Yahoo Finance Five Below Inc (FIVE) Q3 2018 Earnings Conference Call Transcript
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Five Below Inc (NASDAQ: FIVE)
Q3 2018 Earnings Conference Call
Dec. 06, 2018, 7:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Christiane Pelz -- Vice President, Investor Relations
Good morning everyone and thanks for joining us today for Five Below's Third Quarter 2018 Financial Results Conference call. Due to yesterday's market closure, we changed the logistics for our earnings conference call. On today's prerecorded call are Joel Anderson, President and Chief Executive Officer and Ken Bull, Chief Financial Officer and Treasurer. We will host a live Q&A session with Joel and Ken today at 8:00 AM Eastern Time.
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 in 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.
One quick housekeeping note; last year was a 53-week fiscal year, which shifted this fiscal year's quarters by one week. Ken will review this shift in his remarks, and please see our press release for more information.
I will now turn the call over to Joel.
Joel D. Anderson -- President and Chief Executive Officer
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 outlook.
We are very pleased with our third quarter performance, which exceeded our guidance. Total sales increased 22% to $313 million, driven by continued strong results from our new stores and a comp of 4.8%. Earnings per share grew 33% to $0.24. The biggest driver of our growth continues to be our new stores and the performance of our new stores remains strong.
During the third quarter, we opened a record 53 stores in diverse markets across a range of 20 states. 12 of these stores made it to the top 25 all-time summer or fall grand opening list. We believe the growing success of our new stores across geographies and markets is a testament to the universal appeal of Five Below, as well as the benefits of our expanding scale and brand awareness. With only 750 stores today, we have a long runway of growth as we expand nationally to realize our 2,500-plus store potential in the United States.
Including the stores we opened early in the fourth quarter, we have now completed our store openings for the year. The highlight was opening our first Manhattan store on Fifth Avenue. We are thrilled with this location. And if you have not been there, you need to go. From the street, passersby see our vibrant signage and entry with a colorful flashing video, featuring our eight worlds and incredible murals on both walls, created in-house by one of our talented designers. Our real estate, construction, creative and store opening teams really outdid themselves to see this project to completion. We believe this prime location will track both New Yorkers and tourists alike and it will also have the added benefit of increasing our overall brand awareness.
Moving on to comp. You will recall that last year our spinner-driven out performance in Q2 was followed by equally impressive broad-based Q3 results, as we delivered a very strong transaction-driven comp of 8.5% in 2017. We believe customers who had discovered us through the spinner craze, return to our stores and continued to shop at Five Below. This quarter, we once again experienced broad-based performance, led by our Tech, Room, Sports, Create and Candy Worlds. Our merchandise continues to resonate with our customers who shop for everything from back-to-school and Halloween to our core basic programs and trend-right products, including slime, squishy and toys.
On the last call, we mentioned toys as an emerging opportunity for us, due to the void left by the Toys"R"Us closures and the need for families to find a new toy destination. We set the stores with our Mega Toy Island and began advertising toys, games and crafts across our digital marketing channels. On that front, with respect to marketing in Q4, we are excited to announce our expanded TV advertising to cover about half of our stores, as compared to about 40% last year.
We continue to shift our marketing spend and focus to our digital efforts, including TV, YouTube and other social media. New this year, we are excited to announce we have added influencers to our social media program with visibility to both online and in stores. Rounding out our marketing campaign, our print circulars will also play an important role in Q4. Overall, the marketing team is very focused on increasing brand awareness and driving traffic, engagement and repeat visits.
Attracting both new customers and remaining top of mind for current customers is key to delivering a successful holiday season. To that end, the visits to our e-commerce site continue to grow. We believe the site is helping increase Five Below's brand awareness for those who don't know us yet, as well as serving as a pre-shopping tool and driving more traffic to our stores, where our customers love exploring our full assortment of products in a treasure hunt experience.
Shifting gears to our systems and infrastructure. As always, we remain focused on ensuring that our foundation can support our significant future growth, as we firmly believe having the right people, systems and infrastructure in place will help keep execution at a high and consistent level. To that end, the POS implementation we accelerated into this year is now complete. I want to personally thank that team for their year-long effort to complete this project on time and on budget. This new system is foundational to adding features like a customer loyalty program and eventually buy online, pick up in store. As for infrastructure, the construction of our Southeast DC is on schedule and the DC is on track to open in spring 2019. We are also actively scouting the Southwest for our next DC, which we plan to open in 2020.
Before I speak about Q4, I want to touch on the handful of store remodels we completed this year, as well as a new test we started. We are pleased with the progress we made in creating efficiencies to our store remodel process and we plan to announce an expanded program on our next earnings call. As for the new tests, we are constantly looking for ways to innovate in our business and we test different ideas frequently. Some of you may have already seen the TEN BELOW or JUST WOW concept we recently launched in six of our stores, where we are offering an extended product assortment of items up to $10. This is an idea we've been working on for quite some time and we are excited to see it in action.
Our goal is to continue to create and offer extreme value and we believe by expanding our assortment we are offering even more value to our customers. We are analyzing customer behavior and reaction and expect to continue to test this concept throughout 2019. However, I will say we are very pleased with the customer response to-date.
For Q4, if you've been in our stores you know how amazing they look. Our merchants source incredible products like a four-foot Christmas tree, perfect for a kid's room, cool tech accessories, such as a gaming headset, Star Wars action figures, a Monopoly board game and matching flannel plaids for pets and their parents. We even have a paint it yourself squishy toy. For Black Friday we featured incredible value with wireless earbuds, a drone, a metal string guitar, an etched metal table, craft kits and branded toys, even a robot. We are pleased with the customer response to our offering and believe our holiday season is off to a solid start.
Before I close, I want to say a few words about tariffs. This is a fluid situation and we have been aggressively exploring all options to mitigate the impact. In particular, our merchants and vendor partners have been working very closely together to lower costs without sacrificing product quality, and I would really like to thank our suppliers for leaning in and supporting Five Below.
The recent events regarding tariffs suggests there is the potential for tariffs to remain at 10%. Under this scenario, we expect to fully mitigate the tariff impact. We will continue to closely monitor developments and prepare for all contingencies. If required, we are also prepared to take selective price increases. We believe, even with slightly higher prices, our products will continue to deliver extreme value with great quality that will appeal to our customers. Finally, we are also exploring sourcing in other countries as a medium to longer-term solution.
In summary, we are extremely pleased with our performance thus far in 2018, and we believe we are well positioned to deliver on our goals. We are firmly focused on executing in the all-important fourth quarter. Five Below is a perfect place for holiday gifts and stocking stuffers with amazing value and fresh new trend-right products across our eight worlds.
With that, I'll turn it over to Ken.
Ken?
Kenneth R. Bull -- Chief Financial Officer and Treasurer
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. Before I review our results, I want to remind everyone of this year's calendar shift due to fiscal 2017's 53rd week. This calendar shift, which is contemplated in our guidance, resulted in additional sales in the first half of the year and were largely reversed in the second half.
Now I will review our third quarter results in more detail. Our sales in the third quarter of 2018 were $312.8 million, up 21.6% from $257.2 million reported in the third quarter of 2017. Sales for the quarter were negatively impacted by approximately $3.8 million related to the calendar shift, which was included in our guidance. We opened 53 new stores during the quarter, compared to 41 opened in the third quarter of 2017. We ended the quarter with 745 stores, an increase of 120 stores or 19% versus 625 stores at the end of the third quarter of 2017. As of mid-November, we opened to all of our planned new stores for 2018. As Joel mentioned, our new stores generated another quarter of very strong performance and the class of 2018 is currently on track to be our highest performing class of all time, with average unit volumes projected to be over $2 million.
Comparable sales increased by 4.8% for the third quarter of 2018, which was driven by an increase in both comp average ticket of 2.8% and comp transactions of 2%. As I mentioned on our last earnings call, we expected over 100 basis points of operating margin deleverage in the third quarter, due to our planned tax reform reinvestments, all of which were recorded in SG&A. Given our sales outperformance from both comp and new stores, operating margin for Q3 2018 delevered by approximately 80 basis points over Q3 last year, with better than expected results in both gross margin and SG&A rate.
Gross profit for the third quarter increased 22.1% to $102.1 million from $83.6 million reported in the third quarter of 2017. Gross margin increased over last year by approximately 10 basis points to 32.6%. This increase was driven primarily by occupancy cost leverage on the higher sales. As a percentage of sales, SG&A for the third quarter of 2018 increased approximately 90 basis points to 27.7% from 26.8% in the third quarter of 2017. SG&A expenses as a percent of sales were higher than last year, due primarily to the tax reform-related reinvestments mentioned earlier. As a result, operating income increased 5% to $15.5 million versus $14.8 million in the third quarter of 2017.
Our effective tax rate for the third quarter of 2018 was 18.6%, compared to 34.8% in the third quarter of 2017. Our tax rate was favorably impacted by lower rates from tax reform, which was included in our guidance, and the accounting for stock-based compensation, which as is our practice, was not included in our guidance. The impact of stock-based compensation accounting was a benefit to third quarter diluted EPS of approximately $0.02.
Net income increased 36.8% to $13.5 million, or increase per diluted share of 33% to $0.24, versus $9.9 million or $0.18 per diluted share last year. We ended the third quarter with $188 million in cash, cash equivalents and investments and no debt.
Inventory at the end of the third quarter was $339.9 million, as compared to $271.7 million at the end of the third quarter of last year. Average inventory on a per store basis at the end of the third quarter of 2018 was approximately 5% higher versus the third quarter last year, due primarily to accelerated import receipts in anticipation of the previously announced January 1st increase in tariffs. As a reminder, we take ownership of direct imported goods earlier, as we record in-transit inventory on our balance sheet when goods leave the overseas ports.
Now I would like to turn to our guidance. As a reminder, our guidance does not include any future impact from stock-based compensation accounting or share repurchases. We will report the impact if any with our actual quarterly results, which are incorporated in our guidance. In addition, the fourth quarter and full year of fiscal 2017 included an extra week, the 53rd week versus the 52 weeks in fiscal 2018. This week, added approximately $15.7 million to net sales, $3 million to operating income, and $0.03 to diluted earnings per share. For our guidance, the year-over-year comparisons I will reference will be on a 13-week quarter and 52-week fiscal year basis. I'd also like to remind everyone that the tariffs already implemented are not expected to have a material impact to our business or our results in Q4.
For the fourth quarter ending February 2, 2019, net sales are expected to be between $593 million and $600 million, an increase of 21% to 23% over Q4 2017. We are assuming a comp sales increase for Q4 2018 of approximately 3% to 4% versus the 5.9% comp in Q4 2017, which was our highest Q4 comp since 2011.
With regards to operating margin for Q4 2018, as previously announced, we still expect over 100 basis points of deleverage, driven by tax reform-related investments.
Net income for Q4 2018 is expected to be in the range of $86.5 million to $88.5 million, a 32% to 35% increase over Q4 2017. Earnings per diluted share for Q4 2018 are expected to be $1.53 to $1.57, a 30% to 33% increase over Q4 2017.
For the full year 2018, we are raising our sales guidance, which we expect to be in the range of $1.550 billion to $1.557 billion, an increase of approximately 23% over 2017. Comp guidance for the full year increases to a range of 3.3% to 3.7%. We expect to open 125 net new stores and end fiscal 2018 with 750 stores, an increase of 20% as compared to our 2017 ending store count of 625.
We expect an effective tax rate of approximately 22.5% for the full year, which includes a normalized quarterly tax rate of 24.5% for Q4, excluding any impact of stock-based compensation accounting in Q4. Our net income outlook has increased and is expected to be in the range of $146.9 million to $148.9 million, or a growth of 46% to 48% over 2017. Diluted EPS is now expected to be in the range of $2.60 to $2.64, or a growth of approximately 44% to 46% over 2017, compared to our previous EPS outlook of $2.51 to $2.57.
With respect to CapEx, we plan to spend in total approximately $130 million in gross expenditures in 2018, reflecting 125 net new stores with the remainder projected to be spent on our new Southeast distribution center, our existing store base and corporate infrastructure. 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. Joel?
Joel D. Anderson -- President and Chief Executive Officer
Thanks, Ken. We've had an amazing year so far with broad-based strength across our business. The teams are continuing to execute at a high level, as you can see from our new store performance, comp results and profitability metrics. I want to thank everyone at Five Below for delivering these results. Our store associates are delighting our customers, our distribution teams are optimizing, getting product to the stores and the home office WOW talent team is providing amazing merchandise and excellent support for our operations and growth.
We remain focused on executing our growth strategy and are confident in our 2020 -- through 2020 plans, as well as our 2,500 plus store potential in the United States. We will continue to leverage our growing scale and deep vendor relationships to innovate and reinvest in product to offer even more value, newness and wow. We strongly believe that trend identification, innovation and reinvention are key to remaining relevant with our growing customer base. We will continue to utilize our core skill sets and over many years of experience to capitalize on and manage through trends, whether big or small. We also believe our edited assortment of exceptional value products, combined with our amazing store experience is what differentiates Five Below and keeps our customers excited to come back.
Five Below is a unique retailer and brand that is on a mission to help make life better for our customers, so they can let go and have fun and there is no better time to do that than during the holidays. We look forward to speaking with you on our Q&A session at 8:00 AM Eastern today.
Operator
Good morning and welcome to the question-and-answer portion of Five Below's Third Quarter 2018 Earnings Call. All participants will be in listen-only mode. (Operator Instructions)
I would now like to turn the conference over to Christiane Pelz for opening remarks.
Christiane Pelz -- Vice President, Investor Relations
Thank you Anita. Good morning everyone and thanks for joining us today for the Q&A portion of Five Below's Third Quarter 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.
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 our press release, you may obtain one by visiting the Investor Relations page of our website at fivebelow.com, where you will also find management's recorded remarks and a transcript of those remarks.
Now we'd like to open the call up for questions.
Questions and Answers:
Operator
The first question today comes from John Heinbockel with Guggenheim Securities. Please go ahead.
Joel D. Anderson -- President and Chief Executive Officer
Good morning John. John?
Operator
Mr. Heinbockel, your line is open. The next question comes from Paul Trussell with Deutsche Bank. Please go ahead.
Paul Trussell -- Deutsche Bank -- Analyst
Hey, good morning and congrats on good results in 3Q.
Joel D. Anderson -- President and Chief Executive Officer
Thanks, Paul.
Paul Trussell -- Deutsche Bank -- Analyst
So maybe just to start, a little bit more color on third quarter top line trends, perhaps speak a little bit to maybe the cadence of the performance, were you are more pleased with back-to-school versus Halloween. What are you seeing from the expanded toy set and if there's any early color or comments you can give on Black Friday and fourth quarter to-date?
Christiane Pelz -- Vice President, Investor Relations
Okay. So Paul of those four questions, which one would you like answered?
Paul Trussell -- Deutsche Bank -- Analyst
All of the above.
Joel D. Anderson -- President and Chief Executive Officer
Paul, it was a great Q3, as you called out, thank you. I think as we've said many times, Q3 is our smallest quarter and especially when you talk about Halloween and back-to-school of our seasons that we have throughout the year, largely Easter in Q1, summer in Q2 and the Holiday Christmas season in Q4, those are really our smallest. So while we are pleased with the results, neither one has a material impact on the overall quarter. They're just good for keeping the store looking fresh and that's what Five Below is all about. So overall, it was a great cadence. We are really pleased with the quarter, as you can see with the outperformance, 4.8% comp, new store performance really strong. So we're really pleased with Q3.
Operator
The next question comes from Paul Lejuez with Citi Research. Please go ahead.
Paul Lejuez -- Citi Research -- Analyst
Thanks guys. You mentioned being able to mitigate the 10% tariff. I'm curious if that comment was made under the assumption that, that tariff stays in place indefinitely or are we talking specifically just about fourth quarter of 2019. And I'm very curious about the actions that you took that helped you mitigate? Thanks.
Joel D. Anderson -- President and Chief Executive Officer
Sure. Paul, we were referring to it indefinitely. And as I said in my prepared remarks, the vendor community really leaned down and worked with our buying team, they were very supportive and everybody leaned into work on reduction in costs, so that we could mitigate all of that tariff. But we were looking at is long-term.
Paul Lejuez -- Citi Research -- Analyst
So Joel, wasn't that you shifted production in anyway or your buys from other country, it was really just getting better pricing from your existing vendors?
Joel D. Anderson -- President and Chief Executive Officer
Yes. And in fact I've might even commented on that in the call. You know, shifting production is certainly an option out there, but that is a medium to long-term solution, especially when we were in the throes of production already in the work, so that's more of a long-term solution, should things continue to change. Thanks, Paul.
Paul Lejuez -- Citi Research -- Analyst
Thank you. Good luck.
Joel D. Anderson -- President and Chief Executive Officer
Thank you.
Operator
The next question comes from Matthew Boss with JPMorgan. Please go ahead.
Joel D. Anderson -- President and Chief Executive Officer
Morning Matt.
Matthew Boss -- JPMorgan -- Analyst
Maybe Ken, on your fourth quarter margin guidance, at 3% to 4% comps, should we still expect gross margin contraction? Was the majority of the margin contraction that you're talking about for the quarter, more tax reform-related reinvestment through the SG&A, just any help on the gross margin versus SG&A for fourth quarter?
Kenneth R. Bull -- Chief Financial Officer and Treasurer
Sure. Thanks, Matt. Yes, as you noticed, we did raise the implied guidance for our fourth quarter comps. We're still seeing that overall delever that I mentioned in the prerecorded remarks for operating margin, and the majority of that would take place in SG&A, driven by the tax reinvestment. We also have a little bit of incentive compensation, some incremental there, given the outperformance in sales as we've discussed before. The majority of our operating income is in the fourth quarter. So that incentive compensation gets adjusted in the fourth quarter. So you have a little bit of that going on also, which actually occurs, some of that is in -- up in gross margin and some is in -- the majority is in SG&A. So those are really kind of the two factors going on in the fourth quarter.
Matthew Boss -- JPMorgan -- Analyst
Congrats on a great quarter guys.
Joel D. Anderson -- President and Chief Executive Officer
Hey, thanks Matt. We appreciate it.
Operator
The next question comes from Edward Kelly with Wells Fargo. Please go ahead.
Anthony Bonadio -- Wells Fargo -- Analyst
Hey guys, this is actually Anthony Bonadio on for Ed. Congrats on a good quarter and thanks for taking our question. Just quickly on freight, a lot of your peers have continued to highlight elevated pressure here and an expectation that could continue into next year. Can you guys just quickly talk to what you're seeing right now on the freight side and what you've done so far to successfully mitigate?
Joel D. Anderson -- President and Chief Executive Officer
Yes, so we contract our freight on an annual basis and we largely do not participate in the spot rates. So most of the volatility was mitigated through our contracts. We're in the negotiations now, (technical difficulty) contracts turn over mid -- sometime next year. So it's really early to speculate on that, but I would tell you like in years past, I think our -- this is a great example where our growing scale works to our advantage and our suppliers really love working with Five Below, love the opportunity to really grow their business as our business is growing. And so, while there is some upward pressure, I think we'll be able to mitigate a large percentage of that largely due to our growing scale. So we're feeling pretty good.
Anthony Bonadio -- Wells Fargo -- Analyst
Got it. Thanks, guys.
Operator
The next question comes from John Heinbockel with Guggenheim Securities.
Joel D. Anderson -- President and Chief Executive Officer
John, good to have you back.
John Heinbockel -- Guggenheim Securities -- Analyst
So two questions here, real quick. So number one, when you think about product availability, right, some of your peers leaving the market and the work that Michael is doing, maybe speak to that, and as that product quality goes up, the ability to take a little bit more on price, right, is sort of relative to the TEN BELOW test. Number one. And then secondly, the work that George is doing in store experience, keeping pace with the product, where are we on that and how much running room do you think there is to really improve the experience in the store?
Joel D. Anderson -- President and Chief Executive Officer
Yes, I think the analogy with George is similar to the journey Michael and the merchants have been on, it's a long-term journey and I think you've seen several years running now under Michael's leadership. The merchant team continuing to improve the product really speaks for itself how it just continues to get better and better. And honestly, it's the same approach George is taking with the field, and we still see lots of upside and continuing to improve the experience. And at the end of the day, it's fun store and we want to be the yes store, we want to be a store that customers love to come in and just like to go and have fun. And George is putting processes in place and consistency, but at the end of the day, it's about making the store experience great, and I'm really pleased with the progress our operating team has made, and I think you'll see it getting better in '19, but we're well on the way, it feels good.
John Heinbockel -- Guggenheim Securities -- Analyst
Okay, thank you.
Joel D. Anderson -- President and Chief Executive Officer
Hey, thanks. Appreciate it, John.
Operator
The next question comes from Chuck Grom with Gordon Haskett. Please go ahead.
Chuck Grom -- Gordon Haskett -- Analyst
Hi, guys, good morning. Thus far on the toy purchases, have you been able to identify this is a new or repeat customer yet? And if it's the former, do you think there's an opportunity to use toys as a customer acquisition vehicle, similar to the spinner benefit you saw last year?
Joel D. Anderson -- President and Chief Executive Officer
Yes, thanks, Chuck. It is early in the fourth quarter still and having spent a dozen years in the toy business, it is largely a fourth quarter business. So there's a lot to come. But if you look at our Q3 and use that as a proxy, transaction is a proxy for traffic. It was a nice transaction-led quarter. Certainly, by our guide here in Q4, you can see that we expect the momentum to continue. Toys are certainly trending nicely, and the merchant team has done an amazing job sourcing a great lineup of toys, and so we certainly expect with our marketing campaign all around toys that we are going to attract a lot of new customers and it should -- there's no reason this doesn't perform like the spinners did for us. It's just a matter of magnitude and I think we just -- we'll have to wait till we get through the end of the quarter. But the merchants leaned in with toys, the marketing team leaned in with a commercial, largely focused around toys and we are set up for a great fourth quarter.
Chuck Grom -- Gordon Haskett -- Analyst
Okay. Good luck.
Joel D. Anderson -- President and Chief Executive Officer
Hey, thanks, Chuck.
Operator
The next question comes from Scot Ciccarelli with RBC Capital Markets. Please go ahead.
Beth Reed -- RBC Capital Markets -- Analyst
Hi, good morning. This is actually Beth Reed on for Scott. Just wondering if you can talk a little bit more about the $10 and below concept, how rapidly do you think you could extend this to other stores next year? And would that accelerate if the 25% tariffs do go into effect? And then lastly if you could just give us a sense for what types of products there are in this store, and do they have the potential to attract perhaps a new type of customer? Thank you.
Joel D. Anderson -- President and Chief Executive Officer
Yes, thanks, Beth. What I would just say to everybody right now is TEN BELOW is something we've been working on for quite some time. It wasn't tariff driven in its nature, but it does give you a great sense how we continue to reinvest in the Company. We continue to innovate and like we've done with other initiatives, we're going to take this with pace and diligence. I guess the analogy I'd give you is our remodel program, we started that in '17, continued it throughout '18, so was nearly a two-year journey before we are ready to be in a rollout. So as far as '19 and TEN BELOW goes, while we're really happy with the early signs, we haven't even been through a holiday yet, and I would think -- do not think of '19 as a rollout year for something like TEN BELOW. But we are always looking to innovate, and we're pleased with some of the products we've got in there; gaming, connective home, room are all areas we've been able to accelerate and continue to bring that wow to the customer, and incredible value in the $1 to $10 price points.
Beth Reed -- RBC Capital Markets -- Analyst
Got it. Thank you.
Joel D. Anderson -- President and Chief Executive Officer
Thanks, Beth.
Operator
The next question comes from Vincent Sinisi with Morgan Stanley. Please go ahead.
Vincent Sinisi -- Morgan Stanley -- Analyst
Hi, great. Good morning, guys. Thanks very much for taking the question and very nice quarter again here. Just wanted to ask, maybe if you can give a little bit more color in terms of what you're seeing. Obviously we've been seeing enhanced digital marketing efforts as well, and with the new New York store and whatnot. Can you give any sort of update to maybe the types of kind of repeat customers that you're seeing beyond what you've kind of given, just for kind of spinners in the past, maybe also kind of zip codes that might be -- being brought in by some of these enhanced efforts, that would be great.
Joel D. Anderson -- President and Chief Executive Officer
Yes. Thanks, Vinnie. As you know, we don't have our own credit card or a loyalty program yet at this time. So we have to rely on some external research that we do once or twice a year. And I think the biggest proxy for that for us is brand awareness, in terms of understanding how successful these marketing campaigns are. And as we've shared number of times, our brand awareness continues to go up and really pleased with the progress we've made, and it's largely been due to a shift into more and more digital strategies. In my prepared remarks, I commented that we've added influencers in Q4 this year for the first time, and we've also increased our TV reach to about 50% of our stores versus 40% last year, and continue to explore social mobile. And all that together, along with our e-commerce site are all collectively, our digital strategy to make the consumer more aware of Five Below, keep us top of mind and really bring together a holistic approach of all our digital strategy.
So I guess net-net Vinnie, digital is really important to us. It's hard to finger-point down to the exact customer without a loyalty program, which we will look at that over time. But overall really pleased, we are making great progress.
Vincent Sinisi -- Morgan Stanley -- Analyst
Okay, Joel. And if you don't mind, if I could just -- just within your enhanced TVs for 4Q, is that the same relative mix in terms of like new --newer versus existing markets as last year?
Joel D. Anderson -- President and Chief Executive Officer
I have to go back and look exactly, Vinnie. But it is a relative -- when we went from 40% to 50%, it's a 25% lift there. It's a combination of new markets and existing markets. I'd have to go back to last year to see what the mix was, but I'd be surprised if it was any different.
Vincent Sinisi -- Morgan Stanley -- Analyst
Not a problem. Awesome. Thanks very much. Best of luck.
Joel D. Anderson -- President and Chief Executive Officer
Thanks, Vinnie.
Operator
And next question comes from Michael Lasser with UBS. Please go ahead.
Michael Lasser -- UBS -- Analyst
Good morning. Thanks a lot for taking my question.
Joel D. Anderson -- President and Chief Executive Officer
Good morning Michael.
Michael Lasser -- UBS -- Analyst
Joel, when you say you've mitigated the impact from the 10% tariff, does that mean you will have no effect on your margins or is that -- it has taken away potential upside that you might have gone from the (inaudible) and also can you frame the potential impact if 25% tariffs are introduced? Thank you so much.
Joel D. Anderson -- President and Chief Executive Officer
Ask that question again Michael, the first part of it, are you saying does it have --
Michael Lasser -- UBS -- Analyst
So, can you define what you mean by mitigated? A lot of companies have used that term. But it's not clear. Does that mean it's taken away the upside, there's going be no impact, can you give us more of a sense what you mean by mitigated? And also what would happen if we did go with 25% tariff?
Joel D. Anderson -- President and Chief Executive Officer
Yes, the goal always on that is margin. So we expect to build and maintain the same margin rate when we mitigate. And I think -- I will tell you, this tariff thing is very fluid and I think we've all lived the last 90 days, it's changed six times over. We were well on our way toward mitigating the 25%, it landed at 10%. We certainly have that 100% mitigated, meaning our margin rate remains intact. And I think it's really early to speculate on 25%. However, I shared with you in my prepared remarks, we're working on several strategies and I think we'll just take them as they come. But in no case do we expect not to be able to adjust our model, so that it doesn't have a material impact on the business overall, up to and including if we need to change price. But our first focus has been on bringing our cost down in order to compensate for the tariff increase. But too early -- yes.
Michael Lasser -- UBS -- Analyst
Just to clarify what you're saying Joel, so if 25% did go through, you would take a harder look at breaking the $5 barrier across the board as a potential mitigating technique that you would add, is that right?
Joel D. Anderson -- President and Chief Executive Officer
That's right. Anything is on the table, Michael, and up to and including breaking the price, and certainly as -- if it goes to 25% or it expands to a broader piece, you have to look at all options. And then as I said earlier, longer term, and I mean longer, it includes moving countries or eliminating items that we just can't mitigate the price on. But I think the merchant team, the supply chain team has just done a fabulous job. And I'll give a big shout out to our supplier community, they have really leaned in and supported us in working through this. And so we have a lot of flexibility with eight world and I think this is a great example where the model works and the team has flexibility to adjust and here we are with this going in place January 1 and we have fully mitigated it.
Michael Lasser -- UBS -- Analyst
Great. Thank you so much and good luck for the rest of the holidays.
Joel D. Anderson -- President and Chief Executive Officer
Yes, thanks, Michael.
Operator
Next question comes from Jeremy Hamblin with Dougherty & Company. Please go ahead.
Jeremy Hamblin -- Dougherty & Company -- Analyst
Good morning, and I'd like to add my congratulations on the impressive response. I wanted to ask a question on your new distribution centers that you're looking to roll out, a change in the way that you are developing and buying the centers here moving forward. I wanted to see, one, if you could give a little more clarity on the timing of opening the 2019 DC, as well as the 2020, and if you've had any learning now and going through this, where you're really investing a lot more capital in opening up a DC, as it might relate to the next two distribution centers you are opening up in '20 and 2021? Thanks.
Joel D. Anderson -- President and Chief Executive Officer
Yes, let me -- Jeremy, good question, it's actually a really important question, because infrastructure is one of my key three legs I talk about all the time and DCs are really going to be important to our long-term strategy. So let me talk about timing. Ken, maybe jump in on capital. Our plan right now is to open the Atlanta DC in the spring of 2019. We're well on the way, it's on budget, it's -- we got to refine it. We're starting to bring material handling in right now. And then our -- same cadence for 2020, we'd open that Southwest DC in the spring of 2020. And then Ken, you want just comment on capital?
Kenneth R. Bull -- Chief Financial Officer and Treasurer
Sure. Jeremy on the capital allocation, as you know, we always try to remain flexible there. This is -- the Southeast distribution center that Joel referred to opening up in the spring of '19 that is going to be a purchase. That's the first one that we've had. As we move forward with these other distribution centers, we will look at those on an individual basis to see what the best option is from a financing standpoint. But again, we'll keep options open for us as we move forward in terms of how we make those deals on those future DCs. Okay?
Jeremy Hamblin -- Dougherty & Company -- Analyst
Yes. Just a quick follow-up on that. So in terms of the '19 opening, can you call out at this point, Ken, any -- I know you're expecting the impact to be lower than the prior DC openings, but can you give us a sense for the timing of when we might see 10, 20 basis point impact on any of the margin line items?
Kenneth R. Bull -- Chief Financial Officer and Treasurer
Yeah, I'll hold off on that until we provide the full-year guidance on the fourth quarter call, but we would expect to see, obviously, some deleverage with that new distribution center coming on board. Our expectations are less than what we've seen historically. Just to give you a little bit a recap there, if you remember, we opened up our DC in 2013 in Mississippi, it was about 60 basis points of deleverage. Then we opened Pedricktown up in 2015, it is about 30 to 40 basis points of deleverage. So we would expect to see less than that given our scale going into '19, but deleverage nonetheless. All of this, though, as you heard from Joel in the prerecorded remarks, we still feel good about the 2020 algorithm till 2020. So it's all contemplated within that growth algorithm.
Joel D. Anderson -- President and Chief Executive Officer
Thanks, Jeremy.
Jeremy Hamblin -- Dougherty & Company -- Analyst
Great, thanks guys.
Kenneth R. Bull -- Chief Financial Officer and Treasurer
Thanks Jeremy.
Operator
The next question comes from Sean Kras with Barclays. Please go ahead.
Sean Kras -- Barclays -- Analyst
Hey guys, great quarter and I appreciate you taking my question. Joel, in the prepared remarks, you mentioned the new POS system upgrade is now complete, which I think you needed for a loyalty program. Can you give us an update on that when you might start actually testing a loyalty program? And then, also, two, just what a program might look like in terms of -- would that be something where you would accumulate points and perhaps redeem for an item in the store or a discount or just bigger picture, how are you thinking about the program?
Joel D. Anderson -- President and Chief Executive Officer
Thanks, Sean. It was a monumental step to get that done. We accelerated -- I think we talked about at the beginning of the year was supposed to be a two year rollout, accomplished it in one year, great team effort there. As far as loyalty, specifically, goes that was a required step before we could consider it. And honestly, Sean, the teams pretty heads down right now on holiday, but we will quickly turn here as soon as we get to January to start kind of laying out the specifics of that. But like everything we do, we expect it to be fun, exciting, it'll be focused on kids and I think you'd expect to see some sort of test in 2019 on it, but we'll have more details on where we're at by the time we get to our fourth quarter call in March. So just give us 60, 90 days to kind of spell that all out, but it is on the path.
Sean Kras -- Barclays -- Analyst
That's great, thanks.
Joel D. Anderson -- President and Chief Executive Officer
Thanks. You bet Sean.
Operator
The next question comes from Anthony Chukumba with Loop Capital Markets. Please go ahead.
Joel D. Anderson -- President and Chief Executive Officer
Go ahead Anthony. Good morning.
Anthony Chukumba -- Loop Capital Markets -- Analyst
Yes, good morning, thanks for taking my question and congrats on comping the comp again in the third quarter. So I went to the New York store recently and one of the things -- I mean -- and the store looks great, by the way, and there was a ton of traffic in the store, particularly for the time of day. One of the things I noticed there is that there were three self-checkout registers right next to the cash wrap, it looked like they only took credit cards to -- credit and debit cards at the time. And I guess I was just wondering, are you testing that in other stores and are you looking at that as a labor saving opportunity or more just a -- and very high volume store is just another way to kind of move people through the queue?
Joel D. Anderson -- President and Chief Executive Officer
Yes, We do have that in about seven stores now, Anthony. It has been very successful. Certainly, there is a labor component to it, but I'll tell you the part that's really surprised me most is the customers' response. It actually improves our customer experience in those stores that have had it and in most of our stores, like what you saw in the New York, we give them a choice, and when presented the choice, for the most part, they choose self-service over manned checkout. It's been fun to watch the kids do it, they bring in their own money, they are using their allowance, they're putting their cash in. You can use your phone to pay et cetera, et cetera. So it's really a engaging feature with the customers, and it's fun, and I think that's been the main driver more than anything. And you probably should expect to see us continue to do more of that.
Anthony Chukumba -- Loop Capital Markets -- Analyst
Got it. Thank you so much.
Joel D. Anderson -- President and Chief Executive Officer
You bet, Anthony.
Operator
The next question comes from Judah Frommer with Credit Suisse. Please go ahead.
Judah Frommer -- Credit Suisse -- Analyst
Hi guys, thanks for taking my question. One, just a little more high level, with the comps being kind of healthily built with traffic and basket, it's probably hard to parse out with spinners last year and toys this year, but is there any change around thinking about the long-term comp potential for the chain? Is anything changing that you can see, I don't know, maybe by locations that have certain types of co-tenants or -- that are in new versus existing markets where this should be more of a comp story than we've thought historically?
Joel D. Anderson -- President and Chief Executive Officer
No. I know a lot of people like to see the comp story change, but I think what's so awesome about the comp story is the consistency. Sans one quarter, we're 12 consecutive years of positive comps and it's a 3% to 4% comping (ph) business. And our new stores are really probably the more important piece of the model and as we just said to you, 2018 is tracking toward being our highest new store class ever. And so that we continue to produce new stores and that's just a testament to how strong the brands continues to get, awareness is building, but as those new stores open up stronger, the detriment is toward the comp. And so this has never been a comps-driven business. When you look at our growth year-over-year, 80% of the new growth comes from new stores, and that will continue to be the case for the next four to five years.
So don't look at it as a 3% to 4% comping business. I'm talking annualized. And when there is a hot trend in place, it skews hire. When there's not, it skews a little bit lower, but the real story is just about the consistency and we don't swing negative 10% one quarter and positive 5% the next. It's pretty consistent business. And I think it also should make it more predictable for you guys to figure out the model.
Judah Frommer -- Credit Suisse -- Analyst
Thanks and congratulations.
Joel D. Anderson -- President and Chief Executive Officer
Yes, you bet. Thanks, Judah.
Operator
The next question comes from Joe Feldman with Telsey Advisory Group. Please go ahead.
Joe Feldman -- Telsey Advisory Group -- Analyst
Yes, thanks, good morning guys and congrats on a good quarter. I actually wanted to follow up on that question about the new stores. Because I wanted to better understand, why do you think the stores opened is so much stronger this year, this 2018 class sounds very strong, averaging $2 million a box and was there anything like different that you did about the openings or maybe the marketing of the stores or just any color around that would be helpful.
Joel D. Anderson -- President and Chief Executive Officer
Yes, you bet. As far as marketing goes, it's the same as it's been. I think there's a couple factors in it. This class is entirely built of the refreshed concept. So we saw an immediate tickup in '17 with the refresh concept, that's continued into '18. You layer in what '18 has over '17, is the halo of the spinner, so our awareness is higher in '18 than it was in '17. So product is great, awareness is growing, the store experience is getting better. John Heinbockel asked about store experience, can we make that better. George's team is continuing to improve that. And we've got a great layout in there. The stores are bright and fun. And you put all those factors together and it just leads to another successful class of new stores.
And when so much of your growth is on new stores, I appreciate the question toward, because it's where we spend our time and while we certainly talk about comp and look at it, a lot of our people here at the home office we call Wow Town are focused on new store openings and getting those right, because they ultimately -- with such a quick payback, make a big difference on our annual deliverance and performance. But thanks, Joe.
Joe Feldman -- Telsey Advisory Group -- Analyst
Okay. Thank you.
Operator
This concludes our question-and-answer session. I would now like to turn the conference back over to Joel Anderson for any closing remarks.
Joel D. Anderson -- President and Chief Executive Officer
Thanks, everybody. Appreciate you joining us today and for your ongoing support of Five Below. Truly, warm wishes to you and your families for a happy holiday season. We've got three, four important weeks in front of us, and I hope to see you out in the stores, and a great place to get your stocking stuffers and your destination for all your holiday shopping needs. So, have a great day. Appreciate the new cadence for our meeting -- our call today due to yesterday's honoring of President Bush, and look forward to talking to you all soon. Have a great holiday.
Operator
This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Duration: 57 minutes
Call participants:
Christiane Pelz -- Vice President, Investor Relations
Joel D. Anderson -- President and Chief Executive Officer
Kenneth R. Bull -- Chief Financial Officer and Treasurer
Paul Trussell -- Deutsche Bank -- Analyst
Paul Lejuez -- Citi Research -- Analyst
Matthew Boss -- JPMorgan -- Analyst
Anthony Bonadio -- Wells Fargo -- Analyst
John Heinbockel -- Guggenheim Securities -- Analyst
Chuck Grom -- Gordon Haskett -- Analyst
Beth Reed -- RBC Capital Markets -- Analyst
Vincent Sinisi -- Morgan Stanley -- Analyst
Michael Lasser -- UBS -- Analyst
Jeremy Hamblin -- Dougherty & Company -- Analyst
Sean Kras -- Barclays -- Analyst
Anthony Chukumba -- Loop Capital Markets -- Analyst
Judah Frommer -- Credit Suisse -- Analyst
Joe Feldman -- Telsey Advisory Group -- Analyst
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