Prepared remarks
Thank you, Nick. Good afternoon, everyone, and thanks for joining us today for Five Below's third quarter 2024 Financial Results Conference call. On today's call are Tom Vellios, Executive Chairman and Founder, and Ken Bull, Interim Chief Executive Officer and Chief Operating Officer; and Kristy Chipman, Chief Financial Officer and Treasurer. After management has made their formal remarks, we will open the call to questions. I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and our SEC filings.
The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements. In this presentation, we will refer to our SG&A expenses. For us, SG&A means selling, general and administrative expenses including payroll and other compensation, marketing and advertising expense, depreciation and amortization expense, and other selling and administrative expenses. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to US GAAP are included in today's press release. If you do not have a copy of today's press release, you may obtain one by visiting the investor relation page of our website at fivebelow.com. I will now turn the call over to Tom.
Thank you, Christiane, and thank you all for joining us today to discuss our third quarter results and business update. We are very pleased with the progress we've made since our second quarter call. The entire Five Below organization has come together with a refreshed mindset and a focus that is already making an impact. Ken and I have asked a lot of our team. It's been a heavy lift since the second quarter, and I have been so impressed to witness firsthand what we are capable of achieving with this shift. I want to thank the teams across the entire company for their commitment, hard work, and execution as we position Five Below for the opportunity ahead of us. Before I discuss the organizational refocus underway, I want to say how excited we are to announce Winnie Park as our new CEO. The breadth of Winnie's leadership experience across specialty and value retail, especially her merchandising expertise, global sourcing, consumer acumen, and, importantly, how she values people and champions organizational culture make her uniquely suited for the role.
In addition, she brings a deep understanding of the power at the intersection of trend and value. As you saw in our press release, I am delighted that Ken is continuing in his role as COO. And on behalf of the board and the entire Five Below team, I want to thank him for stepping in as Interim CEO. Ken's expertise and deep knowledge of our business was integral in setting a refocus in motion and will continue to be as we execute on our strategic priorities. In my role as Executive Chairman, I'm excited to work alongside Winnie and Ken. We now have a powerful combination of skills and experience that positions us well to realize our full potential. In the three short months since we last spoke, we've made meaningful strides to refocus the organization and are operating with a sense of urgency to address the areas of the business we outlined on our last call: Product, value, and store experience.
While we are off to an encouraging start, we have a way to go to deliver the performance that we believe this company is capable of. Our vision for Five remains the same: To be the best destination for teens and pre-teens and a 'YES' store for parents. We are getting back to our core, focusing on the customer and what they want. Work is underway to edit our assortment, leverage our scale, and deliver newness and trend-right high-quality products at an amazing value, while at the same time improving our store experience and optimizing our cost structure. We have a long runway of growth with significant white space available to us, and we are working to ensure we are properly positioned to capitalize on this opportunity. I've always been passionate about working back from the customer and maintaining an unwavering commitment to delivering on the Five Below principles of extreme value, trend-right product, and a fun store experience. I am excited about our future, and I'm confident in our team's ability to achieve the vision we've put before them. And with that, I will now hand it over to Ken.
Thanks, Tom, and good afternoon, everyone. I'll make some comments on the third quarter results and then share progress updates on our key focus areas of product, value, and store experience. Then Kristy will discuss more details on our results and outlook for the rest of the year. But before I get into results, I want to add how excited I am to welcome Winnie to the team. Her customer-centric experience, team-oriented leadership style, and deep focus on people, both customers and crew, make her a great fit. I look forward to partnering with Winnie to unlock our full potential and drive the next phase of Five Below's growth. I also want to take a moment to acknowledge and recognize the incredible contribution of all our teams. It has been a very busy five months and what they have accomplished has been and is significant. Now on to our results. Sales in the third quarter increased 15% to $844 million with a comparable increase of 0.6%.
Adjusted EPS was $0.42. These results were ahead of our guidance. Overall, we saw improved sales across a broader group of categories compared to the second quarter. Our operational execution across all areas of the business also improved and drove a better customer experience. We were very encouraged to see this overall improvement in the business, including across key comparable metrics. At the same time, we acknowledge we still have work to do to achieve our vision and deliver consistently positive comparable results. For new stores, much like our performance in comparable sales, performance here also exceeded our expectations. We opened a record 82 stores during the third quarter, delivering growth of 18% versus last year's third quarter store count. These new stores were located across 31 states, including our 44th state of Wyoming. Four stores in five states made our top 25 summer or fall brand opening list of all time.
Regarding performance by categories, the tech, seasonal, style, and candy categories, which together represented over half of our business in the third quarter, delivered sales outperformance. We were encouraged to see the positive results from the initiatives we took to add newness and deliver value, especially in our beauty, Halloween, tech, and games and toys categories. Our licensed business was also strong across several departments with both newer trends and existing trends such as Sanrio, as we helped celebrate Hello Kitty's 50th birthday. Within our Five Below assortment, items that represented extreme value and were trend-right resonated with our customers. Now onto our key focus areas. Starting with product and value, we are renewing our commitment to being the 'YES' store for kids and parents. Flexibility, relevancy, nimbleness, and speed are key to Five Below's merchandising success, and we are focused on leaning into these core capabilities.
One of our key differentiators has always been the ability to quickly identify trends and capitalize on them. With the teams back together in the office, we have seen positive momentum towards greater innovation and speed driven by improved collaboration and communication across multiple groups, including merchandising, product development, sourcing, planning, allocation, and visual merchandising. We believe our merchant teams are now better organized and equipped to quickly capitalize on trends and innovate. They have a renewed focus on sourcing truly amazing trend-right items that deliver quality, value, and excitement for our customers. Work is underway to drive broader and more consistent category and world performance with an improved key item approach, better SKU rationalization and productivity, and sharper value. As we said last quarter, this will take some time, and we currently expect to begin to see the impact of these changes in the second quarter next year.
Regarding Five Beyond, we believe it continues to provide us an opportunity to deliver a highly edited assortment of great, trend-right products at incredible value. We will apply the same core teen and pre-teen customer filter and focus as we do with the Five Below product when creating this assortment, and we will optimize presentation in our stores. On to store experience, our store experience is also a key differentiator for Five Below. We aim to be the cool store for kids and the destination for a fun treasure hunt experience. We have invested in our stores by increasing labor and streamlining operations to enhance the experience for both our customers and crew. We added more labor into the stores this year, beginning in August, and have begun creating work efficiencies and reducing tasks for our crew. As an example, to improve crew efficiency in store service levels, especially in the high-volume holiday quarter, part of our investment has associates manning our self-checkout areas and available to assist.
The actions we have taken to date have reenergized the store teams and enabled them to focus and engage more with our customers to deliver a better customer experience. Now turning to the fourth quarter. While it is very early, the holiday season is off to a solid start with the Black Friday weekend coming in on plan. Our stores are filled with gifts and stocking stuffers from cozy apparel to toys and games to seasonal decor. We are leaning into value even more this holiday season with $1, $2, and $3 items. As pleased as we were with our third quarter outperformance and solid start to holiday with our Black Friday weekend results, it is important to acknowledge the expected impact on our fourth quarter results of the five fewer shopping days between Thanksgiving and Christmas. We last had this calendar in 2019 and have used that experience to build our fourth quarter plan this year. As we look ahead, we are pleased with the changes and improvements we have been able to implement in a short period and are excited about the opportunities for the future.
We have a long runway of growth ahead and encouraging early results from the work that is underway to improve performance and results. Before I close, I want to make a few comments on the topic of potential tariffs. First, tariffs are not new to Five Below. We successfully navigated through tariffs in the late 2018 and 2019 timeframe through a combination of vendor collaboration, product reengineering and assortment changes, moving product sourcing to other countries, and ultimately pricing increases, primarily in our tech world. We expect to utilize these tools and tactics again. What's different today is that not only do we have a playbook, having successfully navigated this before, we also have Five Beyond established, as well as our India global sourcing office, which will help to optimize our vendor base overseas. That said, work is already underway with our many vendor partners and our overseas sourcing teams to mitigate the impact of potential tariffs.
In closing, we’re fortunate to have talented and energized teams in place across the organization. We have begun to reset the mindset of our company and have implemented meaningful change that our teams have wholeheartedly embraced. I could not be prouder of and more confident in the entire Five Below team to drive the vision Tom and I have laid out. And with that, I'll hand it over to Kristy to discuss our results and outlook in more detail.
Thanks, Ken, and good afternoon, everyone. I would like to add my welcome to Winnie; I look forward to working with you to create value for our shareholders. I will begin my remarks with a review of our third quarter results and then discuss our outlook. My comments will refer to results on an adjusted basis. Please refer to our earnings press release for GAAP results and all reconciliations. Total sales in the third quarter of 2024 increased 14.6% to $843.7 million from $736.4 million in the third quarter last year. Comparable sales increased 0.6%, driven by an increase in comp ticket of 1.2% partially offset by a decrease in comp transactions of 0.6%. As Ken mentioned, the team did a great job executing against the initiatives we put in place to improve sales. While it's still early in our reset, we were encouraged to see an improvement in the third quarter compared to the first and second quarters across key sales metrics, including transactions and average ticket.
In the third quarter, we opened 82 new stores compared to 74 new stores opened in the third quarter last year. We ended the quarter with 1,749 stores, an increase of 268 stores or approximately 18% over last year. New stores also benefited from the actions taken to improve the business, resulting in new store productivity that exceeded our expectations and our guidance for the third quarter. Adjusted gross profit for the third quarter of 2024 was $280.1 million, an increase of 25.7%. Adjusted gross margin increased by approximately 290 basis points to 33.2%, driven primarily by lapping the approximate 180 basis point shrink true-up from last year's third quarter, the timing of certain product margin benefits, including freight and efficiencies in distribution. These benefits were partially offset by fixed cost deleverage. As a percentage of sales, adjusted SG&A for the third quarter of 2024 increased approximately 180 basis points to 29.9% versus last year's third quarter.
This was driven primarily by increases in store payroll, including investments in labor hours and wages, as well as fixed cost deleverage, partially offset by leverage from cost management initiatives. As a result, adjusted operating income was $27.6 million and adjusted operating margin was 3.3% versus 2.2% last year. Versus guidance, our adjusted operating margin results were better than expected, primarily due to the favorable fixed cost deleverage that was lower due to the sales fee. Adjusted net income for the third quarter was $23.3 million versus net income of $14.6 million last year. Adjusted earnings per diluted share for the third quarter was $0.42 compared to last year's earnings per diluted share of $0.26. We ended the quarter with $216.6 million in cash, cash equivalents, and investments and no debt. Inventory at the end of the third quarter was $818 million as compared to $763 million at the end of the third quarter last year.
Average inventory on a per-store basis decreased approximately 9% versus the third quarter last year, primarily due to our ongoing strategy to normalize inventory levels. The inventory balance at the end of the quarter includes an approximate $21 million incremental reserve for unproductive inventory, as we implement our new merchandising strategy that Ken discussed. Our third quarter ending inventory has us well positioned to deliver against our fourth quarter sales guidance, and we expect to end the year with average inventory per store lower than last year. Turning now to our guidance. Our press release outlines our sales, new stores, and earnings guidance for Q4 and full year 2024. So I'll focus my commentary on additional detailed drivers for that guidance. I will refer to fiscal year 2023 on a 52-week basis and the fourth quarter of 2023 on a 13-week basis, and to fiscal year 2024 on an adjusted basis that excludes the impact of non-recurring or non-cash items as outlined in our earnings press release.
As a reminder, the extra week in fiscal 2023 added approximately $48 million in sales and approximately $0.15 in earnings per share to the fourth quarter and year. For the fourth quarter of 2024 on a 13-week year-over-year adjusted basis, we expect the following: Total sales are expected to increase between 5% to approximately 7% with a comp decline in the range of negative 5% to negative 3%. As a reminder, this is a unique holiday season due to the calendar with five fewer shopping days between Thanksgiving and Christmas, similar to the 2019 holiday season. Adjusted gross margin at the midpoint is expected to decrease by approximately 90 basis points as the 100 basis point benefit of lapping the shrink true-up from the fourth quarter last year is more than offset by fixed cost deleverage on the negative comp and the timing of certain product costs, including freight. Adjusted SG&A as a percentage of sales at the midpoint is expected to be approximately 120 basis points higher than the prior year.
This is driven by fixed cost deleverage on the negative comp and investments in store hours and wages, partially offset by lower incentive compensation. This results in an adjusted operating margin decline at the midpoint of approximately 210 basis points compared with the prior year’s fourth quarter. Moving on to the full year, total sales are expected to increase between approximately 9% to approximately 10% with a comp decline of approximately 3%. Adjusted gross margin at the midpoint is expected to decrease approximately 20 basis points due to fixed cost deleverage on the negative comp that is partially offset by lower inbound freight from the first half of the year, lapping last year's shrink reserve true-up, as well as distribution center efficiencies. Adjusted SG&A as a percentage of sales at the midpoint is approximately 150 basis points higher than last year. Fixed cost deleverage on the negative comp and investments in store hours and wages are only partially offset by lower incentive compensation.
As a result, adjusted operating margin is expected to be approximately 9% or 170 basis points lower than the prior year. Net interest income is forecasted to be approximately $14 million for the year-end. We expect a full effective tax rate for 2024 of approximately 25%. With respect to growth CapEx, we now plan to spend approximately $340 million, excluding the impact of tenant allowances. This reflects the opening of 228 new stores, converting about 180 store locations to the Five Beyond format, the completion of expansions in our distribution centers in Georgia and Arizona, and investments in systems and infrastructure. We expect to end the year with 1,771 stores. For all other details related to our results and guidance, please refer to our earnings press release. To wrap up, the work to return Five Below to realize its full potential is well underway, and we are pleased with the early signs of progress.
We have a large opportunity ahead to meaningfully improve our comparable trajectory as we implement our merchandise and experience strategies and continue our growth. The entire Five Below team is focused on executing against our plans, and we are beginning to see positive results and improvements, which provides us confidence in the opportunities that lie ahead. I want to thank our teams for leaning in during these last several months as we reset for the future. And with that, I would like to turn the call back over to the operator for the question-and-answer session.
Questions and answers
Thank you. We will now begin the question-and-answer session. And our first question today will come from John Heinbockel with Guggenheim Securities. Please go ahead.
Hi, Ken. The one question is a broad one. But when you think about what you want to do with product right, as you go forward. Maybe touch on how you think about sort of allocation by world, kind of recapturing that extreme value right? How do you think about the SKU assortment? Do you want to noticeably cut back in certain areas? And then price points, right? I don't know if you talk about $1, $3, $5 but just to sort of touch on the key things you think recapture that extreme value orientation?
Thank you, John. As we have mentioned, our main focus areas are product and value. We want to see more consistent and broad performance across different markets, which we observed in the third quarter. Our goal is to achieve better performance in that area. We are committed to providing trend-right products of high quality and exceptional value, specifically targeting kids. This will be a central focus for our teams and merchandising efforts. Regarding SKUs, we will begin a SKU rationalization process and assess SKU productivity, leading to a reduction in the number of SKUs. We anticipate improvements in this area by the middle of next year. Additionally, we have set aside reserves against existing inventory, which will assist in this process. As we move forward, we plan to significantly reduce our SKUs, and we expect to see this trend continue into next year. You also mentioned price points within the $1 to $3 range, which was an important focus during the holiday season. You can see this highlighted prominently in our stores. This price segment has always been central to our business, and even the $5 and under price points currently account for about 85% of our total units. Maintaining this breadth will remain a priority for us, especially as we cater to children. Tom, do you have any additional comments on this?
Yes, I believe you covered it well. John, as we reflect on our learnings, it's clear that there is a significant opportunity for us to reset some areas. We anticipate a substantial reduction in SKUs to support our businesses, and we need to explore opportunities for businesses that may require a degree of reinvention, allowing us to meaningfully reduce SKUs to welcome new offerings. Additionally, regarding Ken's comment on price points, we are already seeing a shift, and you can expect increased focus on Five Below. While narrowing the price points, we also see potential in Five Beyond, with a careful selection process to ensure we maintain extreme value and trend-right products at the forefront. More details will follow.
Thanks, John.
Hi, good afternoon. Thanks a lot. Congrats on the progress. Wondering if you guys could just talk a little bit about the benefits of everyone being back in the office. On the outside looking in, it's hard to see. But clearly, that was missing and it clearly looks like it's helping. So can you talk about that? And also, as we look out over the next couple of years, how are you thinking about store growth? New store productivity was better this quarter, but it is still a little bit below where you guys have historically trended. So just how should we think about store growth next year and the years out? Thank you.
Thanks, Chuck. It was essential for us to bring everyone back to the office, and it's been a few months since that happened. You can definitely notice the change because our business relies heavily on collaboration and innovation. Achieving this is quite challenging in a hybrid setting, virtually, or online. Throughout the organization, particularly in key areas like products, merchandising, planning, allocation, and visual merchandising, we've seen this shift. In fact, we've reintroduced physical pods where these teams can work together because it's a team effort. We've observed the benefits of this in a short time, and I believe this trend will continue. Regarding store growth, we previously indicated a target of 150 to 180 stores for next year. Currently, we expect that number to lean towards the lower end of that range due to our careful site selection and some delays from landlords on certain properties. Thus, we're anticipating being at the lower end of that target. As for 2025 and beyond, we'll provide updates during our fourth quarter call, as we typically do. That's our outlook on growth moving forward, and we will have more details to share in future years during that call. Thanks, Chuck.
Thanks. Congrats to Winnie and congrats to the whole team on the improved results. I wanted to come back to just understanding when you look at Q4, you're off to a solid start with the Black Friday period. But what do you think maybe you missed out on? If you could have had a do-over on where your product assortment was, what do you think the missed opportunity is in Q4, whether that's licensing opportunities with kind of some exciting things like Moana, Wicked, et cetera? But what do you feel like you would have leaned into a bit more that could have driven business better? And then just as a reminder, can you outline for us, Ken or Kristy, what the compressed season impact was in 2019? I think I recall it was like several hundred basis points to comp.
Okay. Thanks, Jeremy. I'll take the last part of that question first. We had the benefit this time in a shortened season to be able to have a year that's more comparable. And that's, as you called out, that's 2019, and we use that cadence and modeling and experience to be able to determine expectations for this fourth quarter. I believe if you go back and you look at the transition from say, Q3 of 2019 into Q4, I think we did probably about a three comp in Q3 of 2019, about a minus two comp in the fourth quarter. So you had about a 500 basis point differential in comp. It's pretty similar to what we've done here in terms of where we landed in the third quarter and what we're guiding to in the fourth quarter. So as we said in our prepared remarks, we use that as kind of a guide for us. In terms of the fourth quarter and potential opportunities, I think the first thing I want to just reinforce, we are really happy with what the teams have done in a real short period of time.
They had a chance to make an impact on Q3; a little bit easier to do that for the third quarter just given the nature of the quarter. It is a smaller quarter, it's got small season in there, Halloween, and you just have the ability on an item-by-item approach to have the impact there. It's much more difficult to do that in Q4 just because of the size of the quarter and the nature of our business. It turns from self-purchase in Q3 to more of a gifting approach in Q4. And as you know, myself and Tom, we are never pleased, we're never happy, we're always looking for better. So yes, there are definitely opportunities out there, but I got to tell you, the team has done a really good job in preparing us for the holiday season from a product standpoint and also from an execution standpoint across the organization. So whether it was the stores and what they've done to get the experience there for us or even the operating teams, the planning teams, the allocation teams have done a fantastic job.
So there is a lot here that we continue to learn. I think Tom mentioned that in his remarks too that we’re going to use those things, and that’s just going to be more opportunity as we go forward. So thanks, Jeremy.
Your next question today will come from Karen Short with Melius Research. Please go ahead.
Hi, thanks very much. Just a couple of questions. Well, I'll leave it to one, but maybe lumped into a few. Thoughts on CMO replacement, if there are any? And then I'm curious what you think the optimal number of SKUs are for the stores?
Yes. Thank you, Karen. Tom will respond regarding the CMO, and I will address the question about the SKUs.
I think our merchandising team is performing very well. We have a consultant leading the team and seven DMMs, six of whom have significant experience ranging from six to fifteen years. Our merchandising organization has a strong team, and we are pleased with their contributions. We are confident in their ability to advance the business at this stage. With Winnie joining us, the level of experience in marketing, merchandising, product, and units is impressive. While I have been somewhat involved, I believe the team is in place and ready, and we are very happy with them.
Yes, Karen, regarding SKU optimization, this is currently a key focus for us, and we expect to see results moving forward. Previously, we mentioned that we could achieve up to a 20% reduction in SKUs, although implementing this will take some time. SKU optimization really means rationalization and productivity, which is where our emphasis will be. We see opportunities in upcoming seasons to carry out this work globally, as Tom mentioned, there are specific areas where this will occur more extensively for us. This process will allow us to focus more on introducing new products, which is critical for generating trends and excitement among our customers. So, that provides some clarity on SKU optimization.
And your next question today will come from Michael Lasser with UBS. Please go ahead.
Good evening, thank you so much for taking my question. How much of the improvement from the second quarter to the third quarter was driven by the actions that Five Below has taken versus just the external environment improving over that time? And if it has been as a result of the actions, especially adding more value, how do you reconcile the increased value using price as a lever versus using prices lever to offset the tariff risk that you're going to face in 2025? Thank you.
Thank you, Michael. There was definitely an external benefit. You likely noticed an increase in retail traffic, especially around mid-second quarter, likely around July, continuing into and out of Q3. We were able to capitalize on that traffic, which was crucial. From a product standpoint, we saw strong performance across various categories. We successfully introduced new items and trends while emphasizing value. Additionally, we had a successful Halloween season, which is another driver of traffic for us. The team did an excellent job coordinating these efforts, and the customer response was very positive. We also noted strong performance in our style categories. Operationally, our teams excelled; we invested in labor in stores, which benefitted us, and there was significant improvement in product flow compared to the second quarter. We had a seamless seasonal transition into Halloween, leading to better in-stock levels.
It’s challenging to quantify exact contributions, but it was a mix of all these factors. Regarding value, it’s important to note that it encompasses more than just price; it includes trends and high quality as well. This holistic approach is what customers experience when they visit our stores. If it was only about price, we wouldn’t be in the business we are in. We focus on offering great products first. As for tariffs, it remains an uncertain factor. We have strategies in place, with price being our last resort. Additionally, as part of the shift in mindset that Tom mentioned, we are working on leveraging our scale more effectively, which will enhance value for our customers. Even if price adjustments become necessary, relative to other retailers, we believe we will be well positioned. Thank you for your question, Michael.
And your next question today will come from Scot Ciccarelli with Truist. Please go ahead.
Good afternoon, guys. So you guys have pointed to excessive weakness with your lower-income consumers as the primary sales headwind. I know you've had your hands full, but do you have a feel for what customer cohorts drove the sequential improvements in traffic? Was it concentrated with lower income consumers? Or was it kind of across the board?
Yes. Thanks, Scot. No, we saw a consistent performance across the various income demographics. So consistent with what we've seen historically, when we go back in the business, we saw that recently. So that was good to see. Thanks, Scot.
And your next question today will come from Simeon Gutman with Morgan Stanley. Please go ahead.
Hi, good afternoon, everyone. Ken and Kristy, I wanted to ask you about a couple of things as we look ahead to next year in terms of margins, as there’s some uncertainty on our end. Regarding shrink, you reintroduced self-checkout, so will there be any shrink benefits next year? About labor, you've invested in it in the last six months, seemingly by 20 basis points, and it appears to be effective. How much of a headwind will that be next year? Can you quantify incentive compensation? I'm just curious because as we anticipate next year, there seem to be some margin challenges we need to consider. I’m not sure how much you can assist us with that right now.
Thank you, Ed. We strive to be as transparent as possible, especially regarding our future outlook and assisting with your modeling. Currently, we are concentrated on 2024, and we have a significant season ahead of us that demands our focus. As is customary, we will provide a thorough update and guidance during our fourth-quarter call. Additionally, it's important to mention the potential impact of tariffs, as discussions will not account for those effects. Kristy highlighted in the previous call that we are facing challenges due to incentive compensation. Excluding these headwinds, we anticipate beginning to leverage at a 3% compensation. We're currently assessing the situation and have plans to move forward, particularly through the holiday season, but will share more information in the fourth quarter. Remember, this is all on an adjusted basis in comparisons to the previous year, so please keep that in mind regarding the adjustments we made this year in relation to next year. Thank you, Ed.
Great thanks. So Ken, maybe just on 3Q comps versus plan. If you could elaborate on the contribution you saw from the newness and value initiatives this quarter. Maybe if you could speak to comps in November, how best to think about it relative to the guide? And just if you could rank further initiatives and the incremental initiatives that you cited that would bear by the second quarter of next year, that would help. One quick one for Kristy, just the $21 million inventory write-off, if you could just walk through what line items that impacted that would be helpful.
Thanks, Matt. In the third quarter, we noticed significant improvement in our performance compared to our guidance. This was evident across various areas. Our teams focused on new products, which positively influenced the season. We saw success due to new trends and value. Notably, styles and technology benefitted from better inventory levels, which was encouraging. Additionally, Halloween was a strong performer for us, not only in seasonal items but also in other categories. Beauty also made a positive contribution. Regarding November, we typically don’t comment on mid-quarter performance this early. It’s important to note that comparisons are not entirely straightforward this year due to the changes in the Black Friday weekend and fewer shopping days. That said, we had a good Black Friday weekend and feel positive about our position relative to our guidance. Overall, we are feeling confident.
Yes. I mean as it relates to our inventory, basically, we made an adjustment within gross profit as a reserve for unproductive inventory. So lowering our overall inventory down to the $818 million that we quoted, but it's within gross profit. And again, everything I talked about was on an adjusted basis, there's a reconciliation in our press release for you to look at to see it well laid out for you. Thanks.
And your next question today will come from Seth Sigman with Barclays. Please go ahead.
Hi, everyone. Thanks for taking the question. I wanted to just go back to labor investments and changes you made to the labor model this quarter. Can you just give us a feel for how that helped the performance and, I guess, how you're thinking about the need for further labor investments from here? Thanks.
Yes, thank you, Seth. The labor aspect really became one of our focus areas, particularly around the customer experience. We noted during our second-quarter call that we hadn’t invested adequately in labor, which was evident in our stores through service and inventory levels. Kristy mentioned that we made an additional investment in labor in the third quarter, and we believe it paid off. We successfully transitioned through key seasonal events this quarter, including Halloween and the start of the holiday season at the end of the third quarter, which was encouraging. It's important to note that our efforts aren't just about increasing hours in stores; we're also focused on improving workload efficiency. We have implemented several measures to eliminate non-essential tasks, allowing our teams to concentrate on more critical store operations. We’re pleased with the progress and Kristy noted that we plan to maintain this level of investment. Perhaps you’d like to elaborate on the specifics of what we allocated in the third quarter.
We increased average store hours by approximately 5%, which had an impact of about 50 basis points for the quarter. Looking ahead to next quarter, we anticipate that impact will be about half of that. As mentioned earlier, the full-year impact is expected to be around 20 basis points. We will keep monitoring this, especially in the first half of next year, as we continue to invest in improving our store experience.
Yes. Additionally, during the quarter, we made updates to the self-checkout area by having a staff member present. This has improved crew efficiency and enhanced service levels for customers. We believe this will contribute positively as we move forward. Overall, it has been a positive change compared to our previous setup in that part of the store. Thank you, Seth.
And your next question today will come from Kate McShane with Goldman Sachs. Please go ahead.
Hi, good afternoon. Thanks for taking our question. Ken, I know you said on the last call that you thought some of the competition had been catching up a little bit during your period of softer execution. Just based on what happened with the third quarter and the success and turnaround you had during that time, how would you characterize your competitive positioning today?
Thanks, Kate. What you're seeing is that we are making progress and beginning to achieve results and learnings, which is what we observed in Q3. Our results in Q2 were not at that level. I know it may sound repetitive, but to get back to a trend-right product, it needs to be of high quality, offer exceptional value, be targeted at kids, and incorporate new elements. When we achieve that, we succeed, and that's evident in certain categories during the third quarter. We still have work to do in this area, but that's the essence of the mindset shift and what we're implementing within the organization. We'll continue to see more opportunities as we move forward. There's more to share, Kate. Thanks.
Hi, good afternoon. Nice quarter, congratulations.
Thanks, Brian.
I have a question regarding the increase in comparable sales in the third quarter, especially considering the significant turnaround we experienced earlier this year. Could you elaborate on the sales trends throughout the third quarter? We are hearing from various retailers and brands that consumers are attending major events, but shopping less in between those events. Did you observe similar patterns? Was the sales increase primarily due to these key events, or were sales more stable throughout the quarter?
Yes. Thanks, Brian. Yes, we would kind of mirror what you're hearing from the sector. I think the quarter started off probably a little bit more similar to how we exited the second quarter. And we internally saw improvement as we moved through the quarter, probably in the middle of the quarter on through the end of the quarter. The key there, though, is that we were able to capitalize on it this time. And when we talk about the different areas of the business, the beauty area, the tech area, Halloween and seasonal. And yes, the customer came out and they were shopping Halloween; we had a great assortment for them across newness, across value, and across various categories. So it all kind of came together. But there was that cadence that you saw improving as we went through the quarter. Thanks, Brian.
Hi, thanks for taking the question. I just wanted to ask about tariffs. And I guess it's probably a 3-parter, but could you remind us basically what was the percentage increase that you saw back in 2018, '19 on the goods that you're selling? Is it around 35%? I guess part two would be either as a letter grade or a percentage what amount of the corresponding headwind do you feel like you're able to offset net-net, given your actions and then vendor leverage? And then I guess the final part is can you just remind us today and level set what percent of the sourcing is being imported from China directly as well as indirectly?
Thank you, Michael. You made a good point; that was a complex question. Regarding tariffs, looking back at the increases from 2018 and 2019, there was quite a lot going on. Initially, they started at about 10%, then increased to 15%, 20%, and peaked at 25%. Our tech and room areas were primarily affected by this. I mentioned some ways we sought to mitigate these issues, with vendor partnerships being the most significant contributor, allowing us to manage costs up to a certain point. However, once the rates climbed too high, our vendors hesitated, which led us to exceed the $5 threshold, particularly in tech. You were correct about the percentage related to our overall products, which is nearly 60% from China. I want to stress that all tariff considerations remain uncertain. There are a few factors regarding tariffs that might work in our favor. We have a plan in place because we've faced similar challenges before.
Our Five Beyond initiative is established with customers, and we began testing it back in 2018 and 2019 to assess its viability. Additionally, we operate a sourcing office in India that supports our efforts, whether with current vendors or by shifting to new countries. Importantly, we need to enhance our collaboration with vendors, a focus we discussed last quarter, and we're already making progress there. Regardless of how the tariff situation evolves, we've initiated several activities and communication strategies with our vendor partners and overseas office to prepare for these challenges. Thank you, Michael.
Thank you, and I apologize for the earlier issues. We've made good progress. I'd like to ask about the sequential improvements again. If you analyze the age of our stores, their cohorts, and the maturity of new markets, was this consistent? It seems that some stores are performing at low to mid-single digits. Is there any reason for this? Are these stores still in the immature or mature phase, and do they include more options like Five Beyond?
Thank you, Simeon. There is a lot to unpack there. We prefer not to delve too deeply into intra-quarter details. Overall, we experience various ups and downs across our stores due to several factors, including store-specific issues, events, anniversaries, and weather, among others. We must also consider cannibalization since that is occurring in a controlled environment, and we account for it in our guidance. However, performance across stores has been fairly consistent. We observed positive results not only in our comparable stores but also in new stores where we surpassed our productivity expectations. We are pleased with the performance during the quarter and noted improvements across the chain as we progressed through the third quarter. Thank you, Simeon.
Will conclude our question-and-answer session. I would like to turn the conference back over to Ken Bull for any closing remarks.
Okay. Thank you, guys, all for joining us today. We wish you all a happy holiday season, and we look forward to seeing you in our stores. Thanks, everybody.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.