you pull back on the price increase because of the demand destruction?

Yes.

Honestly, where we saw it perform differently than we expected was largely in certain branded product.

And I think in those cases where we didn't like the elasticity results, we rolled back the pricing.

But most of that we discovered, Scot, during the testing period of the 3 markets that we've been testing for several months prior to rolling out to the chain.

We didn't see anything different when we rolled it out to the chain.

So we pretty much worked through all that way back earlier this summer, but it was largely in branded stuff where there's a lot of visibility out there to what the price is in the marketplace.

The next question is from Paul Lejuez with Citi Research.

Just curious, can you talk about your thoughts about number of stores you're planning to open next year?

And then also just curious, what happened to the overall sales trajectory in the business in 3Q once you did roll out the pricing to the entire chain?

I guess I think it was October 18 that it all rolled out.

So just curious what you saw kind of the first part of the quarter versus the last couple of weeks and beyond?

Yes.

Look, we aren't thinking about on this call anyways guiding for 2020.

But what I did say in my prepared remarks is that we see no signs of not following through on our long-term strategy of 20% top line and 20% bottom line through 2020, so that includes next year.

And so I think with that, it's pretty easy to kind of back into the range you should see for new stores for us.

And then I think on the elasticity, in general, we see a slight decline in unit demand, but that's more than offset by the price increase that we put through.

And it was in line and expected as we saw, as I said earlier, in the test stores.

And we saw the same thing happen when we rolled it out to the chain.

Thanks, Paul.

So does that mean sales accelerated after you took the prices up?

Did what accelerate?

Does that mean sales accelerated once you took prices up?

Did you say that the unit demand decline would have more...

I think the question you asked me was about what impact I saw on the product we took prices to.

And on any given product, you'd see a slight decline in the unit demand and then that was offset by the price increase.

So it was net positive.

But overall, that was factored into our Q3 guide.

And as you can see, we came in at the high end of our guide, both in total sales beating and then comp at 2.9%.

The next question is from John Heinbockel with Guggenheim Securities.

So maybe, Joel, Ken, can you speak to remind us the relative importance of 4B relative to the other lists?

And then how you would attack that mitigation differently right then this past year?

Particularly, are you more wary about taking pricing on 4B items because of some of the modest backlash on some of the other items in the last couple of months?

Yes.

John, I'll take the first piece of that around the costs associated with tariffs.

If you look at 4B, and you got to look at it on an annualized basis, right, because given the difference in timing and then, obviously, there's different rates related to the various lists.

But if you look at Lists 1 to 3, if you look at 4A and you look at 4B and the rates and the rules that are currently in effect, when you look at our business, it's pretty much split in terms of the tariff cost impact across those 3. So probably about 1/3 each for Lists 1 to 3, 4A and then 4B.

Yes.

And then, John, in terms of mitigating 4B, we're taking the same approach on 4B as we did on the others.

We've actually had a lot longer lead time to prepare for that one.

Whereas on some of the other ones, they got implemented pretty quick.

And so that's why there was a lot of shifts this year.

We were behind in Q3.

We're actually catching up in Q4 to have a full year of mitigation.

But a lot of 4B, we've already been working on mitigating through vendor negotiations.

We brought in a lot of product early.

And then the reality is, the price increases we've already taken will start to cover some of 4B in 2020 as well.

So we still believe we are on a path that we'll fully mitigate 4B as well based on what we've already seen from vendor negotiations and the like.

So we're in good shape.

The next question is from Karen Short with Barclays.

I had one clarification and then my real question.

Just in terms of 2020, I think you made the comment that you're still committed to the 20% top line, 20% bottom line.

But I thought there was maybe a little gray in that for specifically 2020 as it relates to tariffs, so maybe just clarify.

But then specific question is on the comp waterfall.

You've had, obviously, many stores open up much, well, looks to be the strongest openings that you've had.

How should we think about the comp waterfall on those very, very strong store openings?

Are they kind of the same as some of the other, like the average chain or just some color there?

Yes.

Look, if I implied any gray area in 2020, I didn't intend to.

We're fully seeing top line of 20% and on the bottom line, 20% growth.

So I'm not sure what I said, Karen, but no gray area on our side for next year.

And then, look, on the comp waterfall, it's a little too early to speculate.

A large portion of the class of 2018 isn't in comp yet even.

And of course, 2019, none is in comp yet.

But I think that's why what's so unique and different about this model is we have such a quick payback, 7 months.

But what we don't have is a more traditional comp maturation curve that traditional retailers have of high teens, mid-teens, low teens and then so on and so forth.

These stores open pretty close to the average of the chain and this continues to be a low single-digit comping model.

And with that, we've actually had an incredible consistency throughout the years and only 1 quarter with a negative comp since we went public.

And in fact, when you start looking at 3-year stacks, it's amazing on an annual basis for the last 5 years the lowest 3-year average stack has been 3% and the highest would be this year in the low 4s.

So it's a pretty consistent path.

And I think as certainly '18 starts to comp and we get into '19, the class of '19, we'll have more clarity on it.

But certainly, with them opening stronger, I wouldn't expect them to have a stronger comp maturity curve than previous classes.

The next question is from Edward Kelly with Wells Fargo.

Joel, I wanted to ask you just about customer response to the pricing.

I mean, obviously, the post on Instagram kind of caught some people's attention.

Can you talk about maybe what went wrong on that portion?

Maybe that's not even the right way to talk about it or ask about it.

But the decision to put something out, in hindsight, would you have done anything different?

Is there anything that's incrementally a concern from your standpoint about the pricing with the Five brand, including sort of like how does any of this impact the way you would think about initiatives like Ten Below?

Yes.

No.

Good question, Ed.

And look, I said it on the Q3 and I'll say it again here.

We are committed to being transparent with our customer, and we are committed to bringing them along with us on the journey.

I think as it relates specifically to the social media post that you asked, where we saw some confusion on what was different with the chain rollout that wasn't there with the test rollouts is that after we put in the Ten Below WOW wall, the gift shop, we just saw some customers kind of getting it wrong.

And so look, we thought it was important to kind of clarify for the customers what our intention was, and that's the reason we put the social media post out.

But in terms of the actual reactions from the customers, it quickly dissipated right after we put that social media post out.

And it's just another sign of us, we're not going to shy away from being just transparent with the customer.

But hindsight's tough to guess on that one, but I think when we did roll out the $6 to $10 gift shop, a few customers just actually thought we were raising prices on stuff we had prior to $6 to $10.

It was actually new product that we've never had.

And quite honestly, the performance we're seeing in the gift shop wall has been amazing.

We're really pleased with it and customers have recognized the value and have just had a lot of positive things to say with it.

And you also got to remember, you're just reading the social media post, what we hear in the stores is at a much bigger scale than what's out on social media and the overwhelming part has been very positive.

The next question is from David Buckley with Bank of America Merrill Lynch.

So across your urban, suburban and semirural markets, what differences are you seeing in new store productivity and traffic levels?

And where do you see the greatest growth opportunity moving forward?

Yes.

Honestly, it's part of the reason, David, that -- I don't know, I have to go back to what quarter we haven't called out some stores opening in our respective top 25.

We look at 3 seasons: spring, summer and fall.

And we always measure the top 25.

And the fact that a store keeps opening in the top 25 means that the bar is getting higher.

And if you'll notice in the ones we call out, sometimes we're calling out rural, sometimes we're calling out urban, sometimes we're calling out suburban, and the message we're trying to get across to you is this concept is working in all 3. And I will tell you from my side, if I go back 5 years ago when I was here and just starting, I didn't think we'd be able to push a Five Below into some of the smaller markets that we have, call it, these county seats.

And we've called out a lot of county seats in the last couple of years that have been successful.

And that's probably been the biggest surprise for me personally, but I think the bigger message has been that it works in all 3.

The next question is from Joseph Feldman with the Telsey Group.

Kind of more capital question, you guys have been buying back a little more consistently it seems, buying back shares.

And I was just wondering how we should think about that fourth quarter and really even into 2020.

Is that something that is just going to become now a more stable part of the business as we go forward?

Yes.

Thanks, Joe.

I mentioned it in the prepared remarks.

We did purchase over $35 million for this year in terms of repurchases.

Actually, the majority of that was done earlier in the year.

We had opened up a program a couple of years back, a multiyear program that we spoke about, but we still continue to be opportunistic in terms of the purchases that we're making.

So we're not on any type of prescribed plan, but we're going to maintain flexibility there.

And the key is being opportunistic in any buys, repurchases going forward.

We've really just been buying back the dilution.

I think that's been the commitment there.

This concludes our question-and-answer session.

I would like to turn the conference back over to Joel Anderson for any closing remarks.

Thank you, and thanks, everyone, for joining us today.

We look forward to speaking to you again at ICR in early January.

And of course, as always, I encourage you to get out and visit our stores.

We've got a great holiday season in front of us.

These next 3 weeks are big weeks.

So get out there and enjoy yourself and thanks again for the support.

Have a great evening.

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