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Ollie's Bargain Outlet Holdings (NASDAQ:OLLI)
Q3 2019 Earnings Call
Dec 10, 2019, 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 2019. [Operator instructions] And as a reminder, this call is being recorded. On the call today from management are John Swygert, president and chief executive 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 good afternoon, everyone. A press release covering the company's third-quarter 2019 financial results was issued this afternoon and a copy of that press release can be found in the Investor Relations section on 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 actual results could differ materially from those mentioned on today's call. Any such items, including our outlook for fiscal 2019 and future performance, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

You should not place undue reliance on these forward-looking statements, which speak only as of today, and we undertake no obligation to update or revise them for any new information or future events. Factors that might affect future results may not be in our control and are discussed in our 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 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.

Reconciliations of the most closely comparable GAAP financial measures to these non-GAAP financial measures are included in our earnings release. With that said, I will turn the call over to John.

John Swygert -- President and Chief Executive Officer

Thanks, Jean, and hello, everyone. Thanks for joining our call today. Before we begin the review of the quarter, I want to thank everyone for your sympathy and support of Mark's unexpected passing and our tragic loss. As many of you know, Mark was a passionate, talented and highly regarded leader as well as an exceptional person loved by the entire Ollie's family.

He will be sorely missed. I had the privilege of working very closely with Mark for almost 16 years and now have the privilege of leading the company. I will be supported by the entire Ollie's team, an extremely talented and dedicated group, as well as our board of directors. Mark's shoes are impossible to fill, but I know that each and every one of us is more committed than ever to do our best to make him proud as we carry his legacy forward.

As Mark would say, we are Ollie's. Now on to our results. We delivered a strong quarter across the board. Strong deal flow and ongoing success for our new stores drove a 15% top line increase.

Comp sales were in line with our expectations, decreasing 1.4% compared to a 4.6% increase in the prior year. As we stated on our last call, the outsized cannibalization impact of the TRU sites and the record performance of our new stores entering the comp base are expected to remain headwinds through the remainder of this year. However, our long-term growth algorithm remains the same. Merchandise margin rebounded, and we regained efficiency levels at our distribution centers.

Improvement in these key areas, along with tight expense control, contributed to a 28% increase in adjusted net income. As we outlined in our prior call, we had visibility into Q2 issues to be addressed and we did just that. As always, we remain bullish on the proven strength of our model of offering great deals, growing our store base and leveraging and expanding Ollie's army. We have a deep bench of experienced and talented merchants who have done an outstanding job building long-standing relationships with our vendors.

As a result, we continue to see exceptional deals. As we said before, we leaned into toys, and our buys are even bigger than last year. We are very pleased with how these and other deals allow us to give customers more of the name brands and bargains they've come to expect from Ollie's. Our pipeline is very full, and we're confident that we're in a great position to capitalize on a robust closeout environment.

Our store growth and merchandising strategies continue to work very well together. The more we grow our store base, the greater the prospects for opportunistic buys for our customers to save even more money. At the same time, our strong deal flow can easily support our expansion plans for the foreseeable future. As we've said many times in the past, our new stores are, in fact, the biggest driver of our growth.

Their performance continues to exceed our expectations with stronger-than-ever new store payback. We had another busy quarter, opening 13 stores and entering two new states, Oklahoma and Massachusetts. We opened a total 42 stores this year, and we are well on our way to having a full pipeline for the coming year with a normalized opening cadence. We look to support the expansion of our geographic footprint with the opening of our third distribution center, which is located in the Dallas-Fort Worth area.

This will enable us to enter both new markets and new states. Construction remains on budget and on schedule for operation in the first quarter of 2020. Ollie's army continues to grow, accounting for over 70% of our sales in the quarter. The army is now $10 million strong.

One of our biggest events of the year, Ollie's army night, is this Sunday, December 15, and we are excited once again to welcome Ollie's army members to an exclusive evening of shopping and special rewards. If you're not an Ollie's army member, there's still time to enlist and join us for a great time. We hope to see you there and share in the fun and savings. During the quarter, we completed our first ever share buyback, demonstrating our confidence in the company's long-term growth prospects.

Our consistent cash flow generation allows us the opportunity to strategically buy back shares and is another vehicle for us to drive shareholder value. I want to take a moment to thank our almost 8,700 team members for all of their extra efforts required during this hectic holiday season. We are grateful for all you do, not only at this time of year, but each and every day. So to wrap it up.

I'm very pleased with our results this quarter. Many of the challenges we faced in Q2 were short-term in nature as we had anticipated. We course corrected where necessary and delivered strong results. We are pleased with our performance quarter to date and the trends are in line with our previous guidance.

That said, we have a lot of big days ahead of us, including Ollie's army night this Sunday. Under Mark's outstanding leadership, we achieved remarkable growth and success. Without Mark, Ollie's surely won't feel the same. What will be the same is how we execute this incredible business model.

There is no doubt he will be missed, but we have a tremendous opportunity ahead of us, and the entire team has rallied together in its determination to make Mark proud. It's the strength of Mark's legacy, together with our team, that give me confidence in our ability to stay focused and continue driving profitable growth and shareholder value now and into the future. I'll now hand the call over to Jay to take you through our financial results and 2019 outlook in more detail.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Thanks, John, and good afternoon, everyone. As John said, Mark was a remarkable person on all fronts, and I share all the sentiments John just expressed. We are very pleased to have delivered a strong quarter, with mid-teens top line growth, effective management of gross margin and expenses, resulting in adjusted EPS of $0.41 per diluted share. In the third quarter, net sales increased 15.3% to $327 million driven by exceptional new store performance.

Comparable store sales decreased 1.4% from a 4.6% increase in the prior year. Comp store sales consisted of an increase in average basket, offset by a decrease in transactions. Nearly half of our merchandise categories comped positive in the quarter. Best-performing categories included floor coverings, clothing, hardware, candy and bed and bath.

During the quarter, we opened 13 new stores, ending with 345 stores in 25 states, a 16.2% year-over-year increase in store count. These latest openings complete our lineup for this year with a total of 42 new stores. These stores continue to perform well above our expectations and we are very pleased with their productivity and ROI. Gross profit increased 15.5% to $133.3 million, and gross margin increased 10 basis points to 40.8%.

The increase in gross margin is due to increased merchandise margin driven by improved markup partially offset by higher supply chain costs as a percentage of net sales. SG&A expenses increased to $90.5 million due to additional selling expenses from our new stores. Tight expense control resulted in an SG&A rate flat to the prior year at 27.7% despite the drop in comp sales. Preopening expenses related to new stores decreased to $3.3 million due to the comparative timing and number of new store openings in the quarter.

As a percentage of net sales, preopening expenses decreased 70 basis points to 1%. Operating income increased 22% to $35.7 million in the quarter. Operating margin increased 60 basis points to 10.9% driven by the increase in gross margin and the reduction of preopening expenses as a percentage of net sales. Net income increased 8.6% to $27 million or $0.41 per diluted share.

Adjusted net income, which excludes tax benefits related to stock-based compensation, increased 28.3% to $26.8 million or $0.41 per diluted share from $20.9 million or $0.32 per diluted share in the prior year. Adjusted EBITDA increased 22.5% to $42.6 million. At the end of the quarter, we had $10.1 million in cash and no outstanding borrowings under our revolving credit facility. Inventory at the end of the quarter increased 15.9% over the prior year primarily due to new store growth and the timing of deal flow.

Capital expenditures totaled $24.2 million in the quarter compared with $52.5 million in the prior year period. The year-over-year decreases is the net result of investments in our third distribution center, offset by our $42 million purchase of the Toys "R" Us sites in the prior year. During the quarter, we invested $40 million to repurchase approximately 689,000 shares of our stock. We have $60 million of capacity remaining under our current share repurchase program and will consider additional buybacks if determined to be the best use of capital.

Turning to our outlook. Based on Q3 results and our expectations for Q4, we are reaffirming the full-year guidance that we provided on our prior call, which is detailed in our earnings release. I'll now turn the call back to the operator to start the Q&A session. Operator?

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Matthew Boss with J.P. Morgan. Your line is now open.

Matthew Boss -- J.P. Morgan -- Analyst

Thanks. And it goes without saying how sorry I am for the loss. Mark was clearly a legend and will be missed by all.

John Swygert -- President and Chief Executive Officer

Thanks, Matt.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Thank you, Matt.

Matthew Boss -- J.P. Morgan -- Analyst

I guess, maybe, John, can you just speak to the cadence or thoughts you pick for the third quarter? And then looking ahead, any comments on November maybe versus plan. And just how best to think about the progression of forward for reverse waterfall, cannibalization and supply chain headwinds? Is it above the timeline for returning to 1 to 2 comps?

John Swygert -- President and Chief Executive Officer

Sure. Matt, I'll let Jay take the first part and I may chime in here a little bit on it.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yeah, Matt. Sorry, you're breaking up a little bit on your phone, but I think I got most of it. In terms of the third quarter, I think you asked about the cadence. I mean, we don't talk about it.

Each of the months were pretty good. October was a strong month so that was good to see. And as far as returning to our normal growth algorithm, like we've talked about, we would expect that to return next year in 2020. And I think you asked also about some of the headwinds regarding cannibalization and reverse waterfall as well as supply chain.

And much like Q2, the cannibalization on reverse waterfall is about 150 to 200-basis-point impact on comp. The supply chain headwind is, like we said on our last call, it ended up being about half of what we experienced during Q2 and Q3, so call it, 75 to 100-basis-point impact.

Matthew Boss -- J.P. Morgan -- Analyst

Great. And maybe just a follow-up, if the line is still clear. Very strong new store productivity, it came in over 100% this quarter. Can you just speak to the strength that you're seeing from this year's fully, maybe just [Inaudible]

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yeah. And Matt, the new store productivity has been very strong, like you said, we're north of 100%. Like we said, the 2017 class was our strongest year, '18 was not far behind it. And so far, what we're seeing in '19 is a very strong class.

Again, it is early with a number of those stores, so we've still got a long way to go, but we're very pleased with the results we're seeing so far.

John Swygert -- President and Chief Executive Officer

Yes, Matt. And keep in mind that 2019 class, we're not surprised on how strong the class is due to the fact that we have had the 14 or so TRU sites that we actually acquired in bankruptcy that we knew they would be strong stores. There are obviously larger boxes and require larger volumes but they're actually performing quite well as we expected.

Matthew Boss -- J.P. Morgan -- Analyst

Great. John, congrats on the role also, and I think we know you all have a great merchant [Inaudible]

John Swygert -- President and Chief Executive Officer

Appreicate it, Matt. Thank you.

Matthew Boss -- J.P. Morgan -- Analyst

Best of luck.

John Swygert -- President and Chief Executive Officer

Thanks, Matt.

Operator

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

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Thanks. Good afternoon. And let me add my condolences on the loss of Mark. Regarding the fourth-quarter outlook, I was hoping you all could give us a little sense of how the Toy business is performing.

I haven't been out in the stores, you've clearly got a great selection of name brand products but admittedly a difficult comparison you're up against. Can you tell us a little bit more about how that category is performing?

John Swygert -- President and Chief Executive Officer

Yeah. As you know, Brad, we don't normally talk about specific categories, and we definitely don't talk about sales within the quarter. But as we've said previously, we're locked and loaded with the Toys. We bought into the Toys heavily for the business that we expected to do for the back half of the year.

We are pleased with what we're seeing right now. But as we've said earlier in the call, Ollie's army night, which is our largest toy sales event of the year, is this coming Sunday, and there's still many days to go to finish the quarter. So we'll hold and reserve the right to give you some additional color as we complete the season but we feel good where we're at today.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Great. And then I just thought maybe we could have -- reflect a little bit more and step back, thinking about how this year is playing out. Clearly, you gave us a lot of color around the Toys "R" Us cannibalization and the reverse waterfall, some of the supply chain issues last quarter. I guess, as you have another quarter to reflect on that, have you had any learnings about maybe how the industry or the business is evolving or feel like the business is in good place to get back to normal next year?

John Swygert -- President and Chief Executive Officer

Yeah. I would say, Brad, I think the business gets back to normal next year as we annualize these Toys "R" Us sites that we opened up during 2019. Business remains very strong. The deal flow is very strong.

The merchants are executing at a very high level. So we don't foresee any reason not to get back to our long-term algorithm in 2020.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Very helpful. Thank you so much.

John Swygert -- President and Chief Executive Officer

Thanks, Brad.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Thanks, Brad.

Operator

Thank you. Our next question comes from Peter Keith with Piper Jaffray. Your line is now open.

Peter Keith -- Piper Jaffray -- Analyst

Hi, thanks. My condolences on Mark as well. He was one of our favorites so he will be missed. I wanted to just take a kind of a big picture view on the current status of the team.

So we know Ollie's had abnormally low turnover and Mark's shoes can't be replaced. But I think there's some questions out there on what his responsibilities have been recently and maybe his involvement in the merchandising decisions and who's leading up merchandising today.

John Swygert -- President and Chief Executive Officer

Yeah. I'm obviously, Peter, we're -- as we said, we're not going to be able to replace Mark in any way, shape or form. So he was the founder. I mean, this was his baby.

He knew each and everything about the company and the overall merchant business. But what he did do, he invested significantly in the team. Our merchant team is a very, very stable team. Our top four merchants, which we -- that does not include Mark today, they have a combined Ollie's experience of about 73 years of time at Ollie's.

So we definitely have a very solid team, and we have a lot of folks who are behind these four individuals as well who have been training for many years under Mark, under them. And one thing we've always talked about in our prior calls with everyone, this is one team. It's always been one team. We don't have individualism.

We all are very collaborative in nature. So the team, as you would imagine, is more committed than ever to carry Mark's legacy on and to execute this at the highest level possible to make him proud of us. So the team is all in. The team is ready to move forward.

And we are confident that we can continue to deliver, and we can continue to get great bargains to our customers as we've come to grow to do.

Peter Keith -- Piper Jaffray -- Analyst

OK. That's helpful, John. And maybe just to help us understand. I know the management structure had changed a little bit nearly two years ago, where you moved into the COO chair.

Could you talk about, kind of, how your responsibilities have evolved in recent years and maybe where you had picked up some increased responsibility and took some off of Mark's plate?

John Swygert -- President and Chief Executive Officer

Sure. Ever since Jay came here and I moved into the COO role, I've obviously relinquished the accounting functions to Jay. So that freed me up in order to really spend a lot more time with Mark and the merchandising team and the marketing team just to get more familiar with that aspect of the business because those were the two pieces I had knowledge of but I had not intimate knowledge. So for basically the last three years, I've really spent a lot of time with Mark and the merchants to get a better understanding of what makes us special and how to make it -- how to execute it.

So that's been something that's been transitioning for a couple of years now, and I feel comfortable with where we're at. The merchant team is very solid, Peter, and they're ready to move forward.

Peter Keith -- Piper Jaffray -- Analyst

OK. Thanks a lot guys. Good luck, and we've got a lot of confidence in you.

John Swygert -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Randy Konik with Jefferies. Your line is now open.

Randy Konik -- Jefferies -- Analyst

Yeah, thanks a lot. And I also want to just pass along my condolences to the entire Ollie's team and Mark's family as well, so really sad, and we miss him. I guess, Jay, a question for you. Can you just give us some -- I'll just go over the the impact of the supply chain.

Again, we just repeat the numbers in the second quarter, the third quarter, what the impact should be in the fourth quarter and then going into the first quarter next year? Or should we continue to see like a half step down like we saw, I guess, in the third quarter and the second quarter? Just go over that math for us please, first.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yeah, for sure. So I mean, obviously, Q2 was a tough quarter. That was an aberration. The supply chain costs.

year over year, we missed margin by 190 basis point, supply chain was 110 of that. And what we talked about going forward when we guided at the end of Q2, and that same guidance is largely intact, we're looking at a 39 and a half full-year margin. And what we said was, we probably had about 20 or 30 basis points of headwind in each of Q3 and Q4 to get to that 39 and a half. So for the third quarter, we were a little bit favorable to that.

Merchandise margin was actually up 20 basis points. The supply chain costs were up 10 basis points as well. So net-net, we came in 10 basis points favorable. When we think about it, for Q4 and the full year, what we expect, probably, we expect still to hit that 39 and a half.

On the merchandise margin side, some of that favorability is really just timing related to the buying of deals. And like John said on his remarks, we've got a lot of big weeks ahead in Q4. So it's too early to really give indication from a sales standpoint or a markdown standpoint for Q4. But the way we think about it for full year it's still at the 39.5.

And really probably merchandise margin, not too dissimilar to what we had planned, kind of close to flat on a full-year basis, and then the headwind coming in the form of the supply chain costs, so maybe 60 basis point, 50-basis-point increase on supply chain costs for the full year.

Randy Konik -- Jefferies -- Analyst

That's super detailed and very helpful. I guess, the next question. The continued theme we keep getting, John, is great new store productivity and great payback. You talked about new markets, Oklahoma, Massachusetts.

How should we be thinking about, into next year, the pursuit of new markets versus existing markets in your store plans for next year or the next couple of years?

John Swygert -- President and Chief Executive Officer

Yeah, Randy, obviously, as you know, we're going to be opening up our third DC in the Dallas-Fort Worth area, so putting a strategic asset to work in that market is going to be the fuel for our growth in those new markets. So we would probably expect that of the 47 to 49 stores we open next year, probably half of those stores will come out of what we call new markets. And then the remaining stores will come out of existing markets. And keep in mind, there's still a lot of new markets, Florida being one of them, that we still have a lot of growth potential there so we still consider that a relatively new market, but this won't be serviced out of the Texas D.C., but kind of the 80-20 rule in terms of where the new store growth comes from for -- and then how we backfill in existing markets.

Randy Konik -- Jefferies -- Analyst

Helpful. Thanks again guys and really sorry about Mark.

John Swygert -- President and Chief Executive Officer

Thanks, Randy.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Edward Kelly with Wells Fargo. Your line is now open.

Edward Kelly -- Wells Fargo Securities -- Analyst

Yeah. Hi, guys. Good afternoon. I'd also like to obviously express my sympathies here.

The thing that I wanted to ask about is on the SG&A side. You were able to sustain SG&A margins on a comp decline this quarter. That's a lower rate, I guess, and what you sort of would have thought from the long term algorithm. So were there any unusual items in here? And then how do we think about the potential for SG&A deleverage in Q4? There's a pretty wide comp range out there, so I'm just kind of curious as to how we should be thinking about that line item.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yeah, Ed. This is Jay. And in the SG&A, right, we just -- we worked hard to keep the costs under control. I mean, the store labor, we squeeze it about as good as we could given the volumes they were doing and the receipts they were getting on the freight side.

So kudos to the store teams, I know that wasn't easy. But most of the leverage that you're seeing in the quarter is really on the G&A side from a labor standpoint and any -- a slight impact, some favorable impact, from our incentive compensation. So then when we talk about Q4, really, probably, I see it to be flat to 10 basis points. We're not going to get a ton of leverage on an annual basis for our SG&A the way we think of it, we're probably pretty close to flat year over year.

Edward Kelly -- Wells Fargo Securities -- Analyst

All right. And then just a question on the new DC opening next year. Just trying to get a sense as to how that would impact the P&L. Is there any color that you could provide at this point that would just sort of help us frame that for next year?

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yeah, for sure. So the way we think about it, and John mentioned this, next year, 2020, we plan to get back to the typical long-term algorithm. I think one nuance to that is our typical long-term gross margin target is about 40%. And with the new DC coming online, we tend to say, we're going to have a headwind of about 20 to 30 basis points.

So when we think about margin for next year, it's probably closer to 39.8% or 39.7%.

Edward Kelly -- Wells Fargo Securities -- Analyst

Great. Thank you.

Jay Stasz -- Senior Vice President and Chief Financial Officer

And our -- just to be clear, our DC flows through our margin.

Edward Kelly -- Wells Fargo Securities -- Analyst

Gotcha.

John Swygert -- President and Chief Executive Officer

Thanks, Ed.

Operator

Thank you. And our next question comes from Judah Frommer with Credit Suisse. Your line is now open.

Judah Frommer -- Credit Suisse -- Analyst

Hi, our condolences on Mark as well. And thanks for taking the questions. Maybe you could help us dig into the gross margin strength a little bit. Which categories, which deals may have driven that? And is there any conservatism in the Q4 gross margin expectation given how well Q3 performed?

John Swygert -- President and Chief Executive Officer

Hey. Judah, as you know, we don't give a lot of color on departmental margins and -- but as you could probably tell on the last call, Mark gave a lot of insight that we felt pretty good about our margin for Q3 when we had the call, because there were certain deals and timing that occurred between the end of the -- the end of Q2 and the call we had in August, so we -- the deal flow was lined up pretty good. I think that the Q4, I think the number that we've laid out, I don't think there's a lot of conservatism built in there. I think that's a number that's pretty solid.

We feel comfortable we can meet it though.

Judah Frommer -- Credit Suisse -- Analyst

OK. Great. And you've said a few times that you feel like you'll get back to the normal algorithm in 2020. Clearly, there'll be some cannibalization from the new stores that impact the comp early in the year.

But as you lap that, does the back half of 2020 set up as a relatively easy compare or are there items within the comparison that we should be thinking about that will keep you in that 1 to 2 comp range?

John Swygert -- President and Chief Executive Officer

Yeah. I would say that having 20 quarters of comps and looking at probably a four-year stack with some pretty big numbers that nothing's a layup. I would say that the back half, in theory, should be a little bit easier than the front half. But keep in mind, our last four years of Q4 comps are pretty large to go up again.

So I don't think anything is necessarily a layup. I think the one to two is a realistic number that's not -- with our continued growth and then the annualization of the TRU sites from Q1 and Q2, they were open in 2019. We still have a drag that we have to deal with on the first half of the year and make that up. So I think that that's the number we would stick with and come out with.

Judah Frommer -- Credit Suisse -- Analyst

OK. Thanks and best of luck in the role.

John Swygert -- President and Chief Executive Officer

Thanks, Judah.

Operator

Thank you. Our next question comes from Rick Nelson with Stephens. Your line is now open.

Rick Nelson -- Stephens Inc. -- Analyst

Thanks. My condolences as well on Mark and congrats to you, John, on your new role.

John Swygert -- President and Chief Executive Officer

Thank you, Rick.

Rick Nelson -- Stephens Inc. -- Analyst

The 47 to 49 stores you talked about for next year, how many are committed at this point? And if you could discuss the cadence of opening. I know this past year was more front-end loaded, how do you see that shaking out next year?

John Swygert -- President and Chief Executive Officer

Yeah, Rick, from a commitment perspective, we're pretty close to done. We have a few more stores that are still on our radar for our real estate team to execute and complete. But we got ahead of it pretty well, and we're in good shape for the 2020 new store openings. I'll let Jay cover the cadence with you.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yes. And Rick, like you mentioned, I mean, the cadence has been shifting on us from year to year. I mean, '18 was probably 40% in the first half, 60% back half. '19 was like the flip of that, about 70% in the first half, and we'll have 30% in the back half.

'20, and it's not in stone yet, but we'll be much closer to kind of a 50-50 split, first half, second half kind of cadence. Maybe it skews up a little bit in the first half if we can get some things going our way, maybe it's 50% to 55%.

Rick Nelson -- Stephens Inc. -- Analyst

Gotcha. Thanks for that. And then over the long haul, you've maintained those mid-teens growth rate in terms of store growth. How many years do you think that can be sustained before things start to plateau or pull down in advantage terms?

John Swygert -- President and Chief Executive Officer

Yeah. Rick, we started to talk about this a little bit in the last year or year and a half that we think at about 50 stores per year, that feels like the right number for us to open and execute on the new store plan. So we'll probably -- in 2021, you will still have the mid-teens unit growth, then you'll start to see it slow down a little bit, but the double digits will be there for quite some time but really. And then we'll reevaluate it if we need to.

But we think 50 to 52 stores is the right number for us to open on an annual basis.

Rick Nelson -- Stephens Inc. -- Analyst

Gotcha. Thanks and good luck.

John Swygert -- President and Chief Executive Officer

Thanks, Rick.

Operator

Thank you. Our next question comes from Paul Lejuez with Citi Research. Your line is now open.

Paul Lejuez -- Citi -- Analyst

Hey, guys. Our thoughts are with you guys, really sorry for the loss. Curious if you are seeing outsized product availability in any specific categories as a result of tariffs. Maybe if you could give a little bit more color about outperformance, underperformance by category for the quarter.

Also curious if you could give us a little bit more color on the comp metrics, maybe AUR versus BT. If you could provide any color there. Thanks.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Sure, Paul. I'll start. On the comp side, the average basket was up about 150 basis points in the quarter so the rest was a transaction shortfall. And then -- I apologize, you were breaking up a little bit.

But in terms of the deals, I think we're talking about Q3, strong performance. I mean -- and like we outlined, the floor coverings did great, and we had a big carpet deal that was a good deal for us in the quarter as well as the waterproof laminate continues strong. Clothing was very strong for us, which was -- part of that was a big apparel deal, which was great and pretty unique getting some branded names there. And then finally, hardware was strong for us, which I know in the last call, we were talking about ceiling fans and some other things that had just come in.

And more generally, I'll turn it over to John.

John Swygert -- President and Chief Executive Officer

Yeah. And Paul, those were our best -- our top three performing departments for the quarter. And then if you -- obviously, you said about half of our departments comped positive, which was basically pretty consistent in how our model works because we're deal driven. Our two weaker departments or less performing departments on just a comp basis was our electronics department and our Housewares department.

Both of those were deal-driven. Those are -- the departments are doing just fine. The volumes are great out of those departments but they just annualize the same deals for the quarter from LY. And if you look back, those are -- were strong performing departments last year as well.

Paul Lejuez -- Citi -- Analyst

Thanks. And have you seen a big pickup in availability in any categories as a result of tariffs?

John Swygert -- President and Chief Executive Officer

Well, I would -- I don't know if we've seen a big pickup related to tariffs at this point in time. I know the pipeline is very full, and our merchants have a significant flow of products. Some of that stuff takes time to flush out if deals are canceled and people are stuck with them. It just -- it takes time for that to play out no different than a normal closeout.

So we're looking for deals each and every day. So those -- if those items were canceled by other companies, we may be able to capitalize on them. But right today, we haven't seen a ton of that yet.

Paul Lejuez -- Citi -- Analyst

Gotcha. Best of luck guys.

John Swygert -- President and Chief Executive Officer

Thanks, Paul.

Operator

Thank you. And our next question comes from Simeon Gutman with Morgan Stanley. Your line is now open.

Michael Kessler -- Morgan Stanley -- Analyst

Hi, guys. This is Michael Kessler on for Simeon. Thanks for taking our questions. And first, of course, let me offer my sincerest condolences on Mark's passing.

So I wanted to circle back to the DC network. So you've talked about the Texas DC opening next year. Curious, how -- at what point you might need to look to open another DC? And I guess, how many stores the network with Texas will support going forward?

John Swygert -- President and Chief Executive Officer

Sure, Michael. Right now, with the three DCs open, we can support right around 500 to 550 stores without any further expansion. And we have two of our buildings that we currently control that are expandable, which could add probably another 100 stores to the overall network that we could service if we expanded those buildings. We would expect that we're probably going to add the fourth building sometime in 2023 or 2024 and that's probably going to be a Midwest distribution center, which will allow us to cover, without getting too far in the stim miles, cover half of the United States, and we think that's about the right thing we need to do to continue to fuel the expansion.

Michael Kessler -- Morgan Stanley -- Analyst

Got it. Thank you. And just one follow-up on the share buyback. I guess, was the -- the buybacks this quarter, was that more a situation where you were taking advantage of the pullback in the stock price? Or is this now something that maybe we should expect on a more consistent basis?

John Swygert -- President and Chief Executive Officer

It's absolutely taking advantage of the stock price in an opportunistic nature.

Michael Kessler -- Morgan Stanley -- Analyst

Got it. OK, great. Thanks, guys.

John Swygert -- President and Chief Executive Officer

Thanks, Mike.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Jason Haas of Bank of America. Your line is now open.

Jason Haas -- Bank of America Merrill Lynch -- Analyst

Thank you, and I'd like to add my condolences as well. And for my question, I wanted to focus on the supply chain issues. Have those been fully rectified? And you -- can you talk about what changes you've made? And then exactly what's causing there to be this lingering pressure to comps in 3Q and 4Q? Thanks.

John Swygert -- President and Chief Executive Officer

Sure, Jason. I'll take the supply chain and then myself and Jay will answer the lingering issue on comps for the back half of the year. The supply chain issues we had really started at the very tail end of Q1 and into Q2, and we just didn't have the right staffing levels in the distribution centers in order to throughput the goods from the vendors into the stores, and we got a bottleneck created when that occurred and it took us almost all of Q2 to work through that. And what we had to do there is we added additional labor, we changed a few of our processes, and we're very comfortable, as you can see, with our results.

We corrected that and that was a very short-term in nature issue that we had to deal with. It's caused a little bit of pressure on the stores with the significant freight that the DC has put into the stores but they've have worked through that, and we feel pretty good where we sit today. So the DC components that we struggled with in Q2 are largely, if not almost completely, rectified. We've had to invest a little bit more in the labor side of the business but we're comfortable, and we believe that was well worth the investment.

With regards to the comps, we have talked about that earlier. We opened up a lot of the TRU sites that we got in bankruptcy court that had significant cannibalization impact on our overall store base. Plus we had the strong store classes coming into the comp. They had a larger drag than our normal drag on the comps from reverse waterfall.

And we had said earlier that we believe that would continue for Q3 and Q4, and then we'll be back into long-term algorithm for 2020. Jay, you want to add any color to that or?

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yeah. No, I think that's spot on. The cannibalization and reverse waterfall are going to stick with us the entire back half like we talked about. The impact on the comp from the supply chain in Q3, like John said, we did get the product out to the stores but it took a while for those stores to handle that volume of product.

We did have to do some balancing by department and by store to get the assortments proper, so that's kind of why we continued to have the headwind during Q3. Largely in Q4, we're not going to have a headwind so much on the comp from the supply chain aspect. That's largely a Q3 item. And in the rearview mirror, I think the headwinds that we're going to have in Q4 will continue to be the reverse waterfall and the cannibalization.

And of course, like John alluded to, we're going up against some pretty big stacks, whether it's a 2-year, three-year or four-year basis just our own success comping that in Q4.

Jason Haas -- Bank of America Merrill Lynch -- Analyst

Got it. That's really helpful. And then for a follow-up, on the reverse waterfall, do you expect that to continue to be a headwind into 2020 based on how the new stores are performing, I guess, at the end of last year and the beginning of this year? Or should that headwind start to dissipate next year? Thanks.

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yeah. Sure, Jason. And for sure, it's going to -- it's always going to be there. I think we had a bit of an outsized impact.

We have had an outsized impact this year with the '17 class being so strong and then the '18 class being right behind it. I think as we look to '19, again, to your point, it is another strong class. But as we grow, our comp base gets bigger. So we think we'll be able to absorb that and get back to our typical long-term growth algorithm in 2020.

And like we said, on the cannibalization front, a large part of that will anniversary in Q1 and Q2 of next year.

Operator

Thank you. Our next question comes from Jeremy Hamblin with Craig-Hallum Capital. Your line is now open.

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

Thanks. And I'd like to add my deepest condolences on the loss of Mark. I wanted to just follow-up, I think, related to supply chain. And in terms of thinking about ways to address that moving forward, are there investments that you might look to on the technology side to help have that process be a little bit smoother going forward?

John Swygert -- President and Chief Executive Officer

Yeah, Jeremy, this is John. I think from a technology standpoint and an automation standpoint, our buildings are state-of-the-art. We don't really have a lot of needs from an automation perspective. I think the thing that we -- we're a little short changed on, we didn't staff up properly in the buildings, and then we had some processes that we needed to tweak a little bit.

And as I said earlier, the DC network is moving very, very well. It's -- we're very proud to say, it's back to normal operations and their throughput's very, very strong. So there's really nothing that we need to do or invest in from a technology standpoint as we move forward. Our oldest distribution center is 2011, so we're not -- we don't have a lot of outdated, nonautomated processes in our building.

So we feel good where we're at today and moving forward.

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

OK. And related, can you comment at all, it looks like some of the industry rates on shipping costs have started to fall just a little bit. Is that something that might be a little bit of a benefit here heading into 2020?

John Swygert -- President and Chief Executive Officer

It could be a little bit of a benefit, Jeremy. We do have contracted rates with our custom house broker but we do have some spot rate opportunities. So there is some potential upside as the rates continue to drop from an import perspective.

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

OK. And then last one for me. Jay, in terms of Winter Storm Harper last year, I know had a -- an impact to the end of Q4. Could you just quantify for us what that impact was to comp and/or sales from last year?

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yeah. I -- we don't quantify -- weather impacts generally. So I know we didn't quantify it last year, and I don't even have my notes on that in front of me. So I can't quantify that.

John Swygert -- President and Chief Executive Officer

Yeah, Jeremy, the only thing I would hang my hat on, and we did not and don't have that number with us. But as you may recall, when we reported our holiday sales, we had about a 7% comp through the holiday and then we ended quarter with about a 5.4%. So January, obviously, was a tougher month, and we really believe most all of that was related to the Winter Storm so that was kind of the delta you should take note of.

Operator

Thank you. Our next question comes from Scott Ciccarelli with RBC. Your line is now open.

Gustavo Gonzalez -- RBC Capital Markets -- Analyst

Hi, this is actually Gustavo Gonzalez on for Scott. Thanks for taking my question. And again, my sincere condolences on Mark's passing.

John Swygert -- President and Chief Executive Officer

Thank you, Gustavo.

Gustavo Gonzalez -- RBC Capital Markets -- Analyst

Just following up on sort of the cannibalization headwinds, I know that's sort of always there, but can you remind us of sort of what kind of the run rate of cannibalization that you typically see in sort of a normalized year?

Jay Stasz -- Senior Vice President and Chief Financial Officer

Yeah. We've typically seen, call it, 40 to 60 basis points. And like we've talked about before, on -- especially on the Q2 call, we're seeing an outsized impact now this year largely because of the Toys "R" Us stores and the way they were weighted toward some very mature markets and the way that they opened pretty close to each other and pretty close to some other stores. So it's an outsized impact.

Again, we expect to get back to the standard growth algorithm in 2020.

Gustavo Gonzalez -- RBC Capital Markets -- Analyst

Got it. Thank you. And then just maybe a bigger picture question. So sort of an environment where costs, particularly in IT and labor, are rising for most other retailers and you've kind of had this sort of tight expense control, especially in this quarter, and then kind of low SG&A growth per store the last few years.

Is that something that's kind of sustainable you think in today's environment? And how should we think about, sort of, future SG&A growth in that context?

John Swygert -- President and Chief Executive Officer

Yeah. We can't really answer on a forward-looking because we do adjust market-by-market, Gustavo so it just depends -- we don't make universal changes across the entire fleet of stores like a lot of other places do, but we look at it competitive-wise when we go into market to pay a fair wage. To attract the overall employee base. So as wages continue to rise, our wages will continue to rise accordingly but we'll try to make changes and adjustments to our overall model to offset some of the cost pressures.

But if the cost pressures are greater than what we can sustain with our 1% to 2% comp store growth, we may have a little deleveraging. But if that were the case, we would be out in front of it and let you know.

Gustavo Gonzalez -- RBC Capital Markets -- Analyst

Got it. Thank you so much, guys.

John Swygert -- President and Chief Executive Officer

Thank you.

Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to John Swygert for closing remarks.

John Swygert -- President and Chief Executive Officer

Thank you, operator. Thanks, everyone, for participating in our call and your continued support. We wish you a very happy and safe holiday season and look forward to sharing our results with you on our fourth-quarter call in late March.

Operator

[Operator signoff]

Duration: 46 minutes

Call participants:

Jean Fontana -- Investor Relations

John Swygert -- President and Chief Executive Officer

Jay Stasz -- Senior Vice President and Chief Financial Officer

Matthew Boss -- J.P. Morgan -- Analyst

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Peter Keith -- Piper Jaffray -- Analyst

Randy Konik -- Jefferies -- Analyst

Edward Kelly -- Wells Fargo Securities -- Analyst

Judah Frommer -- Credit Suisse -- Analyst

Rick Nelson -- Stephens Inc. -- Analyst

Paul Lejuez -- Citi -- Analyst

Michael Kessler -- Morgan Stanley -- Analyst

Jason Haas -- Bank of America Merrill Lynch -- Analyst

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

Gustavo Gonzalez -- RBC Capital Markets -- Analyst

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