Ollie's Bargain Outlet Holdings, Inc (OLLI) Q3 2018 Earnings Conference Call Transcript

Ollie's Bargain Outlet Holdings, Inc. (OLLI 0.25%)
Q3 2018 Earnings Conference Call
December 4, 2018, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon. And welcome to the Ollie's Bargain Outlet conference call to discuss financial results for the third quarter of fiscal 2018. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from Ollie. And as a reminder, this call is being recorded. On the call today from management are Mark Butler, Chairman, President, and Chief Executive Officer; John Swygert, Executive Vice President and Chief Operating Officer; and Jay Stasz, Senior Vice President and Chief Financial Officer. I will now turn the call over to Jean Fontana, Investor Relations to get started. Please go ahead, ma'am.

Jean Fontana -- Investor Relations

Thank you, and hello, everyone. A press release covering the company's third quarter fiscal 2018 financial results was issued this afternoon, and a copy of that press release can be found on the Investor Relations section of the company's website. I want to remind everyone that management's remarks on this call may contain forward-looking statements, including but not limited to predictions, expectations, or estimates and that factual results could differ materially from those mentioned on today's call. Any such items, including our outlook for fiscal 2018 and future performance should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

You should not place undue reliance on these forward-looking statements which speak only as of today. And we undertake no obligation to update or revise them for any new information or future events. Factors that might affect future results may not be in our control and are discussed in our SEC filings. We encourage you to review these filings, including our annual report on Form 10-K, and quarterly reports on Form 10-Q, as well as our earnings release issued earlier today for a more detailed description of these factors. We will be referring to certain non-GAAP financial measures on today's call such as EBITDA, adjusted EBITDA, adjusted net income, and adjusted net income per diluted share that we believe may be important to investors to assess our operating performance. Reconciliation of these non-GAAP financial measures to the most closely comparable GAAP financial measures are included in our earnings release. With that, I will turn the call over to Mark.

Mark Butler -- Chairman, President, and Chief Executive Officer

Thanks, Jean. And hello to everyone. Thanks for joining us on the call today. We delivered another strong quarter. And we're very excited about our results and the continued momentum in our business as we once again exceeded our top and bottom-line expectations. Our overall performance was driven by robust sales growth. Great deal flow, productive new stores, and strong comparable store sales drove a 19% increase in our top-line. This was our 18^th consecutive quarter of positive comps with a 4.6% comp store sales increase, nearly half of our department's comp positive end. Our best performing categories included toys, housewares, electronics, floor coverings, and automotive. These strong sales and our tight expense control contributed to a 47% increase in adjusted net income. All said, another great quarter. Many times, you heard me say that we pride ourselves on consistent execution which is the hallmark of our success.

Key to these consistent results is our focus on the execution of three strategic drivers, offering terrific deals, growing our store base and leveraging and expanding Ollie's army. For over 36 years, Ollie's has brought great deals to our customers. Ours is a simple business. We buy cheap, and we sell cheap. This is just what we do. We have an incredible deals that are throughout the entire store. And we continue to see growing availability of deals from our new and existing vendors. Our pipeline is definitely full with no slowing in sight. Our toy buyouts have performed remarkably well to date. And I'm thrilled with how these and other deals allow us to give our customers more of what they want, name brands at drastically reduced prices. Store growth is another strategic priority. And we're very pleased that our new locations continued to outperform expectations. We had a busy quarter opening 17 new stores, including relocating our Mechanicsburg, Pennsylvania store which was our first store in the chain.

We opened our first store in Texas, our 23rd state. Since quarter-end, we've celebrated yet another milestone with the opening of our 300^th store. Our recent six store openings bring us to a total of 37 new stores for the year, including one relocation in line with our long-term growth expectations. Included in our new store are four former Toys "R" Us locations which we're really excited about. We've acquired a total of 18 former Toys "R" Us sites including six leased and 12 purchased properties. These great sites set us up and strengthens our real estate pipeline now and into the future. As you saw in our release, we just closed on land in Lancaster, Texas to build a new distribution center. This will be our third DC. And we're thrilled we found a home for it in Texas as we think the state and the broader geographic area represent a big opportunity for development and a great place for the Ollie's brand.

The 615 thousand square foot facility will support our new store growth and will have the capacity to service 150 to 200 stores when completed. Construction has begun. And we expect to be operational during the first quarter of fiscal 2020. The end result of all of this is now, I'm as excited as ever about the prospects ahead for us. We're eager to serve even more customers with our proven profitable store model as we continue our expansion. I feel great about the future white space opportunity as we continue on our path to 950 or more stores nationwide. Moving onto Ollie's Army, the Bargain Battalion now totals over 8.8 million members and accounts for approximately 70% of our sales. As part of our efforts to enhance the Army experience, we've launched the Ollie's mobile app and rolled out Ollie's Army ranks. We're in the early stages of these initiatives. And we're excited about the initial response. Our goal is twofold: to incent the new customers into the brand and reward the tremendous loyalty of existing Army members.

We aim to build lasting relationships with the Bargain Battalion and keep them coming back. Our busiest and our most exciting night of the year, Ollie's Army Night is this Sunday, December 9th. We're thrilled once again to open our doors exclusively to Ollie's Army members. Our teams have worked tirelessly to fill the stores with tremendous deals for this special night. And we can't wait to welcome our loyal Bargainauts. Come join us for a great evening. If you're not an Ollie's Army member yet, there's still time to enlist and share in the fun and the special savings. We hope to see you there. So, to wrap it up, we are very pleased with our third quarter results and the continued momentum of the business. Based on our performance and expectations for the fourth quarter, we're raising our sales and earnings guidance for the full year which Jay will speak to in more detail. We're hitting all of our marks.

We're offering incredible deals, controlling expenses, and opening successful new stores. Simply said, our team knows how to execute our strategy and deliver results. Over 36 years, our team has grown to over 8,500 members who are working harder than ever. We know the holiday season places extra demands on our associates. And I sincerely thank them for all they do, not only at this time of the year but every day. It's the combined experience, passion, and commitment of the team that makes Ollie's successful. Thank you for your support of Ollie's. I'll now turn the call over to Jay to take you through our financial results and 2018 outlook in more detail.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Thanks, Mark. And good afternoon, everyone. As Mark said, we had another strong quarter and are very pleased with our results. For the quarter, net sales increased 19.1% to $283.6 million. Comparable store sales increased 4.6% on top of a 2.1% increase in the third quarter of last year and a 3.9% increase on a two-year stack basis. The increase in comp store sales was driven by an increase in average basket partially offset by a slight reduction in transactions. During the quarter, we opened 17 new stores including the relocation of one existing store and closed a store in Parker, Florida due to damages sustained from Hurricane Michael. We ended the period with 297 stores in 23 states, an increase in our store count of 12.1% year-over-year. Our new stores continued to perform above our expectations across both new and existing markets, and we remain very pleased with the productivity of our entire store base. Gross profit for the quarter increased 17.8% to $115.4 million.

And gross margin decreased 50 basis points to 40.7%. The decrease in gross margin is due to higher supply chain costs as a percentage of net sales partially offset by increased merchandise margin. SG&A expenses increased 15.1% to $78.4 million, primarily the result of additional selling expenses from our new stores and increased sales volume in our existing store base. We leveraged SG&A expenses by 90 basis points to 27.7% of net sales. Pre-opening expenses increased 51.6% to $4.8 million and deleveraged 40 basis points to 1.7% of net sales due to the number and timing of new store openings year-over-year including openings associated with our newly acquired Toys "R" Us sites. Operating income increased 21% to $29.3 million. And operating margin increased 10 basis points to 10.3%. Net income increased 31.6% to $24.8 million. And net income per diluted share increased 31% to $0.38. Included in the $0.38 is $0.06 of tax benefits related to stock-based compensation.

Adjusted net income which excludes these benefits increased 47.1% to $20.9 million from $14.2 million in the prior year. And adjusted net income per diluted share increased 45.5% to $0.32 per diluted share from $0.22 per diluted share in the prior year. Adjusted EBITDA increased 18.9% to $34.7 million in the third quarter. And adjusted EBITDA margin was 12.2%. At the end of the period, we had $736 thousand in cash having used approximately $42 million of cash with o our purchase of 12 former Toys "R" Us stores. We had no outstanding borrowings under our revolving credit facility and ended the period with total borrowings of $19.3 million. Inventory at the end of the third quarter increased 16.9% over the prior year, primarily due to new store growth and the timing of deal flow. Capital expenditures increased $52.5 million in the quarter compared to $6.5 million in the prior year due to our purchase of the former Toys "R" Us store sites and the timing of new store openings.

As Mark mentioned, we are raising our full-year sales and earnings guidance based on year-to-date results and expectations for the fourth quarter. As such, for the full year, we now expect total net sales of $1,226,000,000.00 to $1,231,000,000.00 including the impact from the closure of the Parker, Florida store. Annual comparable store sales growth of 3% to 3.5% with Q4 increasing to the high end of our 2% to 3% range from the prior guidance of the low end of the 2% to 3% range, the opening of 37 new stores, including the relocation of one store and two closures. Operating income of $155 to $157 million which includes higher preopening expenses for increased new store openings in the first quarter of fiscal 2019.

Adjusted net income of $115 to $117 million and adjusted net income per diluted share of $1.74 to $1.77, both of which exclude the tax benefits related to stock-based compensation and the after-tax loss on extinguishment of debt. An effective tax rate of 26% which also excludes the tax benefits related to stock-based compensation. Diluted weighted average shares outstanding of $66 million and capital expenditures of $75 to $80 million which now include the estimated cost for our Texas DC through fiscal year-end. We intend to own versus lease our Texas DC and anticipate investing a total of $45 to $50 million in the project over the course of the construction period. I will now turn the call back over to the operator to start the Q&A session. Operator?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press * then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Matthew Boss of JPMorgan. Your line is now open.

Matthew Boss -- JPMorgan -- Analyst

Thanks. And congrats on a nice quarter, guys. Mark, any way to bridge the top-line trends that the model's been showing versus maybe the 1% to 2% legacy comp model that we used to talk about? Maybe just how would you rank the drivers? And have you seen the momentum continue through November?

John Swygert -- Executive Vice President and Chief Operating Officer

Yeah, Matt. This is John. With regards to the overall 1% to 2% comp which has been our long-term algorithm. We have seen a definite improvement over the period of time we've been public with regard to some significant deal flow, some increase in the overall brand awareness and the expansion of our opportunities out there and the margin of our opportunities out there in the marketplace. But as we always look at it, we have increased the comp ranges that we've given for Q3 and Q4, as we've seem to have a little bit more visibility into the holiday season with the toy business that we obviously announced previously. But in the long-run, we do believe the 1% to 2% is the right long-term algorithm for the business. And we'll continue to go back to that after we complete this fiscal year as well. In terms of how we see the quarter, as you know, we don't comment inter-quarter. We have seen the momentum continue in the business. And we're pleased with where we're at today.

Matthew Boss -- JPMorgan -- Analyst

Great. And then just one on margins. On the gross margin side, what was the magnitude of the supply chain headwind this quarter? And how best to think about merchandise margin versus supply chain headwind maybe as we think about fourth quarter? And if there's any initial thoughts on next year, that'd be helpful.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Oh, yeah. Sure, Matt. This is Jay. And I'll start with that. In the quarter, the supply chain was up year-over-year 80 basis points. And that was offset somewhat by the merchandise margin improvement year-over-year of 30 basis points. So, for the year -- for this year, on an annual basis, we're still targeting the 40.1% margin on a full-year basis that we've talked about. When we look at Q4 -- when I look at the consensus estimates that are out there, I think we're pretty close. We're expecting improvement of gross margin in the quarter probably of 20 to 30 basis points. We expect the supply chain headwind to decrease probably to a decrease of about 20 or 30 headwind because we're gonna start to anniversary those costs in Q4 on the supply chain side. So, we do expect that to lessen a little bit from a year-over-year comparison standpoint. And then we would expect the merchandise margin to be up in the range of 40 to 50 basis points.

Matthew Boss -- JPMorgan -- Analyst

Great. That's helpful. Thanks.

Operator:

Thank you. Our next question comes from Brad Thomas of KeyBanc Capital Markets. Your line is now open.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Hey. Good afternoon, guys. And congratulations on another strong quarter here. I was wondering if you could comment a little bit more about how the toy business contributed to 3Q and how it's doing so far here in 4Q.

Mark Butler -- Chairman, President, and Chief Executive Officer

Yeah. Brad, we're excited. Thanks for your comments. We're excited. We performed very well. As we pointed out, the toys was one of our top performing categories. We were locked. We were loaded. We did very well. We're very excited. I'm extremely excited about the prospects coming into the fourth quarter. I know the next question or somebody soon's gonna ask about the holiday weekend. And we had great bargains coupled with great weather. So, I'm really, really thrilled. That being said, there's a long way and a lot of important weekends including this weekend with Ollie's Army Night that we still have ahead of us. And I really, really feel good about where we're at. Toys are doing very, very well. The customer likes what we're offering. And they're absolutely showing it with their wallets and purses.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Great. And then with respect to the Lancaster distribution center, does that have any impact on the P&L for 4Q? And how should we think about factoring that into our models for next year as you ramp it up?

John Swygert -- Executive Vice President and Chief Operating Officer

Yeah, Brad. This is John. With regards to fiscal 2018, there'll be no impact on the P&L from the Lancaster, Texas distribution center. And I would expect a very modest impact starting in Q4 of 2019 for some preopening cost and travel relate to retrofitting the DC and getting it ready to go. But in terms of materiality, it'd be a pretty small number that you'd be seeing in the fiscal '19 number. It'll start quick and away in Q1 of 2020.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yeah, Brad.

Like John said and like we've said before, when we get that DC up and running in 2020 -- typically, we experience a headwind of call it 20 to 40 basis points in the margin.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Judah Frommer of Credit Suisse. Your line is now open.

Judah Frommer -- Credit Suisse -- Analyst

Hi, guys. Thanks for taking the question. Back to the supply chain pressure. Is it similar to last quarter when we were talking really freight and fuel? Is there anything labor related in there that's changed that you'd call out?

Jay Stasz -- Senior Vice President and Chief Financial Officer

Judah, this is Jay. And I'll start. And John or Mark may chime in. But the short answer is that no, the pressures are very consistent with the fuel and the trucking. We have continued to invest in the wages at the DC like we've talked about before. So, there's a little bit of that expense as well. But it's really from the trucking side.

Judah Frommer -- Credit Suisse -- Analyst

Okay. And more broadly in wages labor? Obviously, some commentary out of not necessarily direct competitors but the industry since your last call. Any issues retaining talent or filling positions?

John Swygert -- Executive Vice President and Chief Operating Officer

Judah, this is John. We really have not seen any impact on retention or the ability to hire. We continue to pay a competitive wage and provide what we believe to be a good work environment. So, we have not seen any big changes. We adjust market by market when we need to. But we're continuing to work through it. We're investing in the stores to make sure that we have the stores in good shape for the holiday season with giving additional hours to the stores. But in terms of turnover retention, we're in pretty good shape.

Judah Frommer -- Credit Suisse -- Analyst

Okay. Great. And if I could squeeze one more in just on the slightly negative transaction count, I think last quarter you called out the comparison with spinner traffic in the prior year. Was there more of that. Or was there anything you'd comment on for the consumer? Are they pulling back? Are they going elsewhere? Or is there some other phenomenon going on?

Mark Butler -- Chairman, President, and Chief Executive Officer

Did I tell you I had a 4.6% comp?

Judah Frommer -- Credit Suisse -- Analyst

You did. That's with fewer people.

John Swygert -- Executive Vice President and Chief Operating Officer

Yeah. Judah. As we've always said, we don't focus on driving the traffic into the store. The deals drive the traffic and as you can with the 4.6% comp. And when Jay said a very slight negative transaction count, it was a very slight negative transaction count that we were able to see for the quarter. So, nothing that concerns us where we're still seeing people put more in the basket. And we're continuing to maintain on the customer base. So, we're excited about it.

Judah Frommer -- Credit Suisse -- Analyst

Fair enough. Thanks. And good luck.

Operator

Thank you. And our next question comes from Randy Konik of Jefferies. Your line is now open.

Randy Konik -- Jefferies -- Analyst

Hey, guys. How are you? Just wanted to go back to the supply chain costs. So, just to be clear, do you see those costs or those headwinds start to dissipate after next quarter? I wanna get the timeframe and duration of that.

John Swygert -- Executive Vice President and Chief Operating Officer

Yeah. Randy, I'll start and let Jay finish on the technicalities. But in terms of the overall costs we're seeing on the distribution and transportation side and the headwinds, we are starting to annualize those on a full-year basis. So, we don't see the headwinds subsiding. We just see them annualizing. And at this point, we don't think -- as of today, we don't see them getting worse than they were last year. So, we believe they'll start to just level off. So, it'll become more of the new norm unless there's some type of disruption that occurs that is new to us that we haven't seen yet today.

But the transportation side has seemed to stabilize year after year. But it's still much higher than it was two years ago. I don't know if that helps you at all, but we think that -- we're still poised to maintain that long-term algorithm of the 40% gross margin that we've been able to deliver for several years now. So, we expect to see that continue. And the only pressures we do see is going into 2020 with the new DC starting up. You may see a little bit of headwind on the margin with the DC firing up and some costs in order to leverage it taking another year or two after that to do so.

Randy Konik -- Jefferies -- Analyst

And then on those incremental DC costs, do you think that you can offset that a little bit with what you're seeing nice merchandise margin improvement continuing?

John Swygert -- Executive Vice President and Chief Operating Officer

We would tell you we'd expect to see somewhere between 20 to 40 basis points of pressure on the margin related to the DC probably in year one and then starting to see that subside in years two and three. But I don't think we can offset -- if you look at when we opened up our DC in Georgia in 2011-2012, you saw us at the 39.8, 39.7, 39.9 area. So, we would tell you we probably would not be able to maintain the 40 in the first year that we fire up the distribution center unless our freight savings offset is that significant. But I would not count on that at this point in time.

Randy Konik -- Jefferies -- Analyst

Very helpful. Very clear. In terms of just the DC, just the reason to own versus lease and anything from a technology perspective in the third distribution center that's different or the way it's set up that's gonna be different from the other two? And talk to the ability to have additional throughput and/or anything you learned from the third distribution center that would be applied to the other two. Thanks.

John Swygert -- Executive Vice President and Chief Operating Officer

I think what we learned, Randy is the third distribution center is gonna be almost a almost exact duplicate of the first distribution center. We feel that the first distribution center that we actually had built as well back in 2011, that that is a great prototype for us to roll out for our next distribution centers. And we feel it's the most efficient model that we have. And we're basically duplicating that same footprint. We may add a little bit more automation in the building from the pick mods, per se. But other than that, we're gonna be opening up pretty much the spitting image of what we did in 2011 in York, Pennsylvania. We feel very comfortable that that's the right model and the right building from a throughput perspective. In terms of the owning of the owning [inaudible] I'll let Jay address that.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yeah, the own versus buy -- we've been on these calls, and we've talked about capital allocation. This is a strategic asset for us. It's not necessarily like store assets. It could change quickly over different periods of time. We wanna own this asset. We wanna control it for the long-term. We've got the capital to do it. So, we thought that it made sense from all those standpoints to buy it versus pay a premium to lease it.

Randy Konik -- Jefferies -- Analyst

Understood. Helpful, guys. Thank you so much.

Operator

Thank you. And our next question comes from Vincent Sinisi of Morgan Stanley. Your line is now open.

Vincent Sinisi -- Morgan Stanley -- Analyst

Okay. Terrific. Thanks, guys for taking my questions. Good afternoon. Just wanted to go back to Judah's question. We know it's slight but just on the traffic during the quarter. I know that the last couple of quarters with some of the compares and whatnot has been the case. But more importantly, just wondering since you've introduced the ranks within the Army program, can you just talk to maybe some -- we know it's early, but from -- to what you're seeing in terms of frequency? Obviously, traffic will turn positive again. But what are you seeing with maybe some of the higher ranks and whatnot?

John Swygert -- Executive Vice President and Chief Operating Officer

Yeah. Vince, I would tell you it's probably really too early for us to even see a big difference. We just rolled out the ranks here at the beginning of August. So, you're talking two months of activity. We don't have enough data yet to really start analyzing and digging into it. So, I think we probably need a couple more quarters under our belt to really tell you -- to see what we're seeing in the ranks and how that's moving the needle. But that's something we're not anywhere near ready to talk about or give any type of color on today.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yeah. And Vince, this is Jay. Just one comment on the transactions. If we look back to the year-ago quarter, HBA was one of our top departments. So, that's obviously maybe a higher velocity, high transaction item. So, from that standpoint, we weren't too surprised, especially given some of the top categories this quarter that we would have had some headwind to transactions.

Vincent Sinisi -- Morgan Stanley -- Analyst

Gotcha. That's helpful, Jay. Thank you. And then maybe just a quick just additional follow-up to that. Just with the ranks now in place for this holiday season, with the Army Night and whatnot coming up this week, any kind of changes or increases or approaches to marketing this holiday that you can speak to? And then if you don't mind, I might just slide one more in. Just with the new DC, once it does become operational, any initial thoughts -- we know it's early -- but around the mix of existing versus new markets, how that might change over time?

Mark Butler -- Chairman, President, and Chief Executive Officer

Yeah. Vince, this is Mark. I'll go first on the Always Army Night. It's absolutely 100% same exact thing we did last year, and we have done for decades before. The entire store is on sale to the customer. You gotta be an Always Army member to get in. and there's greater discounts on all Christmas and all toy product that are in the store. So, the stores are gonna be an absolute zoo. They're gonna be packed. Hopefully, with good weather. We're watching the weather every moment. But it looks pretty favorable. But there's absolutely no change. The ranks do not affect and would not even in the future affect. We're so busy that you wouldn't even be able to do anything with the ranks on this particular night. So, there's no change in the Ollie's Army go-to-market approach and especially for Ollie's Army night. The second part of the question, I'll let the boys go.

John Swygert -- Executive Vice President and Chief Operating Officer

Yeah. Vincent, this is John. With regards to the DC and what it affords us from a overall store growth opportunity, whether it be new markets or existing markets, obviously, we believe Texas is gonna be a very good market for us. It's gonna be a lot of stores. We believe somewhere between the neighborhood of 80 to 90 store opportunity in Texas. The state itself is very large from a logistical perspective.

So, in terms of how much -- Jay had mentioned the DC will service anywhere from 150 to 200 stores when it's fully built out. We believe 80-90 stores in Texas. The remaining stores will come out from Louisiana, Arkansas, Mississippi, part of Tennessee market and fill out the store count and probably part of New Mexico as well. So, that'll be the servicing area, as we've always said. And we're still filling up a lot of the new markets from the Georgia distribution center. Still have a lot of opportunity in Florida. We believe we'll probably have about 70%-80% of our stores come out of the new markets and 20% to 30% of the existing markets.

Vincent Sinisi -- Morgan Stanley -- Analyst

Very helpful. All right. Awesome, guys. Thanks very much. Best of luck.

Operator

Thank you. And our next question comes from Paul Lejuez of Citigroup. Your line is now open.

Paul Lejuez -- Citigroup -- Analyst

Hey, guys. Can you talk about the growth in active customers this quarter versus last quarter? I'm curious if you can tell if you attracted a new customer with the increase toy buy and focus on that category.

John Swygert -- Executive Vice President and Chief Operating Officer

Paul, this is John. I don't think we've actually looked at the new active customers this year versus last year, quarter-over-quarter. We normally look at it on an annual basis. So, I wouldn't' even have the answer on that today. But I could get back to you on that.

Paul Lejuez -- Citigroup -- Analyst

Okay. And then on that 4.6% comp, how much of that came from toys specifically? And then also how much of that comp came from traffic that was driven by toys? In other words, not just the toy sale itself but also the attached sale with a toy purchase.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yeah, Paul. This is Jay. We really don't get into the departments, calling them out, their contribution to the comp. So, we're not gonna speak to that. And like John said, we haven't really done the analytics to the extent that you're referring to.

John Swygert -- Executive Vice President and Chief Operating Officer

And Paul, one follow-up on that is we -- and Mark always tries to remind everybody we've been a toy retailer for many, many, many years. So, it's not like we just have toys this year and didn't have them last year. So, it's not like we're necessarily attracting all these new people, per se, that didn't buy toys last year. We may just be selling more toys to the same basket. And that would be a very hard analysis to perform and get that accurate anyway.

Paul Lejuez -- Citigroup -- Analyst

Yeah. Got you. And then just higher level, can you talk a little bit about your inventory turn trends maybe by category? Where have you seen the biggest improvement in turns? And then what categories are your biggest opportunity for improvement? Thanks.

John Swygert -- Executive Vice President and Chief Operating Officer

Hey, Paul. This is John. I've been with Ollie's for about 15 years now. And we are not a company that focuses on inventory turn. We focus on deals. And the deal drives the business. So, there's a good reason we're not a fast fashion retailer. We don't manage inventory to have a shelf life of eight to 12 weeks. We manage the inventory to have the right product to motivate the consumer. So, our inventory turn as a company has been about 2.3 to 2.4 turn times a year since I've been here. And it's not improved, and it's not gotten worse. That's just the nature of the business the way we buy. So, we're not really a business that focuses on trying to increase the turn in a department. We try to increase the deal to the consumer.

Paul Lejuez -- Citigroup -- Analyst

Thanks, guys. Good luck.

Operator

Thank you. And our next question comes from Scot Ciccarelli of RBC. Your line is now open.

Scot Ciccarelli -- RBC -- Analyst

Hey, guys. How are you? So, another toy question. And just conceptually, how does this split typically work on a seasonal basis for toys between 3Q and 4Q? Let's say you had $50 million of inventory to sell between those two quarters. What would the typical split be?

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yeah, Scot. We haven't disclosed that. We typically just talk about the annual toy sales which run about 5.5% last year. We have talked about that number going up in Q4. In a normal year, it goes to about double that in the fourth quarter. And that's really all we've talked about. We haven't talked about the split between Q3 and Q4.

Scot Ciccarelli -- RBC -- Analyst

Okay. Understood. And then just a second question. What kind of lift to traffic do you guys typically experience as you open new stores? I know you guys tend to have very strong new store openings, dips a little bit, and then ratchets back up. Do you guys have an annualized number that you have on the lift to traffic or transactions you typically get from the new store order fill?

John Swygert -- Executive Vice President and Chief Operating Officer

Scot, we don't count traffic. And I think we've said that many a times to everybody. I know everyone likes that concept. But we don't count traffic. That's not something we look at. We look at sales only.

Scot Ciccarelli -- RBC -- Analyst

Okay. I'll [inaudible]. Thanks, guys.

Operator

Thank you. And our next question comes from Rick Nelson of Stephens. Your line is now open.

Rick Nelson -- Stephens -- Analyst

Thanks. Good afternoon. Great quarter. I'd like to ask you -- early in the year, you had talked about spending some of the tax reform benefits or having that opportunity up to 20%. If you could speak to what you think you have reinvested up to this point and your need to do that going forward?

Jay Stasz -- Senior Vice President and Chief Financial Officer

Sure, Rick. This is Jay. And yeah. We talk quarter by quarter. We hadn't in Q2 spent much of that. We had invested a little bit in benefits and a little bit in the DCs in Q3. We definitely saw an uptick in net investments. We continue to invest in the wages in the DC. We also did a lot of seasonal hiring for all our stores in a lot of key markets. So, we also invested in wages by market, like John said earlier on the call. So, we invested in wages across certain markets, not across the board. We didn't raise our minimum wage. But we also have invested additional hours into the stores for the selling season. And the benefit reinvestment continues. So, Q3 is more normalized. And we think that's gonna go onward. We had planned about $4.5 million in Qs two through basically this year. So, if you take out about $1 million for Q2, I think that investment is gonna be ongoing next year, probably at about -- I would say $3-$4 million on annual basis.

Rick Nelson -- Stephens -- Analyst

Okay. Thanks. That's helpful. Also, I'd like to ask you about tariffs. They were on. Now they're off. If they go back on, how do you see that affecting your business?

Mark Butler -- Chairman, President, and Chief Executive Officer

Yeah, Rick. This is Mark. And as we previously have mentioned, the tariffs -- we have some minor impact to some of the product that we do sell, we bring in, we do sell. But by and large, the tariffs don't have a major effect to us because we are not a price setter. We are a price reactor. So, what our goal is is to be at a percentage off of what we call the real stores. So, if the real stores -- whatever they have adjusted their prices to be is what we hope to be a percentage off of those. And if they're paying more for the product, they likely are going to have to raise their price. We don't know that. Certainly, with the delay in any of the tariffs, certainly one would think the consumer will win. But we just know that we're gonna have to pay attention to the competitive situations and price accordingly to what the market is.

Rick Nelson -- Stephens -- Analyst

Fair enough. Thanks. And good luck.

Operator

Thank you. And our next question is from Peter Keith of Piper Jaffray. Your line is now open.

Peter Keith -- Piper Jaffray -- Analyst

Hey. Thanks, guys. Nice quarter. Hey, Mark. Just a follow-up on tariffs. As we talk about this on again, off again dynamic, I'm curious how you think about that as an opportunity for closeouts. You've always talked to the past about change can help your business. Do you see some potential opportunities as we look out to '19 that there may be in excess of import inventory that becomes available?

Mark Butler -- Chairman, President, and Chief Executive Officer

Oh, we do, Peter. Yeah. Look, we're aggressively pursuing it. From my perspective -- and you know my personality -- I think there might be a lot of canceled orders that are gonna happen because people tried to beat timing. And any time there's a disruption which is to your point, your question, we have the opportunity to jump on it. And we have been ahead of this. And we are aggressively pursuing overseas stock lots, canceled orders, discontinued items. I think there might be a pretty good run on that. But it remains to be seen. It's very, very early. But you are 100% in line with our daily thinking.

Peter Keith -- Piper Jaffray -- Analyst

Okay. Very good. One other separate question back on toys. There's a concern with investors that you're getting this one-time closeout, and it'll be difficult to lap next year. Do you think you're improving relationship with the supplier community within the toy category such that your toy business going forward each year just might run-rate at a higher level now with Toys "R" Us exiting the market?

Mark Butler -- Chairman, President, and Chief Executive Officer

Yeah, Look, that's a good question as well. Welcome to my world. This is 18 consecutive quarters. So, whether it be toys or HBA or candles. But I do think that once you get people familiar -- much like what we did with the coffee, once you get people familiar to come into your store and they enjoyed the experience and they saved money, that there's going to be a habit for them to come back. So, I'm excited about the prospects of our ability to sell toys. We're aggressively pursuing toys now and in the future for next year. Certainly, we've been able to take -- and we enjoyed some really good success in Q3. Hopefully, it's gonna continue here in Q4. We got a long way to go. But we got a lot of really, really great name brand products of toys and others. But I think that next year, we are gonna have to lap it. I think we're up for the task. And I think we're gonna do just fine.

Peter Keith -- Piper Jaffray -- Analyst

Okay. Sounds terrific. Thanks. And good luck.

Operator

Thank you. And our next question comes from Edward Kelly of Wells Fargo. Your line is now open.

Edward Kelly -- Wells Fargo -- Analyst

Hi, guys. Good afternoon. And I wanted to start with just a follow-up on the freight and supply chain. Just based on your comments on the call, it sounds like you're expecting the pressure to normalize next year. Can you just maybe talk about the drivers of that? I know we probably should expect diesel to maybe be down. But we're not really hearing from others that they would expect that cost to normalize. I think a lot are still expecting that cost to be a drag. I'm just curious as to what drives that.

John Swygert -- Executive Vice President and Chief Operating Officer

Just to make sure we're clear, Ed, I think that what we're saying is we're annualizing it year-over-year. So, it's not going back to what was normalized prior to it increasing. It's just gonna be at the same level as it has been for a year now. So, we're not expecting that to get worse than what we've seen for a 12-month period now. So, we're not gonna go back to normalized levels prior to the increase that we saw all over 12 months ago. We're just gonna start to annualize that number. And that becomes what we call the new norm. I hope that makes it clear for you.

Edward Kelly -- Wells Fargo -- Analyst

No, no. I get that. I guess what I'm asking about is the rate of inflation and that cost in your P&L. Would that be elevated again next year or not?

John Swygert -- Executive Vice President and Chief Operating Officer

We, at this point, are not seeing a continued elevation year-over-year. We believe it's gonna normalize, and we're gonna see that flatline out at the new, higher levels, per se. So, it's still a challenge. And we gotta maintain a higher merch margin to offset that. But our quarter-over-quarter variances should not be as large as what you've seen from an overhead distribution and transportation perspective.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yeah. And Ed, this is Jay. Just to tack on, we still have a long way to go as we pencil out our plan for 2019. We haven't got there yet. And we don't really talk a whole lot about it certainly on this call. We'll talk more about it on the Q4 call.

Edward Kelly -- Wells Fargo -- Analyst

Understood. And I just wanted to ask a question about Ollie's Army. Did I hear you guys say 8.8 million members this quarter? Was that right?

John Swygert -- Executive Vice President and Chief Operating Officer

That is correct.

Edward Kelly -- Wells Fargo -- Analyst

Could I just ask about that? Because unless I'm taking the numbers down wrong, it looks like that's less than what it was last quarter. Is that right?

John Swygert -- Executive Vice President and Chief Operating Officer

Yeah. That is correct, Ed. And if you go back to your notes from last year at the same period of time, you would have had the same issue. We purge our Ollie's Army database once a year. And it's always done at the end of October. So, from our Q2 to Q3 call, you're always gonna have a decrease because we're clearing out those customers who we deem to be unactive. We purge them. So, we don't allow that number just to keep growing. We're working right now diligently to try to get to what we call a quarterly purge, so that becomes more smooth for you guys. We're not there yet. We're very close to getting there and starting to have that take place. So, that's our goal right now to where you can start to see quarter-over-quarter, year-over-year, the numbers will not be as choppy. And you won't see so many people disappear from the Q2 to Q3 call. But that's the same thing we've done since we've gone public. It's been the same case each and every quarter.

Edward Kelly -- Wells Fargo -- Analyst

So, this quarter, year-over-year is probably the right way to think about growth in that membership base. Is that better?

John Swygert -- Executive Vice President and Chief Operating Officer

That is correct, Ed.

Edward Kelly -- Wells Fargo -- Analyst

Yeah. Okay. Great. Thanks, guys.

Operator

Thank you. And our next question comes from Chris Prykull of Goldman Sachs. Your line is now open.

Christopher Prykull -- Goldman Sachs -- Analyst

Hi, guys. Thanks for taking the questions. I just had a quick follow-up to Ed's question. Are you more exposed to contract freight rates or spot freight weights? And are you seeing a difference in those rates year-over-year between the two? Because it looks like spot rates have come in, but contract rates are still elevated.

John Swygert -- Executive Vice President and Chief Operating Officer

Yeah, Chris. Our exposure has been more on the spot market. The way we buy and go to market, we don't really know where our goods are coming from each and every time we make a purchase. So, we're normally in the spot market on the inbound freight side of the business. We are on the contract -- we're mostly on the contract rate basis on the outbound. And most of our headwind this year has been all in the inbound side of the business.

Christopher Prykull -- Goldman Sachs -- Analyst

Excellent. That makes sense. And then was the slight change in operating income guidance -- I think I heard it correctly, but it was primarily around some incremental pre-opening expense in the fourth quarter. Is that accurate?

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yeah. That's right. Yeah. We had a little increase, just over a half a million increase in pre-opening expenses primarily just related to the improved cadence in the opening of stores in '19 compared to a year ago.

Christopher Prykull -- Goldman Sachs -- Analyst

Fair enough. And then just one last one if I could sneak it in. Any initial learnings or color from the mobile app rollout? Or is it just too early?

Jay Stasz -- Senior Vice President and Chief Financial Officer

I think it's probably a little too early, Chris. But one thing we -- we're excited from the standpoint that our adoption rate on the mobile app has been higher than we had expected. We're now north of 115,000 members who have adopted the mobile app. And we did not expect such a high adoption rate so fast. So, we're excited to see that many people sign up for it this rapidly.

Christopher Prykull -- Goldman Sachs -- Analyst

Great. Thanks so much. And good luck over the holidays.

Operator

Thank you. And ladies and gentlemen, this does conclude our question and answer session. I would now like to turn the call back over to Mark Butler for any closing remarks.

Mark Butler -- Chairman, President, and Chief Executive Officer

Okay. Thank you, Operator. Thanks, everyone for participating in our call and your support of Ollie's. Looking ahead, we feel great about our current trends. We believe we're well-positioned for the remainder of the holiday season. It's an exciting time here at Ollie's Our stores are packed. And we urge all of you to get out there and shop our incredible bargains. We wish everyone a very happy holiday season and look forward to sharing our results with you on our fourth quarter call in late March. Thank you very much. Happy holidays.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

Duration: 46 minutes

Call participants:

Jean Fontana -- Investor Relations

Mark Butler -- Chairman, President, and Chief Executive Officer

Jay Stasz -- Senior Vice President and Chief Financial Officer

John Swygert -- Executive Vice President and Chief Operating Officer

Matthew Boss -- JPMorgan -- Analyst

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Judah Frommer -- Credit Suisse -- Analyst

Randy Konik -- Jefferies -- Analyst

Vincent Sinisi -- Morgan Stanley -- Analyst

Paul Lejuez -- Citigroup -- Analyst

Scot Ciccarelli -- RBC -- Analyst

Rick Nelson -- Stephens -- Analyst

Peter Keith -- Piper Jaffray -- Analyst

Edward Kelly -- Wells Fargo -- Analyst

Christopher Prykull -- Goldman Sachs -- Analyst

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