Image source: The Motley Fool.
Five Below, Inc. (NASDAQ:FIVE) Q4 2018 Earnings Conference Call March 27, 2019, 4:30 p.m. ET
Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:Operator
Good day, and welcome to the Five Below Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press *1 on your touch-tone phone. To withdraw Please note, this event is being recorded. I would now like to turn the conference over to Christiane Pelz, Vice President of Investor Relations. Please go ahead.
Christiane Pelz -- Vice President, Investor Relations
Thank you, Gary. Good afternoon, everyone, and thank you for joining us today for Five Below's fourth quarter and fiscal year 2018 financial results conference call. On today's call are Joel Anderson, President and Chief Executive Officer, and Ken Bull, Chief Financial Officer and Treasurer. 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 Five Below's SEC filings. The forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward-looking statements. If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our website at fivebelow.com.
As a reminder, the fourth quarter and fiscal year of 2017 included an extra week, the 53rd week. This extra week added $15.7 million to sales, approximately $3 million to operating income, and approximately $0.03 to diluted earnings per share. This extra week caused a calendar shift in Fiscal 2018, which resulted in additional sales in the first and second quarters, which were largely reversed in the third and fourth quarters. I will now turn the call over to Joel.
Joel D. Anderson -- President and Chief Executive Officer
Thank you, Christiane, and thanks, everyone, for joining us for our fourth quarter and year end earnings call. I will review the highlights of the quarter and fiscal, as well as discuss thoughts on 2019, before handing it over to Ken to discuss our financials and guidance. And then, we will open up the call for questions.
We delivered another quarter of very strong performance. This was up against last year's outstanding fourth quarter, which was one of our best fourth quarters since going public. Sales increased 23% on a 13-week basis to $603 million, driven by solid results from our new stores and a comp of 4.4%. Earnings per share grew to $1.59, or growth of 35% on a 13-week basis. These results capped a terrific year for Five Below in which annual sales grew 23.5% on a 52-week basis to $1.56 billion, driven by new store unit growth of 20% and a comp sales increase of 3.9%.
This was our 13th consecutive year of positive comps. The better than expected results and momentum created throughout the year allowed us to raise our original guidance and solidly comp the comp following our spinner-driven 2017. For 2018, operating margin finished at 12%, even after making tax reform related investments while net income and earnings per share grew over 45% on a 52-week basis, benefiting from the strong operating results as well as the reduction in taxes over 2017.
These results were driven by strong and consistent performance from our new stores, which remain our most significant growth opportunity, as well as the main driver of our 20/20 through 2020 vision. During the quarter, we opened five net new stores for a total of 125 net new stores in 2018. We ended the year with 750 stores, which represents less than one-third of the 2,500-plus store potential we see in the United States. Like the 2017 class, the 2018 class is diverse geographically, is generating very strong productivity, and is on track to be a record class with first-year average unit volumes expected to be over $2 million, our second consecutive class to cross this milestone.
Moving on to comps, our 4.4% comp for the fourth quarter exceeded our guidance of 3-4%, and was fairly even split between transactions and ticket increases. We saw broad-based performance throughout several of our worlds, led by tech, sports, create, and candy. The toy opportunity this Holiday season was even better than expected, and drove the outperformance in sales. In addition, other continuing trends like slime, squishy, and unicorn also drew customers into our stores.
With respect to merchandising for the Holiday quarter, we offered an amazing, diverse selection of affordable options for gift giving, such as desktop diffusers and rock salt lamps in room, plush loungewear and face masks in style, wireless earbuds in tech, action figures and board games in sports, as well as craft kits in create. Customers shopped a broad selection of products across the store and across our worlds. Our overall assortment continues to get better and better, reflecting the benefits from our growing scale and our philosophy of reinvesting in merchandise to consistently deliver our customers the promised wow factor.
On to the marketing front, we remain focused on increasing our brand awareness, traffic, and customer engagement. We continued to shift our marketing efforts into TV and digital advertising while utilizing e-commerce and email to dynamically feature our Holiday campaign and great gift assortment. This year marked our fifth year of Holiday TV campaigns, and we were especially pleased with the results. In 2018, we expanded our reach to include markets covering approximately 50% of our stores, which is the highest percentage of stores we have reached through TV.
On the digital advertising front, we tested social media influencers this quarter with fun video content on Instagram and YouTube, and we're pleased with the resulting customer engagement. We will build upon our influencer testing throughout 2019. With the respects to e-commerce, we saw continued growth this year at fivebelow.com. Midyear in 2018, we transitioned our ecom fulfillment in-house and the team did a great job picking, packing, shipping orders to our customers. While still small contributor sales, we believe e-commerce is an important marketing tool that helps us connect with our customers, creates brand awareness, and also drives traffic to our stores.
Overall, 2018 was a terrific year on many fronts. And in addition to the strong financial results and record store openings, we achieved several other important milestones. No. 1, 2018 was our first full year at Wowtown, our new home office, which is truly a place where associates can work hard in a unique and special environment. The difference in energy and excitement compared to our prior home office is incredible, and it is a selling point in attracting and retaining talent. We believe that creating a place where people want to work is critical to hiring great associates, especially in a low unemployment environment.
No. 2, we successfully completed our store remodel test, and are rolling out a formal remodel program in 2019. No. 3, we launched a test within a handful of our stores, offering a limited assortment of higher price point items currently up to $10, which is another example of our continued focus on innovation. We will continue to test this in 2019. No. 4, we broke ground and built our first owned DC just south of Atlanta, which is expected to officially open this spring, serving nearly 200 stores and eventually up to 500 stores as we expand into the southeast.
No. 5, we successfully completed the accelerated rollout of our new POS system on time and on budget. No. 6, we enhanced our technology team, increasing talent and hiring our first CIO. No. 7, also with regards to talent, we reinvested a portion of our tax reform related proceeds in our associates to improve their wages, benefits, training, and development, and to help ensure a solid, competitive position in our markets. Our associates are extremely important to us as they are key to creating the wow customer experience we are known for.
No. 8, and last but not least, we created partnerships with both local and national organizations to support charitable causes such as autism research through the Philadelphia Eagles, health and wellness through CHOP, the Children's Hospital of Philadelphia, and education through the Kids in Need Foundation. These are in addition to our ongoing support for Alex's Lemonade, St. Jude Hospital, and Toys for Tots. Both our customers and our associates have enthusiastically supported these causes, and I would like to thank them for their efforts in raising millions of dollars in 2018.
As you can tell, we accomplished a lot in 2018. Now, looking ahead. We believe we're in a great position for 2019. Overall, we continue to make disciplined investments to further strengthen our foundation and support the growth and scaling of Five Below. We remain committed to our key strategic priorities and we'll continue to invest in our stores, merchandising, marketing, people, systems, and infrastructure.
Specific to 2019, we are focused on three strategic areas: 1.) elevating the experience for our customers and associates, 2.) delivering even better wow products, and 3.) enhancing our supply chain. Let me elaborate further. At the heart of everything we do is our customer. Our goal is to continue to innovate and provide an amazing differentiated store experience and, in doing so, we aim to attract and wow new customers and, just as importantly, increase our existing customers' already strong brand loyalty to Five Below. Our store teams are critical to our customer shopping experience, and we are investing in our associates so they can better serve our customers.
I am excited to share with you today the progress we have made in several areas to improve the Five Below experience. No. 1, as you saw from our announcement a few weeks ago, we hired Judy Werthauser to the newly created position of Chief Experience Officer, or CXO. Judy brings a wealth of experience and expertise in leading teams and developing cultures while driving growth, having done so most recently at Domino's Pizza and Target. She will lead a cross functional team to improve both our customer and associate experience. We welcome Judy to Five Below.
No. 2, as part of our focus on the customer experience, we have been testing a redesigned frontend. This reimagined experience includes self-checkout and additional impulse items in the checkout area. Our customers have enjoyed the new experience, and the benefit from speedier checkout, and a higher level of associate engagement. We expect to expand our redesigned frontend experience in over 100 stores this year, including most of the stores in our remodel program.
No. 3, based on the successful store remodel test, we now are in a position to roll out a formal multiyear program, beginning with approximately 50 stores in 2019. The refreshed store is designed to create an even better shopping experience, which we believe will drive more repeat visits and foster even more loyalty among our customers. These remodels, combined with 145-150 new stores we are opening, will bring the total stores in the fresh format at the end of 2019 to nearly half of the chain.
No. 4, we also began testing a new offering within our Five Below stores to deliver extreme value and a slightly higher price point, currently up to $10. Some of the stores have a separate area for these products while others have only an eight-foot section. We will continue to source and test exciting new products for this area to give our customers even more value. Given the initial positive customer reactions that we have seen, we plan to expand the test in 2019 to about 20 more stores.
No. 5, as for our associate experience, we are investing in both Wowtown, which is our home office, and our Wow Crew, which is the field. Specific to the Wow Crew, we began investing in wages last year as well as in systems, tools, and routines to make the job easier. Our retail operation is led by George Hill, and I am excited about the progress he's making four our field associates.
I couldn't be more proud of the many teams at Wowtown that have worked tirelessly to bring these initiatives to life so quickly. We are really excited for our customers and associates to enjoy all of these innovations, from the remodels to the expanded extreme value tests, to the reimagined checkout experience, and so much more.
On to our second strategic priority, wow products. We are gearing up for Easter with fresh products, including new collectibles and other toys and, as always, a great lineup of Easter baskets and candy to delight teens, tweens, and beyond. In addition, we are seeing a continuation of trends from the fourth quarter that are also helping drive sales. Easter is later this year, April 21st to be exact. So, we have big selling weeks ahead of us and our teams are ready for them. New this year, we decided to do a small TV test in Q1, which will cover bout 10% of our store base, similar to how we began Q4 TV five years ago. The ad will focus on our Easter product offering and began running this week. This new TV commercial is another example of the innovation mindset that permeates the organization.
Regarding our third strategic priority, supply chain, we already mentioned opening our new southeast distribution center this spring. The southeast DC outside of Atlanta will supply product to our stores, and thus our customers, more quickly. We are also close to announcing our next DC in the southwest to open in 2020, and are beginning to work on strategic plans for our West Coast and Midwest DCs. We are firmly committed to enhancing our supply chain to ensure our growth continues uninterrupted.
In addition, we are kicking off several new projects in IT to improve ecom, business intelligence, and our core merchandising platforms. The merchandising platform upgrade is a two-year project. It is the last leg of the core systems upgrade that remains after having successfully integrated our new financial, planning, and POS systems. We look forward to having robust systems in place that will serve us for the next decade and beyond.
In summary, we are extremely pleased with the performance and core strength of Five Below, as demonstrated by our fourth quarter and full year 2018 performance. Oure results continue to reinforce the universal appeal of Five Below, and the strength, consistency, and flexibility of our model, giving us continued confidence in our 2,500-plus nationwide store potential and ability to achieve 20% top-line growth with 20%-plus bottom-line growth through 2020. We are firmly focused on executing on our 2019 priorities and delivering another strong and exciting year for our customers, our teams, and our shareholders. With that, I will turn it over to Ken to provide more color on the financials. Ken?
Kenneth R. Bull -- Treasurer & Chief Financial Officer
Thanks, Joel, and good afternoon, everyone. I will begin my remarks with a review of our fourth quarter and Fiscal 2018 result, and then discuss our outlook for the first quarter of Fiscal 2019.
Our sales in the fourth quarter of 2018 were $602.7 million, up 19.4% over the fourth quarter of 2017, or up 23.2% on a 13-week basis. Sales for the quarter were negatively impacted by the calendar shift by approximately $6 million, which was considered in our guidance. We opened five net new stores during the quarter, and ended the quarter with 750 stores, an increase of 125 net new stores over 2017, or 20% unit growth. As Joel mentioned, we are very pleased with our 2018 new store openings, which are on track to be another record class.
Comparable sales increased 4.4% for the fourth quarter of 2018, driven by a 2.3% increase in comp average ticket and a 2.1% increase in comp transactions. This compares to a 5.9% comp increase in the fourth quarter of 2017.
Q4 gross profit of $244 million increased 17.6%. Gross margin finished at 40.5%, deleveraging by approximately 60 basis points primarily due to the outperformance of toys and game sales, which included lower margin opportunity buys. Q4 SG&A as a percentage of sales deleveraged approximately 60 basis points to 21.2%. Tax reform related investments, primarily in store wages and marketing, were offset in part by leverage of other corporate expenses.
Operating income of $16.5 million increased 12.6%, or 16% on a 13-week basis. Operating margin decreased approximately 120 basis points to 19.3% of sales, driven by the factors I just described. Our effective tax rate for the fourth quarter of 2018 was 24.4%, compared to 35.2% in the fourth quarter of 2017. The decrease in the effective tax rate was driven primarily by the benefit from tax reform.
Net income for the fourth quarter of 2018 was $89.3 million, or $1.59 per diluted share, an increase of 32.5% and 31.4% respectively. On a 13-week basis, net income and EPS increased 36.5% and 34.7% respectively. Q4 2018 EPS included an approximate $0.01 benefit from share based accounting. For Fiscal 2018, total net sales were $1.560 billion, an increase of 22% over fiscal 2017, or 23.5% on a 52-week basis. Comparable sales increased 2.9% as compared to a comp sales increase of 6.5% in 2017. The comp increase was driven by a 3.1% increase in comp average ticket and a 0.8% increase in comp transactions as we anniversary the spinner trend from 2017.
Operating income of $187.2 million increased 18.9% over Fiscal 2017. Operating margin for 2018 declined approximately 30 basis points, as relatively flat gross margins were accompanied by SG&A deleverage. Tax reform related investments were partially offset by leverage of fixed expenses. On a 52-week basis, operating income increased 21.3% and operating margin declined approximately 20 basis points.
Our effective tax rate for the year was 22% compared to 35.5% in 2
