Andy Regrut - Vice President of Investor Relations Bruce Thorn - President and CEO Lisa Bachmann - Executive Vice President, Chief Merchandising and Operating Officer Tim Johnson - Executive Vice President, Chief Administrative Officer and CFO

Jason Haas - Bank of America Merrill Lynch Peter Keith - Piper Jaffray Brad Thomas - KeyBanc Capital Markets Paul Trussell - Deutsche Bank Chris Prykull - Goldman Sachs Vinnie Sinisi - Morgan Stanley Matthew Boss - JP Morgan Joseph Feldman - Telsey Advisory Anthony Chukumba - Loop Capital Markets

Ladies and gentlemen, welcome to the Big Lots’ Q3 2018 Earnings Conference Call. This call is being recorded. All lines will be muted until the question-and-answer portion of the call. [Operator Instructions] At this time, I would like to introduce today’s first speaker, Andy Regrut, Vice President of Investor Relations.

Good morning. Thank you for joining us for our third quarter conference call. With me here today in Columbus are Bruce Thorn, our new President and CEO; Lisa Bachmann, Executive Vice President, Chief Merchandising and Operating Officer; and Tim Johnson, Executive Vice President, Chief Administrative Officer and Chief Financial Officer. Before we get started, I would like to remind you that any forward-looking statements we make on today’s call involve risks and uncertainties and are subject to our Safe Harbor provisions as stated in our press release and our SEC filings, and that actual results can differ materially from those described in our forward-looking statements. Our commentary today is focused on adjusted non-GAAP results. Reconciliations of GAAP to non-GAAP adjusted earnings are available in today’s press release. This morning, Bruce will start the call with the few opening comments, Lisa will discuss our results from a merchandizing perspective, and TJ will review the financial results from the quarter and the outlook for Q4 and fiscal 2018. I will now turn the call over to Bruce.

Thank you, Andy, and good morning, everyone. It's a privilege to be speaking with you today as President and CEO of Big Lots. Like Big Lots, I was born in Ohio in 1967, and had known Big Lots in my whole life. Growing up, my mother used to take me shopping at our stores on a regular basis. She was always about making our lives better with new home décor, best of holiday celebrations and trees and toys for life's special moments. So you can imagine how thrilled I am to have the opportunity to serve this great company and its customers. Before I get started, I'd like to take a moment to thank TJ and Lisa for their co-leadership of Big Lots over the past year. Leading a large public company is hard work and it's even more difficult during times of transition. Their professionalism and commitment to customers and associates has been exemplary. Let's talk about Q3. From a top-line perspective, Q3 was encouraging with comps increasing 3.4%, which is solidly in line with our guidance. It represents our best quarterly comp in nearly seven years, or 27 quarters to be exact. Lisa will discuss the performance by merchandising category in a moment, but suffice to say our ownable categories of furniture and seasonal and soft home or the headlines that drove the strength and performance. Our bottom-line or loss for the quarter fell far short of expectations. TJ will cover the details later in the call. But we are not happy with the quarter’s mixed results. Based on my observations so far, I do see several key opportunities. Here are a few of them. We are in a great marketplace that continues to grow. After spending the past several years in men’s apparel, it’s exciting to be serving all of the U.S. population across a hardy assortment of products and solutions. We have a strong proud team that wants to grow. We’re dedicated to Jennifer and enjoy serving her. We are community retailer and our associates champion that purpose every day in our 1,400 plus stores, five distribution centers and corporate office. We have a lot of work to do in order to grow profitably and get our fair share of this marketplace. But we are pleased with achieving positive sales comps for the last two quarters. We need to achieve sustained and accelerated profitable growth in the future. Over the past 60 plus days, I’ve been fully emerged in our company, learning about the business through detailed business updates, and one-on-ones with our leadership. I’ve spent time with many of our valuable vendors. I’ve met with our company’s leaders and associates through road shows, town halls, DC and store visits. I've spent one of my first weeks at Big Lots working as a store associate, where I got to experience unloading a truck at 4 A.M., stocking shelves before the customers arrive, listening to our frontline associates on the floor and in break-rooms and conducting personal customer interviews. From this schedule, I’ve learned a lot about our business and this has begun to inform my thoughts and ideas for the future. First and foremost, we have the best associates in retail. I’ve been amazed by the reception and welcome I received from the entire Big Lots family, the passion energy and engagement of our team is incredible, particularly as we focus on serving Jennifer this holiday season. Next, we need to continue to grow furniture, seasonal and soft home. Multiple years of sales growth in these categories, along with customer insights, suggests continued upside opportunities. We gain market share here, and recent competitor store closers suggest we still have room to grow. We have work to do in other categories of the store, namely food and consumables. The performances of these categories have been challenged, or in certain instances faced more competitive pressure. However, we have to make swift progress here, and I believe the team is up for the challenge. We must continue to invest and refine our new store of future format that the team has developed. Driving incremental sales lift of high-single to low-double digits in most major markets completed this year is quite impressive. These lifts continued to be a balance of a bigger basket and transaction growth, which is coming from higher traffic to our stores. We intend to move swiftly here accelerating the number of remodels in 2019, and challenging ourselves to get through the majority of the fleet in the next three years, quicker than originally planned. I see this as a key growth initiative, not just because of the sales foot from the remodel, but the store of the future layout also better positions us for continued merchandise resets or category shifts going forward. We’re also encouraged by the potential for net new store for growth next year and into the future. This location in the real estate market with competitor closings has presented excellent opportunities for Big Lots, enabling us to enter some new markets as well strategically relocate dozens of locations to be more appropriately sized to support our ownable businesses. I also view relocations as an opportunity to be more convenient for our customers. While we must do a better job improving our brand awareness and equity, I am pleased with another quarter of growth or signups in our rewards loyalty program with the majority of growth coming from online signups. We ended Q3 with a record number of active members at 16.4 million. We achieved record penetration of rewards activity both in sales and transactions for Q3. Growth in our loyalty program increases our opportunity to effectively communicate with Jennifer and more efficiently share the changes at Big Lots, particularly in store of the future markets. We are continuing to invest in and improve the effectiveness, efficiency and consistency of our supply chain. This means getting our new California DC up and running as planned and making better upstream decisions that improve our flow of merchandise from vendor to shelf. We need to make our stores easier to run for our leaders and associates, while also creating an even more engaging and curated experience for our customers and future customers. As I mentioned earlier, the new store of the future format is a huge step in this direction. Our store team leaders are highly engaged and excited about the direction we are taking here. And we have a unique opportunity to leverage their excitement remembering they are the last person Jennifer sees in stores and the pace of the company to her. We need to be a better omni-channel retailer, and I'm excited about BOPIS, buy online pickup in-store, another key growth opportunity that was under development when I got here. Clearly the retail landscape has been evolving at an unprecedented pace for the last few years. The importance of a fully integrated, seamless shopping experience combining brick-and-mortar stores and e-commerce capabilities is what Jennifer expects. And our stores are extremely excited about it. We'll begin piloting BOPIS later in 2019. Finally, we must improve our expense management near term and longer term in order to fund our growth opportunities for the future. The Big Lots business model has so many solid foundations in place to enable us to grow. However, we recognized we need some outside in-help in order to accelerate growth and deliver more consistent shareholder value in the future. Over the past several weeks, my team and I have met with some of the best consulting minds in retail. And as a result, we've engaged a team of experts to help us enhance and accelerate our growth strategy and also help us expand margins and improve our bottom line longer term. Our leadership team will be working in tandem with this outsized team to identify ways that we can strengthen and grow our ownable and winnable categories, while identifying new opportunities to drive productivity and improve customer traffic trends. Simultaneously, we will be searching for opportunities to enhance profitability and fund future growth efforts. Partnering with our board, our review is accelerated and moving forward with speed over the next 60 to 90 days. Our goal is to be prepared to discuss our ideas and roadmap for our next three year strategic plan with our associates and the investment community by mid-March. Simply stated we are building our three year playbook for where to play and how to win in an ever changing retail environment. As I look forward, despite our current challenges and headwinds, I'm excited about joining Big Lots at this point in its journey. I'm overwhelmed by the passion and energy of our associates serving our customers every day. And I'm energized about our opportunities to drive growth and shareholder value in the future. I'll now turn the call over to Lisa, to provide more details and insights on Q3 merchandising performance.

Thank you, and good morning, everyone. As Bruce highlighted, Q3 was very solid quarter from the sales perspective. Furniture was the best performing category comping up in the low teens. Congratulations to Martha, Robert and the entire team for responding to the competitive headwinds and Jennifer feedback earlier this year and delivering growth for the newness in our assortments. All four departments, upholstery, mattresses, case goods and ready to assemble were strong in Q3, and we continue to chase inventory to support the trends in the business. We won Labor Day and gained market share in this key timeframe for the categories. And we have also successfully anniversaried the $49 out the door offer on our Easy Leasing program, which was launched in Q3 of '17. Equally impressive with seasonal, which was up high-single digits on top of the 9.6% increase last year. Great job by Michel, Steve and the entire team. Q3 is a transition quarter for our seasonal business as we sell-through our outdoor living assortments remaining from spring. We set and sell-through Halloween and harvest and then quickly turned our attention towards the holidays and Christmas tree tram. I'm pleased to report that we sell-through and exited summer in lawn and garden quite well, and the fashion drivers within Harvest in early Christmas tram look promising. Jennifer definitely likes our fashion assortments and has responded early. However, we anticipate the sell-through of more basic items to take place later as part of our accelerate markdown cadence. Soft home was also up high-single digits again this quarter, on top of a 5% increase last year, with strengthened Home Décor, decorative textile, flooring and bath. Another very good quarter for Kevin and his team, who continued to deliver consistent and impressive long-term growth trends in this high margin business. Next, consumables declined in the low-single digits for Q3. We have seen some success with new branded never out or NVO sets from a number of well known CPG companies. But the rate of sale has not accelerated enough to offset declines in volume in our closeout or in and out business. Similarly, food was down low to mid-singles in Q3, exhibiting many of the same characteristics as our consumables business, along with heightened competitive pricing pressures. Rounding up the balance of the store, hard home electronics were down to alive. We did see some bright spots of positive results in appliances, table top and accessories and flat performance in toys. Moving to online, our e-commerce business had another very good quarter with strong sales resulting in a lower operating loss year-over-year. Nearly every KPI have been trending favorably in this business with sales nearly doubling in Q3, versus last year. Sales growth has been driven by site visits, number of orders and a higher average order value. Congratulations to Steve, Erica and the entire team who continued to make tremendous progress, ramping up our digital platform for the all important holiday selling season. I'll now turn the call over to TJ, for insight on the numbers and thoughts on Q4 and the full year.

Thanks, Lisa, and good morning, everyone. Net sales for the third quarter of fiscal 2018 were $1.149 billion, an increase of 3.6% versus the $1.109 billion we reported last year. As our comp store sales increased in a favorable impact from the fiscal calendar shift was partially offset by a lower store count year-over-year. Comparable store sales for stores opened at least 15 months plus e-commerce sales increased 3.4%, which is on top of the 1% increase, we reported last year for the third quarter, and better than the midpoint of our guidance of plus 2% to plus 4%. In terms of cadence throughout the quarter, comps were positive in each of the three months, with August and September posting the strongest results, driven by furniture and soft home, clearance sales and seasonal lawn and garden and summer and our highly successful Labor Day event and selling period, Lisa mentioned earlier. The loss for the third quarter was $6.6 million or $0.16 per share, which compares to our guidance in the range of income of $0.04 per diluted share to a loss of $0.06 per share. Q3 is very much a transition quarter for our business and our most challenged from a P&L perspective. During this quarter, we’re preparing for the peak selling period of the holidays and incur the higher levels of costs in our DCs and stores ahead of a significant ramp in sales in Q4 or November and December. The gross margin rate for Q3 was 39.9%, a 10-basis-point decline from last year’s third quarter rate, which was essentially in line with our guidance. The result does reflect the beginnings of higher tariff-related costs and peak season surcharges. The peak season surcharges were necessary in order to move forward and receipt imported merchandise earlier than planned in an attempt to minimize the tariff impact. You also will begin to notice tariff impact on our balance sheet inventory and a smaller impact in interest expense for the quarter. This will become more evident in Q4, which I’ll speak to in a moment. Total expense dollars were $469 million compared to $441 million last year or an increase of $28 million year-over-year, with the majority of the increase coming in three key buckets. First, $14 million was related to key strategic investments in store of the future; tax reform reinvestment, primarily in average wage rate, and to a lesser extent, our corporate headquarters relocation. The next largest bucket of increase was a $6 million increase in distribution and transportation costs, similar to what we discussed on our last call. This is an acceleration of freight rates, fuel costs and productivity challenges for our DCs, as our merchandising strategy and content shifts towards bigger, bulkier product and more of a replenishment model with our growth and never out merchandise. The last noteworthy item and expense was rent and occupancy or approximately $4 million of growth. We have normal rent steps when store leases are renewed each year. But this growth is higher than a normal quarter, driven by our opportunistic strategic decision to purchase and assume a certain number of Toys "R" Us leases to fuel future net new store growth starting in 2019. So approximately $24 million of the $28 million, or the majority of the expense growth year-over-year was isolated in these three key buckets. The balance of the expense base was up phenomenally year-over-year, despite the 3.4% comp we reported. Relative to our guidance, our expenses did finish higher and contributed to a wider loss for Q3 with a variance primarily in the areas of first distribution and transportation. While transportation rates were fairly consistent quarter-to- quarter, fuel costs did accelerate. Next, we did ship more cartons than originally forecasted in an attempt to improve in stocks in certain never out classifications. Additionally, in an effort to minimize tariff impacts, we did intentionally receipt or move forward receipt of import goods, which created less than optimal inventory flow in our five DCs. There is incremental expense associated with this decision in order to risk mitigate or avoid a higher cost or lower margin on holiday goods. Next, depreciation and rents were slightly higher for the quarter than originally modeled. This increase is associated with our store of the future remodel program and new store opportunities. In terms of the store of the future, we've made strategic decisions to do more work and more construction in these stores than originally planned. The good news is, we are seeing very strong sales performance, but the near-term impact is slightly higher depreciation related expense. Referring to new stores, we've been able to quickly analyze and secure over 25 Toys “R” Us locations to-date through the bankruptcy process or other negotiations with landlords. Specifically, when we went to a location through the bankruptcy process, we began paying rent day one as we were building out the store. Strategically these incremental locations will be a big win for Big Lots, but they come with the near term costs ahead of the longer-term sales and growth opportunity. The third most notable variance was store related bonus. Given the strong comps and strong store controllable profit performances for the quarter, store-related bonuses were higher than expected. And in addition to these variances, we did have several holiday related costs hit a little earlier than anticipated given the retail calendar shift. This will actually benefit Q4 at the expense of Q3. Interest expense for the quarter was $3.1 million compared to $2.1 million last year as rates have increased and we carried a larger average debt balance during the quarter due to significant strategic capital expenditures, timing of inventory purchases year-over-year and the lower income we've experienced in the first three quarters of fiscal 2018. Moving on to the balance sheet, inventory ended the third quarter of fiscal 2018 at $1.074 billion compared to $1.038 billion last year. This level of inventory represents a 4% increase in the average store, and is largely the result of timing of receipts to the fiscal calendar shift and the growth of never out merchandise levels to improve in stock levels in our stores. During Q3, we opened 15 stores and closed 15, leaving us with 1,415 stores and total selling square footage of 31.5 million. In the first three quarters of this year, we opened 20 stores and closed 21. We now believe we won in fiscal 2018 with approximately 1,402 stores. Capital expenditures for the third quarter of 2018 were $76 million compared to $42 million last year and depreciation expense was approximately $31.9 million, an increase of approximately $2.4 million to last year. Our CapEx increase was planned. And as the result of our investments and store of the future remodels, new store activity and AVDC, which is our new distribution center in Apple Valley, California. We ended the third quarter with $62 million of cash and cash equivalents and $488 million of borrowings under our credit facility. This compares to $58 million of cash and cash equivalents and $372 million of borrowings under our credit facility last year. Our use of cash generated by operations was focused on strategic capital expenditures like store of the future and AVDC, and also on returning cash to shareholders through both share repurchases and dividends. As announced in the separate press release earlier today, on December 4, 2018, our Board of Directors declared a quarterly cash dividend of $0.30 per common share. This dividend payment of approximately $12 million is payable on December 28, 2018, to shareholders of record as of the close of business on December 14, 2018. Year-to-date, the combination of share repurchase activity and our quarterly dividend payments have returned approximately $139 million to shareholders. Turning to guidance, for Q4, we've revised our income expectations to be in the range of $2.20 to $2.40 per diluted share compared to prior guidance of $2.90 to $3 per diluted share, and last year's adjusted income of $2.57 per diluted share. This guidance is based on comparable store sales in the range of flat to plus 2% of gross margin rate, which is expected to be down to last year, and expenses as a percent of sales, which are expected to be higher than last year. The lower expectations for Q4 are reflective of, first, we've lowered our sales assumption, we now expect comps to be in the range of flat to plus 2% compared to prior guidance of low-single digits. This change is solely based on a flattish start to the quarter in the month of November. While we were encouraged by low-single digit comps over Thanksgiving and the Black Friday weekend and we enjoyed a record day online on Cyber Monday, the month of November or the weeks around these days and around these market share events were softer and below last year. This is the sole reason for lowering our Q4 comp forecast as we are not assuming loss sales from November comeback in December. For the balance of Q4, we are assuming December comps to increase in the low-single digits, and month-to-date, we are off to a good start. To complete the quarter, we're also assuming a January comp in the low-singles as well. Our guidance now assumes a lower gross margin rate to last year compared to prior guidance, which suggested the rate would actually slightly increased year-over-year. The change in the margin rate guidance is directly related to below planned sales of our seasonal and seasonally sensitive merchandise in the month of November, and the associated glide path markdowns expected to be necessary to exit the season clean as we move into Q1 and spring. Additionally, tariff-related costs on future seasonal merchandise for spring are playing a role in a more cautious forecast of the gross margin rate for Q4. From an expense standpoint, we continue to see the expense rate above last year's level, given the strategic investments we have made and we'll continue to make in store of the future early and more new stores for spring 2019, and the reinvestment of tax reform savings in our average hourly wage rate. Additionally, we continue to expect the transportation market to be challenging and do not see rates slowing down. The only new expense risk of note would relate to the expected consultative costs for our strategic review, which Bruce mentioned in his opening remarks. In terms of our outlook for the full year, we’ve updated our estimate for adjusted income to be in the range of $3.55 to $3.75 per diluted share, which compares to prior guidance of $4.40 to $4.55 per diluted share and adjusted income of $4.45 per diluted share in 2017. The annual guidance is based on a comparable store sales increase of approximately 1% and total sales down slightly to last year, as the comp increases expected to be offset by a lower overall store count, and that fiscal 2018 has 52 weeks versus 53 weeks in fiscal 2017. The change to guidance reflects Q3 actuals and the detailed changes for Q4 that I just covered. We believe this level of financial performance will result in cash flow of approximately $10 million to $20 million, down from approximately $100 million in our prior guidance. The key drivers of this change are first and foremost a strategic decision to pull-forward import inventory receipts. As our teams work swiftly to position deliveries, to arrive earlier than plan, to avoid what was forecasted to be a significant potential tariff increase or risk should the 25% rates been put in effect on January 1st. Based on what is now reported in the news, it appears those tariffs may not go into effect on January 1st. However, given the lead time of import merchandise, we had to make these decisions weeks ago based on the information at that time and an effort to mitigate as much risk as possible to the spring '19 season. The second most significant impact on the estimated cash flow for the year is lower net income assumptions we're sharing today. Given the lower cash flow and expected higher inventory levels at the end of Q4, we expect interest expense for the quarter to also be above last year as well. With that, I’ll turn the call back over to Andy.

Thanks, TJ. Operator, we would now like to open the lines for questions.

[Operator Instructions] And we will take our first question from Jason Haas.

So I wanted to ask a little bit more on the slowdown you saw in November. Do you think that was industry-related, or you think you might loss share? And what give you confidence that you’ll see the acceleration in the rest of the quarter? And maybe you could speak a little bit about how the business shifts from November through December heading into January in terms of what categories to spend out more in January relative to November? Thanks.

Jason, this is TJ, I’ll go ahead and start. I think a couple things. From our point of view, late in the month of October and early in the month of November, we did see some softness related to -- more in line with the performance in the average baskets than necessarily even transactions or customer traffic. Our history would suggest that typically around certain large election events. We do see the softness in traffic that might be one reason. I think the second reason might be just general overall softness ahead of -- for us was a very successful Thanksgiving and Black Friday period. So the week that was most important throughout the month that Thanksgiving week around the actual holiday Black Friday, and then as I mentioned Cyber Monday, we’re very encouraged that, when Jennifer was out there we did quite well in those time periods or those market event periods. What gives us confidence on December is the actual results we're seeing, Jason, and then particularly, in some of our bigger ticket categories and in that basket there was a little bit softer late in October and parts in November has firmed up and is starting to be a very major contributor to the comp once again. So that's typically driven by bigger ticket categories like furniture, like seasonal, where we've been more aggressive with price and clearly soft home. Additionally, I think this time of the year even though our food business is a little more challenged or has been in other parts of this year, that holiday giftable element that the teams deliver in food and consumables, has also picked up speed of late. So we feel good about where we are month-to-date in the month of December, rounding out the quarter, the month of January is very much a transition quarter. But the mix of business does start to move more towards -- in certain markets, more towards lawn and garden in summer. But also some of our bigger businesses like furniture and soft home tend to start to be more important than they might have been in October and November. So hopefully that helps to answer your question on trends through the quarter.

Our next question comes from Peter Keith with Piper Jaffray. Please go ahead.

First question I had for you was just on the accelerated pace store of the future remodels. Just to get majority of the chain done in three years, are you implying it -- you're probably accelerate your pace with that 300 a year. And then as a follow-on, do you have the logistics infrastructure to handle that acceleration, because, certainly it sound like right now there's some pressure on your DC -- well, your distribution center network effects?

Hi, Peter, this is Bruce. I'll take that question initially, a good question. We are excited about our store of the future, obviously, earning high-single digit, low-double digit is a good place to be. And what excites us a lot about this is it's a platform for growth, being able to standardize our fleet of stores with a new remodel that's performing well allows us to do future resets and adjacency work in an accelerated manner. We're also seeing with store of the future increase in transactions, new customer growth, which is lifting 65% of those transactions in a bigger basket, so obviously we're excited about this. I think the last time the team spoke to -- the street on this we around 250 a year in terms of store of the future. We're obviously going to go north of that. And as part of our strategy work, we'll be playing it out in course of the next few years of how that looks in terms of modeling it. In terms of in terms of DC capability, one of the things we've invested in is our California DC, we think we're in good shape to be able to support the new store growth.

Peter, it's TJ. I would add on there. I would think of it more -- it's not solely remodeling markets. As we mentioned in the prepared remarks, we see the opportunities starting in next year to actually open more stores than we close. And the success that the team is had around particularly the Toys “R” Us locations what is forecast to be continued dislocation in the real estate market maybe post holiday. I think that all sets up well for us. Additionally, with the new layout in the store of the future, we're a little more exciting from a landlord perspective, and we're getting a lot more interest. So I think there is a number of different ways Peter that we grow that number of stores that are actually comes into the new format. I agree with Bruce from an AVDC standpoint. From our view, anyway, I think that the remodeling of stores isn't necessarily what's creating the biggest part of our challenge from an infrastructure and supply chain. It really is as the business mix has changed. We're working hard to kind of catch up to that. So I wouldn't necessarily connected to fully, but we are excited about store of the future and to have something that is working and generating increased transactions through increased traffic from following us for a number of years that traffic and transactions as historically been a challenge. So to be able to see that happening naturally in store of the future, supplemented by the marketing that Steve and his team are doing, we feel very good about that moving into that next three year view.

Okay. Thank you. TJ, if I could just have follow-up on the expenses. So up $28 million year-on-year, they were up about -- maybe 18, where we were modeled. I guess I'm still not [Technical Difficulty] what surprised you to as a negative? And furthermore, how should we think about that surprise versus negative expenses continuing with Q4 in early '19?

Yes, it's difficult for me to speak to your model, Peter. It's 6 versus -- I think, you said 6 versus 28. I think the three big buckets of expense are two of which we've talked about in significant detail around the reinvestment in store of the future, tax reform, and then also the relocation of the building here in Columbus. Distribution and transportation, those trends, particularly around carrier rates are not new. What might have been new both to last year and to the [Technical Difficulty] the first and second quarter, rent and occupancy costs were up about $2 million each, and then I mentioned that for third quarter, they were up $4 million. So clearly, something changed in the trend there. And we pointed to you directly to the Toys "R" Us opportunities, many of which we're paying rent on now that won't open until first quarter. So that is not only a change to our variance to guidance for the third quarter, but this one that we'll likely continue -- will continue in the fourth quarter. I think the second part of your question, Peter, relative to guidance from expense standpoint, let me just pause on those for a minute. We mentioned in the prepared remarks, particularly around the distribution and transportation costs, carrier rates look similar to us year-over-year, -- quarter to quarter, fuel did not. Fuel did accelerate during the third quarter, that's the first piece. I think the second piece was we did intentionally send out over a million more cartoons than we originally forecasted towards the beginning of the quarter with the goal of trying to improve in-stocks and never out categories within the store, throughout the store as we prepare for holiday. That comes at a cost. I think the third piece that might be a little more difficult to understand not being inside the business is, I'll say the dislocation that's occurring out there right now as we along with everyone else tries to rush to make sure that we have all of our merchandise for holiday, and we're well positioned for spring from an import perspective, particularly coming out of China. That creates some inefficiencies in our supply chain as we try to deliver holiday goods, while also taking care of those challenges. So those are two or three things Peter that at the beginning of the quarter and distribution and transportation costs would have been difficult for us to fully understand or fully estimate. I think the second piece that was a difference from the beginning of the quarter to where the quarter ended from a model perspective, I would imagine that our depreciation expense came in a little bit higher than you were expecting. As we mentioned in prepared remarks, Store of the Future we made a decision to do more work and many of the stores within markets to try to ensure that we get as much merchandise out on the floor and create the best possible shopping experience. As Bruce mentioned, we’re seeing very strong results, so it feels like on balance that was a better decision than not. Additionally, as we’ve opened stores in third quarter, many more of the stores that we're opening this year are actually stores we’re building out versus what the landlords building out. So that impacts depreciation as well versus if the landlord goes out of store comes back to us and normally and rent over a longer period of time. I think a couple other things, Peter, from an expense standpoint that Bruce mentioned in his remarks and that might not again be fully easy to understand. Our store teams and district teams actually had a very good quarter, not just from a volume standpoint but from what they can control standpoint. And what I mean by that is their incentive based on controllable profit, which includes sales, gross margin and then those expense items that they control, like store payroll, like store supplies, like workers' comp expense, things like that claims in the store. Our store teams had a very good quarter from that perspective. So their bonus expense would have been higher than we anticipated. And as I mentioned, the rent associated with some of the new store activity coming our way, unfortunately, we’re starting to pay for that now ahead of when those stores were open based on the nature and which we sourced them. So there’s a number of different pieces to it, Peter. None of us are happy with the way that the loss ended up for the quarter. But hopefully, we’ve given you a little more detailed to work with in terms of understanding why some of the expenses were different than we originally modeled and why they were -- why the decisions were made that were made.

And our next question will come from Brad Thomas with KeyBanc Capital Markets. Please go ahead.

I was hoping you talk about the comp and the benefit that you saw in the quarter from the store and the future remodels. Could you help to quantify for us how much of the 3.4 comp, which was quite strong am I add. How much of that came from Store of the Future and how you’re thinking that will continue to add to comps in for 4Q as we move to 2019?

I’m happy to talk about Store of the Future as much as you’d like, Brad, we’re pretty excited about it as you hopefully can tell. Within the quarter, the 3.4% comp I would estimate somewhere around 6 or 7 times of that comp came directly from Store of the Future. So as we completed the remaining markets that we intended to remodel during 2018, those happened in September and October timeframe coming online. So probably closer to the 7 times number, Brad, was third quarter. Anticipating your next question with all of the markets complete as we go into fourth quarter, we estimate that -- we anticipate that impact will be closer to a full point of comp in these roughly a 115 or 120 stores that have been remodeled. That's embedded in our flat to plus 2% guidance for Q4.

And TJ to follow-up on margins. Could you talk about the gross margin expectation in all more detail for 4Q? And I guess as we think about lapping this a year from now, how much of the costs that you're incurring in 4Q do you think you might be able to recoup? Thanks.

The second part of the question is a little tougher than the first. I think the first part of the question Brad is directly the result of our decision to be more aggressive on price, particularly in seasonal and seasonally sensitive products as we've started the fourth quarter as we mentioned, even leading out of October into November, so third into fourth quarter. We saw below plan sales in most of those categories that have a seasonal element to it, the importance of that obviously is those categories have a period in time when the store that they can live and then they need to move on, because something else new is coming in behind them. So the majority of the margin rate change was about markdowns. The second part of your question is a little tougher to estimate or articulate, because there has been so many different moving parts, I think you're implying know tariffs and what was the impact there. That's a little difficult -- more difficult for us to quantify, Brad, because there's a lot of moving parts around timing of when those goods are going to be receded, what surcharges are we incurring to get them in, where have we taken action from a retail pricing standpoint to try to offset some of that cost knowing that some of the benefit might actually come in spring in the form of markdowns or maybe less promotions than originally anticipated. So it's difficult for me to estimate for you Brad until probably till the quarter is over with fourth quarter and what next year's fourth quarter might be able to look like. So unfortunately, I'm going to start to move that one down the road until we see the actual results for Q4.

And we will take our next question from Paul Trussell from Deutsche Bank. Please go ahead.

I appreciate the color and all the margin detail T.J., maybe just one more question along those lines though. As we break down the change in the fourth quarter forecast. Can you perhaps speak a little bit more to the magnitude or order of impact of the various items that you have discussed, including the lower sales assumption, the markdowns, the tariff impact, the higher distribution and transportation costs and the depreciation related to the remodels. Any way that you could just rank that for us to better understand where the change in fourth quarter assumptions are coming from?

In terms of magnitude of change guidance to guidance, I would put them in this order; first, gross margin rate; second, November sales; third, expenses. The gross margin rate piece, again, I won't go any further than we've already gone. The majority of that is markdown related, in addition, trying to make sure that we're positioned to get goods here on a timely basis ahead of what was supposed to be this big January 1st deadline. The second piece, again number two in order to sales, that's all about November. As we mentioned, December is actually in line with or slightly better than our planned week to-date. Again only a handful of days in but we're encouraged that the comps were up solidly in the low single digits to start the month of December, knowing that we have the extra shopping day and knowing that Jennifer typically shops later each holiday season. And then I think the third and the smallest change relative to prior guidance was in expense. Again, in terms of order of magnitude, the consultative costs followed by rent and occupancy costs related to the new stores to open in spring, around Toys "R" Us, and then the third would be higher depreciation. So hopefully, that helps you rank order them as you think about modeling going forward.

And then a follow up for Bruce. Welcome. And just wanted to get a little bit more of your thoughts in these early days on other tweaks or changes in strategy that you think need to be implemented as we move forward. You mentioned in your prepared remarks, the accelerated store remodels, but you also mentioned, I think, something around making swift progress in food and consumables categories. Just curious what thoughts -- what you're thinking about in that area, and anything else that maybe stands out?

First let me just say, I am very pleased to be joining Big Lots at this time in its journey. We are in a great marketplace. Many of you know over last several years, I work in the menswear apparel industry, and I woke up every morning and had to look at the population of American and cutting in half, and say that's my target audience and then cut it again that we didn't really serve boys clothing. And to wake up at Big Lots and have the total U.S. population as a target audience with a hearty assortment is a good place to be. So I'm very excited about being here. Just on that note, we've got great people here serving each other the customer, Jennifer and our communities and really want to grow. So that excites me as we look towards the future. And just talking a little bit about some of my early observations that I mentioned and how we're going to accelerate into this. Store the Future is a great platform for us. I mean, the team has worked on that. It's getting great results early on and it's that platform that's going to allow us to be more nimble and agile to do more resets, more adjacencies, maybe add more places where to own and when. Having said that, while we might have some growing pains at that right now, we're working through that -- we're learning a lot on cost management less disruption. The good news about Store of the Future and what I love about it is the fact that, as we look at our 13 markets that we've been in and working with this and two of them comping now, we're seeing that a lot of our older markets that we haven't touched in a while are really performing well and that's good, because the balance of our fleet is older markets. And so I’m excited about how we will continue to grow with that and bring order and a platform of growth for the future. In terms of food and consumables, it's very important to us to get that right. Now, food and consumables still makes up a third of our business, the traffic driver for our stores, Jennifer wants, expects that in our stores. We need to have food and consumers work harder and the team is up for challenging this. It’s going to be a key focused area in our strategy work, but they’re outside team helping us to find a path forward. What does it look like? What are the things that we can do the balance of never out, which we expect that some sort of consistency with the balance close out, which adds tremendous value and allows us to compete with some of the bigger boxes? So the output of our strategic work is really to find out how we can play, where we can play better, how we can win and why do we have the right to win there. So I’m excited about our consulting outside and look helping our team in here, we think they’re already smarter than us. It’s just that we’re trying to run the business and they’re going to help us change the business and accelerate our efforts in that way to grow profitably, expand stable margins, expand that area, reduce costs, invest in new growth opportunities. We're excited about the team working together with them handling.

[Operator Instructions] And we will take our next question from Chris Prykull from Goldman Sachs.

So as you look at some headwinds to margins in 2018. Can you maybe parse through each of the expense headwinds and think about what should remain as a headwind as we move into next year and those that should reverse?

Chris, this is TJ. I’ll start on that. I think if we start with our single biggest headwind, which has been distribution and transportation. I think there’s a range of potential trends that go into next year and in that space. And what I mean by that is you have to look at the marketplace out there and see which level of transportation rate increase do you think is going to occur next year. As we think about the business, we’re not thinking about transportation rates going down. We think they will likely continue to go higher. Will they go up 15% or 20% like they have in the last two quarters? Hopefully not, that’s not what we’re seeing out there. But we do have this trend that we’ve experienced over the last several months, expecting that to go into the front half of 2019. And then hopefully those increases start to moderate. I think when we look at distribution and the product mix changing, et cetera, as we talked about in the prepared remarks, I think that’s something, as Bruce just mentioned, will get a lot smarter. And when we go through this strategic review process of the next eight to 10 weeks to try to understand categories that we want to accentuate or adjust going forward in terms of how we source as well. Additionally, just how we flow product through our source, through our buildings, are there infrastructure investments we need to make in DCs to enhance the flow and enhance the turn. Those are all things that I think we’re going to be a lot smarter on when we talk in March. I think the second piece that I would expect will likely continue into 2019. As we mentioned is the investment in Store of the Future. We have something that's working. Nick and Mike and the teams have done a great job of quickly mobilizing and getting cross-functional teams to work together, and we're driving significant lists in our stores and they've been maintained. And as Bruce mentioned, we have a couple of markets that now have their birthday or anniversarying. And particularly in the Phoenix market we're seeing those stores comp to comp and grow at a faster rate in year two than where the company is growing. So that's really encouraging to us, and investments that we would want to continue to lean into and accelerate further. I think the third piece that as we look forward, we're excited about the new store opportunity. There’s cost ahead of opening a new store, particularly in the sub-year or the year of opening. So you get that full year worth of sales impact. So we're excited about the growth opportunity and remodels and new stores, we wouldn't see that abating either. Wage rate has been a challenge this year. We have invested into it. We're seeing record engagement scores in our stores from our store team leaders and district team leaders. We're starting to hopefully see some early signs that turnover is abating a little bit, although, it's early. So I think that's been a wise move on the part of the company and our associates appreciate it, and they're paying us back for it. So, I think those types of items, Chris, will likely continue into 2019. It's been a challenging year for the company. So from an incentive standpoint, costs are low this year. We would expect them as the company performs at a faster rate or better rate of growth at a more healthy rate, we would expect the incentive cost to be greater next year. Putting all of that out there, just identified for you things that likely trend a little bit higher year over year. So where are the offsets, where are the opportunities to generate leverage in the model for those people out there who followed us for a long time. You know that we've historically leveraged some very low comp. We're making investments now that profile has changed a little bit. But I think the expectation coming out of our review with some outside help ought to be some efficiencies throughout the business, whether they'd be in stores, distribution centers how we source product here in the office, being more challenging on costs will definitely continue to be a priority. And we'll likely move even further towards the front as we look to fund these other growth activities. So we have some growth activities that are working. We need to be just as vigilant about funding those opportunities. So a lot of information there for you, hopefully, that helps. We'll be a lot smarter as we get into March and get through our strategic review, but that's how we're thinking about it.

Great, that was really helpful -- go ahead, Bruce.

What I was going to say is just adding on to what TJ said here. We're excited about what we're going to engage in here over the next 10 weeks or so in a very accelerated outside in look. And just to add here you are what we're going to be doing with an outside team is really getting after consumer insights that's going to accelerate our thought process on what are some key areas that we can add to our ownable winnable categories, that's going to expand margins and sales growth, et cetera. We're also, just to reiterate this. We're also going to definitely look at every part of our business for opportunities. And this is -- there won't be any sacred cows and events and it's going to be an area for us to learn and understand, and benchmark to understand where we can get better. We're excited about our growth prospects. We're excited about the things that we have Store of the Future, furniture ownable winnable categories. We just want to fund them better. And so this is going to be exciting for our team working with the outside team to unlock this value for our shareholders in the future.

And then if I can just sneak one more quick one as you accelerate the Store of the Future rollout. Should we anticipate CapEx also accelerating? I think you had initially guided to about $600 million three years at the last Investor Day. Any context for how to think about CapEx so we can get a better handle on free cash flow?

It's tough for us to give -- we're not giving guidance today, Chris, as you know. So it's tough to speak in full detail on 2019, particularly not knowing for sure what we're going to decide to do over the next two or three months from a review standpoint. So I guess I would ask you to think of it in the way that we've given 2018 guidance. So in big buckets maintenance capital, I think, we estimated around $45 million to $50 million that's maintenance for stores and distribution centers primarily. Obviously, we're going to maintain -- and we're going to maintain our assets. The second piece would be new stores. I think we've guided to about 30 new stores this year. We'll likely finish a couple stores higher than that. I think we had guided somewhere around $20 million to $25 million of CapEx for those stores. We're talking about accelerating new store growth next year based on the opportunities with Toys "R" Us, so that number likely goes a little higher as we go into 2019 based on store count. Store of the Future remodels, I think, we had given you an estimate for 120-ish stores at around about $50 million of capital. We're talking about accelerating the number of store remodels going into 2019, because we're seeing results and because the investment makes sense. I think we had estimated for you the distribution center we're building in California. We have about $60 million as we came into 2018, that building appears to be on schedule. Obviously, we don't need to invest the money twice and we intend to open it next year, so that number likely moves a little lower as we go into 2019. And then the last bucket that I think we've given detail on are some of the strategic initiatives that don't fall into the first four buckets. And there we're thinking about things like systems. You heard Bruce mention in the open BOPUS, which will be new for the company and will require some level of capital. Although, not a significant as we might have originally thought. It's still new investment. So that strategic bucket, whether we fill it up or not, remains to be seen from the strategic review. So unfortunately, Chris, I'm going to have to ask you to think about it that way until we can give good guidance, and have your own point of view on flexing the different levers there based on commentary we've given.

And our next question will come from Vinnie Sinisi from Morgan Stanley. Please go ahead.

Wanted to go back to the tariffs for a second. It sounds like of course you’ve been working if that 25% does go through in January. Just want to get a sense, though, if it were to, at this point what the work that you’ve done. How much of that potential impact has been mitigated do you think? Or likewise if it ends up not happening, how much of a potential benefit could there be. Just wanted to get a little bit better sense of sensitivity to what you’ve done versus what may or may not happen?

Tariffs, it’s an extremely fluid situation, as you know. And it actually seems to be changing daily. If you take a step back, we import about 25% of our merchandise. And yes, the majority of that is coming out of China. And over the past several months, we’ve been doing a lot of different things to risk mitigate. The implication that that could have on our gross margin things like -- well, one, raising retails and passing some of that along to consumer like many of the other retailers are sharing some of those costs with our vendors as we look to partner on, again, how do we mitigate this. And diversifying our sourcing strategy is another piece as well. But as you can imagine that takes time. But the team has been very proactive there as well. But we have, as we’ve talked about, we have pulled products forward where it makes sense, where product was available from our vendors, again, to help mitigate what that potential cost could have been. And I think as these tariffs conversations continue, we will continue to be very, very adaptable. We’re very, very nimble company and the teams have responded incredibly and trying to help us develop the best plans possible. And you can expect that as we go forward, we watch this every day, we will continue to do the same type of activities.

Okay, that’s helpful to hear the thought process there, Lisa. Thank you. And then maybe just as a follow-up for Bruce. It’s been a couple months now since you’ve taken the role there. Sounds like on obviously the positive end accelerating the focus on the Store of the Future, getting still nice results there, so that’s good to see. But how Bruce -- just on the flip side so far and perhaps that we know it hasn’t been very long. But what has been your observation so far on what’s the biggest weakness/opportunity to improve that you’ve seen so far. And obviously, look forward to hearing more in March, but that would be helpful.

I’ll tell you what, there’s just so many positive things I see for future growth, as you mentioned Store of the Future. And our ability to play a larger role in that, update our stores and build a platform for flexibility, it's very exciting to me. And I think some of the opportunities, just what we’ve been talking about. How do we accelerate that growth in a more profitable manner through margin expansion and cost management, and redirecting our profit enhancements into more growth? And I think really at the end of the day when I look at our current state and what I think we can be, I really believe that we can be the authority for trustworthy value on key ownable winnable categories. I think that we need to continue to make our omni-channel experience more convenient. We need to make it easy for her to shop. And that means you know being in more convenient locations where she's at and that gets into our relocation and remodel work that we're doing, as well as our online presence. We've got a good start to e-commerce but investing in things like by online pickup in store and making more of our assortment shopable online is important for our future and making our stores easiest place for her to shop. And that doesn't mean that everything happens on an e-commerce channel, but I think it's more of the way we think about is influence. So in our marketplace, the more that we can allow her to shop on her terms and then come and pick it up in the store or have it curated for store, that's exciting for me and for our company. And I think those areas we can work in. And then finally, I think another opportunity that we're focusing on and we can continue to get better and better at is make it personal, make it even more personal than it is today. So that means we need to know Jennifer better than anyone else and maybe even better than she knows herself. She comes in and she shops us and she buys some pink toys and maybe some of our early motherhood items. The thing that we know is we've got about 16 million other Jennifer's that have gone through that experience, and we can maybe curate and hold her hand through life's journeys, making more sense out of how we engage with her and the shopping experience going forward. We think that data customer insights is something that will help us accelerate top line growth in more ownable winnable categories, expand margins and in doing so, leverage are our expenses. So I'm excited about where we can be. In total, I think we're -- I think we can be a better omni-channel retailer to more Jennifer's out in the future.

And our next question will come from Matthew Boss from JP Morgan. Please go ahead.

So, maybe came on the expense side, 2 to 2.5 times necessary to leverage the SG&A this year. I guess maybe when you put these pieces together, what do you see necessary to leverage your SG&A in 2019 and even in 2020?

As I mentioned earlier with one of the earlier questions, I think Peter might have asked or someone different. We're not in a position to really give guidance on 2019 at this point. I think that A, we know that we want to continue to lean into those aspects of investments that are helping us grow that we've talked about, whether it'd be Store of the Future, new stores, investment in the rewards program and regarding that personal relationship. You just heard Bruce talk about how we go to market in certain categories, namely furniture seasonal and soft home around developing strategies going forward there from a branding perspective. I think there are a number of things that we believe that will drive future growth that we need to continue to invest and lean into, and those with a near-term costs along with again new store growth, which is a place that we've not done in a number of years. Additionally, based on this year's performance, we know that incentive costs have trended lower particularly, being solely focused in stores and in districts throughout the country. So I think there are a number of places that we will want to continue to invest in for growth, going forward. I think that the difficulty in answering your question is we don't know what other growth opportunities we might come across or feel good about coming out of the strategic review. And we don't know the flip side or those areas where we might want to pull back on where we're spending or pull back on where we're allocating resources to fund the growth. So I can't answer your question at the moment. I think we'll be prepared to answer your question in March. And not just for 2019 but I think more importantly what is that three year outlook need to look like to support some of these new enhanced growth opportunities, and where is that funding going to come from. So more to come in March, unfortunately. I know that doesn't answer your question fully but it's best we know right now.

And then just follow up maybe on Store of the Future. So any difference in the year to left that you're seeing from your Ohio belts relative to what we decided in Phoenix? And just any way to triangulate CapEx need next year? I know you talked about increasing with the acceleration of Store of the Future but anyway to triangulate the magnitude of CapEx next year versus this year?

Well, first off, we have two markets that have anniversaried. And those are the only two markets we're going to have that have comp to comp until we come around the bend in spring of next year. But we really only have two markets to go on based on who is comping the comp. We talk a lot about Phoenix, not just because it's the best of the two from a comp perspective, but because we think it's the most indicative of what the balance of chain looks like. As Bruce mentioned in his comments earlier, Phoenix hadn't been touched in a while and was little more tired than some of our newer markets like Columbus. And so what we're excited about is as Phoenix has come around the band, particularly even just as recently as the month of November where we mentioned in our prepared remarks that the company was fairly flat from a comp perspective, Phoenix comped up closer to 4% for the month and that's on top of a double digit comp a year ago. So clearly something is working and working really well there in that market, one of our more challenged markets from a competitive standpoint and one of our more challenged markets from a physical plant standpoint. It's difficult to extrapolate out Columbus as a market. It has not performed from a comp perspective or incremental lift perspective near as well as Phoenix. But two things to consider. First off, we know this market looked better than most in the chain, because we're here. And we've invested and tinkered with this market more than any other market in the company. Secondly, we opened a new store during the same timeframe and we know we cannibalized other nearby stores. And third, we moved our corporate headquarters from a nearby -- close to a nearby store to close to no nearby stores. So we know we've done things to impact the market and we know that Columbus looked better to start with. So, we don't have much trepidation around that comment or that situation. We know in the markets where -- that look more like Phoenix, we're seeing that high single digit low double digit lift. We're seeing significant risk in large markets like on Long Island and in Northern New Jersey where our average volume was already significantly higher than the company. So there’s a lot of good things to point to, Matt, just from a numeric standpoint before you even get into the qualitative aspects of the Jennifer experience. So unfortunately, again, we’re not giving guidance for 2019. So it’s hard for me to triangulate for you as you’re asking. Only just say that, we did 120 stores this year from a remodel standpoint. We’re already working on many, many more markets next year than this year. And we’re already working on already in construction on many new stores to start out of the gate strong in spring.

And our next question comes from Joseph Feldman from Telsey Advisory. Please go ahead.

When I asked a little bit more about furniture, obviously, up high teens, very strong results. And wanted to better understand; what do you guys think you’re taking share from, is one part of the question; second part of the question is like, how high do you think it could go as a percent penetration of your business, especially in the store of the future? Just I guess I’ll leave it there for those two questions.

As you know, the furniture market can be very, very fragmented from the perspective of a lot of regional players. We are the largest national player as it relates to furniture. So as we look to the market share, and we are taking from it, I think we could tell you that it’s definitely coming from some of the regional players. But as you know, there’s some challenged businesses out there right now that are closing stores. And we’re being very proactive with the location of those stores and adjacency to our stores and ensuring that we’re well positioned there as well. So I think that would be the primary area that I would tell you that I think that we’re taking the share.

Yes, I’ll add a couple other things I think to what Lisa is saying here. I’d tell you what I love about our furniture business is that while we’re in a highly competitive area with the fragmented players as Lisa said, we have a national footprint. And our advantage is that we’ve got great values across our store and in our inventories in the store, which allows her to leave with it. And that’s not necessarily something you can do across the nation. In addition to that, we’ve got a great seasonal assortment right next to it and soft home attachment capability where we can curate and put it all together. And that is a nice place to be, it’s defendable, it’s differentiated. And then you top that off with great partners with progressive helping us with easy leasing, we own Labor Day, I mean Lisa and her team just own Labor Day, and we’re excited about that. So we see ourselves in a really good market growth position and for the future, but I think that’s just going to continue as we continue to strengthen that assortment and dovetail it with the omni-channel features as well, so excited about that.

And then if I could ask, if I heard correctly, I get accelerating Store of the future makes sense, I understand that. Sounds like you guys want to accelerate that new store growth as well. And I just wanted to get a better sense of what you're thinking there in terms of units, I know you probably haven't figured out the full plan yet. But is this going to be a big jump in number units next year, or is this 1% increase in unit growth or how should we think about that going forward?

I’ll start off and then maybe hand things over to TJ for more of the details on it. Our real estate model continue to be a promising; one, truly like what we're doing with the relocations that make us more convenient to Jennifer and also allow us to expand in areas like our ownable winnable furniture. One of our stores maybe in the low 20,000 square foot range that it don't really allow us to have a full assortment of our ownable winnable. So being in relocated stores and getting a larger footprint that allows us to have a more complete assortment is very promising for us and one of the reasons why Store of the Future is an accelerator platform for us. What’s happened over the last year with the going out of business of a key toy store has given us an opportunity to bid on choice real estate, and that really suits our model in a nice way. And so as a result of that, because we do not have a lot of overall cash flow stores hardly any that are negative and because we are relocating and because of that closure of that chain, we're in a great position to pick up real estate in an opportunistic way. Sure in the short term, it's adding to our expenses but in the long term, these are right investments for us to grow. Now, the increase year-over-year, I'll have TJ give you a little bit more color on it. But we'll be net positive on store growth for I think the first time in many years. It's not significant net positive, but it's a movement in that direction we think because of our fleet being healthy, I think it's moving in the right direction.

Yes, I think Bruce just summarized it for you really well, Joe. I would think of 2019 as being whether you look at square footage or store count, slightly positive year over year where for at least the last probably five or six years, if not longer, we've seen net store contraction of 1% or 2%. So we're not talking about 4%, 5%, 6% net footage growth at all, that's not where we are Joe. But for us being down 1% or 2% historically and flipping that into positive territory that's a pretty significant move, and our teams are excited about it. As Bruce mentioned, strategically, it's a great fit for us to be more able to more appropriately position and present our ownable categories, because in many stores we can. Even as we look into 2019, I would suggest to you the large majority of any stores that we close will be because we're relocating the store, not because the store is not necessarily performing. So we feel very good about that decision. Again, it's unfortunate the way that opportunities are coming to us where we're experiencing some of the cost ahead of the benefit. But when we look out over the next three years or longer, we'll be glad that we moved into these locations from a volume and a positioning standpoint in the market.

And our final question will come from Anthony Chukumba from Loop Capital Markets. Please go ahead.

I guess I was just wondering, obviously, you brought down your free cash flow guidance pretty significantly. And it sounds like you'll be accelerating Store of the Future remodels going forward, and it sounds like those remodels are going to cost a little bit more than recently anticipated. So I guess, what I'm wondering is at what point do you have to reevaluate your capital allocation strategy, and you're paying about $50 million a year on deferring your cash dividend and did you guys accelerate share repurchase last quarter. So I guess I was trying to think about -- I am just trying to get your thoughts in terms of how you think about that given like I said the change in the free cash flow and the store remodel repurchased or even, the fact that you're going to in terms of opening new stores as well. Thanks.

I'll start and TJ finish up some things I may not cover. We've always, working with our board, we've always been in a position where we've had cash to do a nice balance of investing in our business, first, strategically paying the dividend as you noted and stock buyback. We continue to think this way and we'll continue to think this way about how we'll do that. I think the key thing is that from my perspective, our job is to really find strategic initiatives that produce long term shareholder value in an accelerated way. And if we do that well, the balance of that cash allocation could change from year-to-year. As we go through the strategy process over the next 10 to 12 weeks and talking in March, we're going to be more informed about what that looks like. But our intent is to always get that balance right that brings both near term and long term value to the company to the shareholders.

I think Bruce summarized it well, Anthony. This time a year ago or little over a year ago at our investor conference, we talked about, I'd say, those lines crossing a bit. Meaning, historically, you followed us. We returned more of our cash to shareholders and we were investing back in the business. The pivot was less fall when we started seeing positive results and being encouraged by Store of the Future. And we said we will start investing more in the business and returning to shareholders. I think that likely continues going into 2019 and beyond and the level or degree of that is what we're going to learn to do this strategic review. We know from feedback from shareholders that capital allocation and returning cash to them is important. It's not something that we take lightly, and it's certainly something that we will prioritize in our discussions. We also know from talking to investors that they want us to invest and grow the business and grow the top-line in the business and grow market share and become even more competitive. So we're trying to balance both of those, more to come. But it's been a consistent topic between the management team and the board for the last couple of quarters at least.

Okay, thank you everyone. Samantha, would you please close the call with replay instructions?

Of course. And ladies and gentlemen, a replay of this call will be available to you by 12 o'clock noon Eastern today. The replay will end at 11:59 p.m. Eastern on Friday to December 21, 2018. You can access the replay by dialing toll free U.S.A. and Canada 1-888-203-1112 and enter replay passcode 3446862 followed by the pound sign, international 1-719-457-0820 and entering the replay passcode followed by the pound sign. Ladies and gentlemen, this concludes today’s presentation and thank you for your participation. You may now disconnect.