Q2 2020 Five Below Inc Earnings Call
Good day and welcome to the five below second quarter 2020 earnings Conference call all participants will be.
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During the conference ever to Christiana, So Vice President Investor Relations. Please go ahead.
Thank you call good afternoon, everyone and thanks for joining us today for five below second quarter 2020 financial results Conference call.
Today's call Joel Anderson, President and Chief Executive Officer, and Campbell, Chief Financial Officer and Treasurer.
Management has made their formal remarks, we will open the call two questions.
I need to remind you that certain comments made during this call may constitute forward looking statements that are made pursuant to and with it.
Got the Safe Harbor provisions of the private Securities Litigation Reform Act 1995 at the blended such forward looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially [laughter]. Those risks and uncertainties are described in the press release, a five belows FCC filing.
Forward looking statements made today, our adds up to date. If this call we do not undertake any obligation to update our forward looking statement.
If you don't have a copy of todays press release, you may obtain went by visiting the Investor Relations page of our website.
I will now I'll turn the call over to John.
Thank you Christian and thanks, everyone for joining us for a second quarter 2020 earnings call.
I want to begin by saying, how proud I am not the execution and results.
Well below team delivered.
Especially given the pandemic impacted rapidly evolving backdrop.
We did this by playing offense and staying focused on our growth strategy.
He swiftly responded to new.
And changing operating conditions.
Oh safely reopening our existing stores.
Adapting our new store opening plans.
Remodeling stores accelerating our digital strategy and.
Ensuring the relevance of our merchandise assortment and marketing messages reflected the current environment and our store and our customers needs.
Through at all we did not lose sight of our longer term vision and goals.
This discipline and focus is evident in the significant strides we made on the foundational initiative.
Underpin our growth strategy.
Namely our people systems and infrastructure.
Which I will discuss further.
Our teams worked very hard to accomplish all this and they did so would the safety and well being our customers and crew remaining top of mind.
Hi, thank them for their flexibility dedication and determination and rising to the challenges presented by this unique environment.
You can tell there was a busy quarter for five below.
Let me start by discussing the restart and ramp in our operations and reopening of our stores.
We reopened stores in weekly ways throughout the quarter.
Virtually all of our stores were reopened by the end of June.
Additionally, during the reopening period, we opened a record 63 new stores.
Most in the new prototype.
Which features Bible beyond and the Reimagine front end.
Which include self checkout, and then expanded snack area and we remodeled eight additional stores.
We did this well restarting our supply chain, which has largely been shut down.
Our vendors have been great partners throughout this entire period quickly ramping up their own operations to fulfill our orders.
During the quarter. We also opened a new distribution center, expanding our supply chain that work and enhancing our overall distribution efficiencies.
In addition to all the work we did related to stores.
We rapidly improved and expanded our ecommerce capabilities on the quarter, enabling strong current and future growth from this channel.
We leveraged the platform capabilities and customers acquired with the purchase of Pollard Dot coms assets last year to approval and grow our ecommerce offering achieving three major milestones in Q2 <unk> first the successful migration of our site to our new plot.
Form was completed in mid July.
Any interruption to our site.
Second.
We launched the five below App.
About a year ahead of our originally contemplated timeline and third.
We fully transitioned holler dot coms, Ohio ecommerce fulfillment to five below.
With the trial with a stronger technology stack, a newly launched App.
And a second and fully dedicated E Commerce fulfillment center.
We're in a great position to continue to improve and expand our E com business.
Now onto our financial results.
Total sales in the second quarter grew 2% over last year's second quarter to 426 million.
The impact of store closures as Ken will later discuss.
We're very pleased that we generated a positive reopen comp of approximately 6%.
He opened stores and E com combined.
With disciplined expense management, we delivered earnings per share 53 cents.
Compared to 51 cents and the second quarter last year.
Our most attractive growth opportunity continues to be new stores.
Which were disrupted by the pandemic.
We were able to partially catch up in Q2 openings 63, new stores and this brings our year to date openings to 84, new stores similar to the 83, new stores opened in the first quarter of 2019.
These new stores opened in diverse geographies across 24 states.
We were pleased with the performance of these openings even in this cobot environment.
Would you curtailed our ability to grand opening new stores in the manner, we typically do.
We also operated the new stores with reduced hours compared to previous years as we did throughout the entire chain.
Despite this.
Two stores still made our top 25 summer Grand openings.
They were both in the brand new markets of Denver, Colorado, and Las Vegas, Nevada, which demonstrates the universal appeal of five below and the growing awareness of our brand.
The appeal of five below lies in our unique.
Special.
Flexible and edited assortment of while product at incredible values delivered in a neat clean and fund store environment.
Just curious taught us a tougher economic times served to strengthen that appeal.
And our commitment to our customer promise of delivering wow and value is stronger than ever.
With nearly 1000 stores today.
We have a long runway of growth with a nationwide potential of over 2500 stores [noise].
As we navigate the current environment, we do so with the flexibility and speed that is inherent to our model and the discipline that is core to our DNA.
And most importantly, we do so while staying true to our customer promise of always delivering value.
Have a unique ability and organizational agility to make quick assortment changes that ensure continued relevancy.
Recognizing that shopping patterns have changed with customers consolidating trips and prioritizing health safety and convenience, we added more central household and wellness items and snacks at great prices.
In addition to the hand, Sanitizers wipes and mass we sourced in the first quarter.
We now offer new home and personal care essential, including kitchen and Bath products.
They also continued to see demand for fun teas, and tops as well as home or nesting products, including items for pets.
Both new and existing customers discovering or returning tourist stores have recognized and embraced our offering a fresh product extreme value and a fun shopping experience and.
We are pleased with their response.
With regards to marketing for Q2, given the environment, we focused our program on targeted digital advertising scaling back from traditional TV and eliminating print Flyers.
We created an authentic approach the digitally focused kick start the fun campaign that launched in mid June.
It was a very successful and cost effective campaign for us.
We were present across many digital platforms, including you to Instagram Facebook Snapchat snap chat and others and we also executed paid search and email.
Well, our digital region increased our TV reach was reduced to just over 10% of our stores in Q2.
We will continue to evaluate our marketing mix prioritizing digital marketing strategies, including E com.
Where we have a great opportunity to attract and retain the large number of customers new to five below dotcom.
In addition to our operating activities and achievements during the second quarter.
We also made significant progress on our strategic investments across people systems and infrastructure.
Which will allow us to continue to scale our business to over 2500 stores.
Some examples include.
We made key senior hires at the senior Vice president level for digital and stores.
We installed a new warehouse management system.
And we opened a new distribution center in Conroe, Texas, which is our second home facility.
We also announced our next distribution center.
Which will be located in Buckeye, Arizona.
Where are we are currently already under construction or a new building.
Service our stores in our while Western states.
We expect that DC to open in mid 2021.
I am extremely impressed at the team speed and agility to accomplish these major fundamental milestones.
That are critical to our growth.
Especially given the very challenging environment.
Looking ahead to Q3.
And the holiday season, I'm very pleased with our readiness, including our lineup of amazing products at its standing values.
As well as the improvement in store operations that will make for a better customer experience. During this important time of year.
Given that this back to school season is far from traditional.
We shifted the level of composition of our assortment accordingly.
Backpacks to study and work at home related items as well as more central items.
Being flexible quickly adapting constantly innovating our core to five below and what we do everyday.
And these capabilities service well in this current environment, which requires extreme nimbleness.
We're in the middle of finalizing our plans for holiday are buying team has been busy sourcing amazing fresh new and relevant products.
We believe our inventory will be in a very good position as we have adjusted orders and are closely monitoring deliveries in order to maximize the sales in the back half of 2020 [noise].
From a store operation standpoint, we're working on a number of initiative. So that our customers can continue to shop safely and efficiently in the holiday quarter.
For example.
During the process of increasing the penetration of self checkout, and adding temporary registers, especially in our higher volume stores.
And expect half of our chain will have self checkout this holiday season.
These initiatives improved customer experience by significantly increasing register capacity and customer throughput.
Which is especially important during the holiday shopping period.
We also plan to optimize store hours and once again offer curbside pickup as needed.
In addition, and brand new this year, we expect to implement a trial for same day home delivery and BOPUS.
The merchandising front, we will be bring bringing back the seasonal while wall now called by beyond featuring unbelievable products at extreme value and we're allocating more space for these incredible gifts as well as starting our holiday selling period earlier than we did last year.
Our digital team will be increasing their reach throughout the second half let customers know about are amazing offering.
And finally.
The holiday calendar itself.
Is more favorable which will help to spread out the holiday traffic and and shopping.
This year there are two more shopping days between Thanksgiving and Christmas.
And Christmas is on a Friday, providing all we post Super Saturday for last minute holiday shopping.
You are ready for the holidays and are confident in our ability to offer unbelievable and affordable gifts for customers.
And to provide multiple shopping a sense for them.
We can't wait to surprise and delight our customers. They are amazing assortment of Wow holiday gifts.
And style stocking stuffers at incredible that prices.
In summary.
We are successfully managing the business through the challenging time, innovating and adapting quickly while making progress on our strategic initiatives, which will continue to drive.
Our long term success.
Our business model is flexible and resilient. The team is very discipline in the management of our expense structure and capital allocation and in the prudent investments, we continue to make and our people systems and infrastructure.
We have substantial cash reserves.
A debt free balance sheet, and a new store model that continues to pay back our investment in less than a year.
Enabling us to self fund our continued growth.
We maintain an unwavering focus on delivering while an unbeatable value for our customers as we further strengthen our competitive position.
And drive long term sustainable growth.
With that I'll turn it over Ken Ken to provide more details on the financial and.
Thanks, Joel and good afternoon, everyone.
I will begin my remarks with a review of our second quarter results and then provide some go forward commentary.
When we held our first quarter call in early June about 90% of our stores where reopened.
And by the end of June virtually all of our stores had reopened.
As Joe mentioned in addition to reopening stores our teams did an amazing job in the second quarter opening 63, new stores compared to 44, new stores opened in the second quarter last year.
We ended the quarter with 982 stores, an increase of 149 stores or 17.9%.
Versus 833 stores at the end of the second quarter of 2019.
Despite this growth given the temporary store closures during the quarter. Our total operating days were down about 3% compared to last year's second quarter, which significantly impacted sales operations and results.
Additionally throughout Q2.
Our reopened stores operated on limited hours.
Our sales for the second quarter of 2020 were $426.1 million.
Up 2.1% from $417.4 million reported in the second quarter last year.
Comparable sales for the second quarter decreased by 12.2%.
Driven by a reduction of approximately 19% in comp store operating days.
Positive comp contributions from both our reopen stores and E. Commerce helped partially offset the loss of operating days.
Comparable sales for the reopened period increased approximately 6%.
With the reopen stores comping up approximately 4% when compared to the same open period last year.
And ecommerce contributing approximately 2% to the total reopened period comp.
[noise] ecommerce sales were strong in Q2 with sales over four times higher than last year's second quarter, yet they still represented a low single digit percentage of our total sales.
As we had expected as stores reopened throughout the quarter E Commerce sales moderated.
In stores since reopening we saw higher average tickets, partially offset by lower transactions as we believe customers consolidated trips.
Turning to gross profit.
Typically about 20% to 25% of cost of goods sold our fixed costs with occupancy being the largest fixed component followed by certain distribution center operating costs and the expenses related to our buying teams.
Given the temporary store closures and the impact they had on our sales results in our fixed costs gross profit decreased $6.4 million from the second quarter of 2000 $19 million to $139.8 million.
Gross margin decreased 220 basis points to 32.8% compared to 35% in the second quarter last year.
With more than two thirds of the decline driven by occupancy cost deleverage.
We also faced a headwind as we anniversary last year's benefit from the timing of certain merchandise costs that shifted from Q2 Q3 in 2019.
SGN a expense for the second quarter of 2020 of $106.7 million decreased by approximately 3% versus last year's second quarter.
As a percent of sales SGN aid decreased 140 basis points, the 25% from 26.4% last year.
We acted swiftly to manage variable expenses and a closed store environment and approach the reopening period with discipline from an expense standpoint.
The primary drivers of the SGN, a leverage were lower marketing and store expenses.
We reduced our TV advertising penetration.
Produced a lower cost commercial and did not print any flyers.
As we shifted our focus to a more efficient and cost effective digital spend.
The lower store expenses were driven by the reduction in operating hours.
These savings were partially offset by the de leverage of corporate expenses.
Corporate expenses for the second quarter included a benefit of over 100 basis points from stimulus related credits.
As a result, we reported operating income of $33.1 billion for the second quarter versus operating income of $36 million in the second quarter of 2019.
Our effective tax rate for the second quarter, 2020 was 9.4% compared to 23.2% into second quarter 2019.
The effective tax rate includes the benefits of discrete items related to the stimulus program and share based accounting.
We currently expect a more normalized effective tax rate for the back half of fiscal 2020, bringing the rate for the full year fiscal 2022 approximately 20%.
Net income for the second quarter of 2020 was $29.6 million versus net income of $28.8 million last year.
Earnings per diluted share for the second quarter was 53 cents.
Compared to last years earnings per diluted share of 51 cents driven primarily by the factors I just described.
This years earnings also included a share based accounting benefit of approximately three cents.
Compared to last years second quarter benefit of approximately one cents.
We ended the second quarter in a strong liquidity position with $202 million in cash cash equivalents in investments and no debt, including nothing outstanding under our 225 million dollar line of credit.
Inventory at the end of the second quarter was $294 million as compare to $273 million at the end of the second quarter last year.
Average inventory on a per store basis decreased 8.5% versus the second quarter last year.
As we managed inventory carefully by cancelling and delaying orders and as we sold through the inventory from the ended the first quarter, which resulted from the store closures.
We feel we are in a good current inventory position going into the back half for the year with flexibility and open to buy to respond to customer preferences, we have seen since reopening our stores.
Now looking ahead and similar to last quarter, we're not providing guidance due to the continued uncertainty in this cobot environment.
While we normally do not provide quarter to date updates we will provide some color on what we are seeing currently as well as certain of our plans and expectations.
We're continuing our growth and have increased the low end of our 2020, New store opening program from 102 110 stores expecting to end the year with a thousand tend to 1020 stores or unit growth of 12% to 13%.
The majority of these new stores are being opened in existing markets as we execute our densification strategy.
In addition.
We plan to remodel approximately 45 stores and add self checkout checkout capabilities to over 100 additional existing stores.
With respect to business trends, so far in the third quarter total comparable sales are tracking up approximately 6% consistent with the second quarter.
In stores as we anticipated, we continue to see higher baskets and fewer transactions.
As it relates to future profitability after cutting and delaying expenses in Q1 in Q2 due to the cobot environment. We are restoring expenses in the back half of the year.
In Q3. This is expected to result in a slight operating margin decline.
For Q4, we expect to return to a more normalized gross margin after a record 42.1% gross margin in Q4 last year.
In addition, we expect a more normalized level of incentive compensation expense in Q4. This year that will result in X gene a de leverage.
With respect to gross capital expenditures, which excludes tenant allowances, we still plan to spend in total approximately $200 million in 2020.
This reflects the planned investments in new stores and Remodels, the new Texas in West distribution centers.
And investments in systems and infrastructure.
[noise] I believe we are in a very good position on many fronts and I am not only proud of everything we accomplished in the last 90 days, but all that we accomplished over the last six months.
Our teams did an outstanding job reopening stores quickly and safely and pivoting on merchandise store operations marketing and E commerce as well as preparing for the all important second half of the year.
All while continuing to advance our strategic growth priorities.
I too thank the teams for their hard work dedication and enthusiasm.
The flexibility of our model and the discipline that is an integral part of our culture here at five below we'll continue to serve us well as we execute our growth plans, especially during the current evolving environment.
And with that I would like to turn the call back over to the operator to open up the lines for questions operator.
Thank you well now begin to question answer session.
You asked the question Chris Star then one on your touched so.
If you're using a speakerphone please pick up your handset pricing Vicki.
So your question. Please press Star then too.
Limit yourself to one question. If you have further questions you may we entered yourself into Q.
And at this time, we'll pause momentarily.
Ross.
My first question today will come from Simon Gutman with Morgan Stanley. Please go ahead.
Hey, everyone Simeon.
My question.
For either Joel or Ken.
The off Pricers, who you are sometimes compared to they haven't seen their sales recovery yet your business seems to be on a better trajectory and I think Joe you said, it you're selling value in fund.
The thing the market is trying to figure out.
What your value proposition ends up being in a post coburn world one in which we're gonna have Mike higher E Com mix.
So your comps would suggest that you'll have a pretty strong place going forward can you point to anything else to make that case even stronger.
Yes, Thanks came in.
I can't speak for them I can tell you for us and I think you heard it both in my comments as well as Ken.
I'll tell you the team executed on all levels.
We're faster a nimble we got back in stock and product we were now playing offense quite frankly and.
Once we kind of knew the path to reopen.
We got back to getting back in stock ordering product we really.
Especially those first couple of waves of stores that reopened we watch the shift in what the customer more just buying you heard us talk about you know adapting and picking up essential merchandise.
I think normally if you would see a quarter and I'll say, we announced a five six comp corridor.
Hi departments would probably be low double digits in our are underperforming departments would be flat.
That's very different this time, we're seeing our eight worlds.
Some are up 20, 30% summer down significantly and negative comps so.
What did the buyers, especially did was nimble and.
We shifted what we bought back end do and that's really kind of served us well.
And clearly you know you've got.
Every Kitten America home.
There and.
For the summer extended as Barry for schools and I think.
Parents are looking for something to do and.
With their kids and by blows that destination and you add value into it and all plays into our favor.
Thanks Simeon.
And our next question will come from David Buckley with Bank of America. Please go ahead.
Hi, guys. Thanks.
Are you seeing with traffic trends into Q and how does that compare with August and then looking after the fourth quarter. How are you thinking about black Friday, and the holiday shopping season consumers.
We remain reluctant to return to in source shopping and how that will impact fourth quarter sales volumes.
Can you want to talk about traffic trends and I'll I'll take your fourth quarter.
Sure.
And David Thanks for the question.
We saw from the beginning of Q2, and we were reopening stores that trends in the components of comp where.
Transactions were down, but they were more than offset by.
Average ticket.
And it was pretty consistent throughout the quarter and we've actually continued to see that as we've moved into the third quarter again, where.
Transactions down and ticket up so it's been relatively consistent throughout the reopening period even into August yes, good as far as Q4 goes David.
I think I hit on it in in a lot of my prepared remarks.
The biggest couple changes we made is the amount of self checkout checkout stores. We've added as I said, a half our fleet will have Seth self checkout and really what that does is allows for greater social distancing. It allows for more checkout locations in a given store on average.
We go from five in a normal environment to nine.
And we also have looked at shifting our hours a little bit in fourth quarter and quite honestly. The the calendar set up for this particular your couldn't be better for us.
Hanukkah moves earlier last year was right on top of Christmas.
We've got a full week from Super Saturday, which really spreads out shopping so between the calendar set up which is great and then the the changes our operators are making to allow for greater throughput will really serve as well as we try to do.
Manage through.
The increase in traffic in in Q4.
Thank you. Thanks, Yeah, you bet David.
And our next question will come from Matthew Boss with JP Morgan. Please go ahead.
Great Thanks, and congrats on a nice quarter.
Yeah, Hey, Thanks, Matt I appreciate it.
So can you speak to trends that you're seeing in her new stores productivity was back nearly two historical levels and the second quarter and that's despite the social restrictions in marketing costs. So maybe just touch on opportunities that you see in a store pipeline here, Tom finance multi year in high teens unit growth just overall new stores.
What you're saying.
Yeah, you know what we're really pleased with.
What we saw with new stores.
If you recall, Matt somewhere late last year, we started talking about a new prototype.
And that really emerged out of the tariffs on we broke $5 for the first time and back then we call. The 10 below and we tried several different versions of that we've now landed on it being called five beyond and so all these new stores that were opening this year.
For opening in the in the new prototype that has a five beyond section year round in the back of the store.
It's it as the Reimagine front end, which has expanded snack and self checkout and then quite frankly, just the being value driven in the timing couldn't be more right. As you know the country went through this pandemic.
And you know as our AR.
You know awareness continues to grow and we opened new stores like customers kind of nowhere coming and so we've seen.
I called out having a record opening in both Denver and Vegas, and I think those are just indicators.
Awareness levels being there, but really no concerns on the new stores.
We clearly couldn't you know the first week or two was certainly open softer because we didn't do grand openings like we normally would.
But you put those first couple of weeks aside its.
Really was the all around.
Yes, 63 stores in a in a.
Pandemic environment, great execution by the operators.
That's great best of luck.
Thanks, Matt.
Your next question will come from Edward Kelly with Wells Fargo.
Good.
Yes, hi, guys nice quarter.
Joe I wanted to think about.
I wanted to just get back into holiday a little bit can you just maybe provide a little bit more color around sort of how you're thinking about I mean, obviously historically you've been married traffic to kind of Dan. If you do a lot of is that's in a very short period of time for Christmas maybe.
Help us think about what that cadence you normally it looks like in and how you overcome it and then as you think about the product cycle for holiday.
What's really changed because you're going to lap things like frozen.
You have some things coming in do you think it's added net positive just just sort of like additional thoughts there I think would be helpful.
Yeah.
Certainly we are lapping frozen, but we always talk about trends and you know.
All the trend around essentials, right now is significantly bigger than frozen.
So that more than offsets that I called out in my prepared remarks.
Continued emphasis is on five beyond I think last year it was.
Opportunistic and the buying teams had to scramble to get that in places that was the first time, we'd ever done that whereas this year, they add more than a year to prepare and put together an incredible assortment that were quite honestly really excited about and and that'll make a difference so that by beyond section will be bigger.
And it will be.
Throughout the entire chain also you know look we're going to stretch the season this year.
It's going to start in October not only us I think all retail is looking to pull things forward. So we'll benefit from that.
I always say, we drive half our traffic.
Other retailers drive the other half so.
By starting at earlier in October I think that helps spread out the traffic further and.
You know with with more customers home than ever I mean look a large majority of schools are on.
You know school at home and so it gives the customer a lot more flexibility when they shop, we're not going to be reliant on this weekend traffic.
So really add I.
That's up about as good as you could ask.
And especially when you layer in the overarching.
Concerns over safety and Matt and.
Were worse about prepared as we could be in and you layer and we've got a great assortment of product come and we feel good.
Great. Thank you.
Hey, Thanks, Ed.
Our next question will come from Karen short with Barclays. Please go ahead.
Hi, Thanks, very much I was wondering if you could talk a little bit.
Yes.
Maybe I will then give color on what the average ticket.
The demographic is.
And then maybe tie that.
A little more color on what you're saying.
Okay.
As well.
Yeah. Thanks, Karen.
You know a look this is my third time running an online business from Toysrus Walmart now this and.
Like most retailers you're a typical online transaction is roughly double the stores.
That's how I used to look at it in the past that's kind of how we see it today.
It's a little earlier that really tell you a lot about the customers we picked up from the hauler transition as we just made that conversion in July.
We do know we saw a lot of new customers come from that now we need to keep them and keep bringing them back. So I think thats an a net positive that will continue to grow and so you know is excited as we are about.
Really finally put some investment behind our our digital capabilities specifically ecommerce.
Hardy Senior Vice President.
Digital.
No I think it's also important Karen so keep in mind that.
You know.
Tom is still the icing on the cake for us it's not the driver of our business is still low single digits, but it is a nice additive and and clearly for those customers concerned about going in the stores want to socially distance even further.
It was fortuitous timing that we made that acquisition last year habit up and running and will be fully operational for holiday. So lot of good stuff there Karen it's just a little early to.
Speculate on on a couple of questions asked them, but hopefully that gives you a good some good color.
Thanks, Karen.
Our next question will come from John with Guggenheim Partners. Please go ahead.
Two quick ones.
Beyond you think you double space and assortment this year and I think we'll see a lot of 10 dollar items and then going on BOPUS right.
How many stores do you think you'll really.
We are.
Store specific inventory.
Right and you can do BOPUS.
Completely.
What percent of change.
Yeah look.
On the five beyond stuff it's.
It will definitely it's probably not double John but it's significantly more than than last year.
And I think the biggest differences Michael seen last year as I said, a couple questions ago, there had to be opportunistic. This year. We go into it planned and I think you know what is really going to allow us to do long term. John is could you do move more and more to center of the plate so instead of being the.
Just the stocking stuffer destination now will become the main gift destination. So we got to walk there at the right pace, John We can't just quickly and on immediately jumped to 15 and $20. So you know the majority of the items will be in five to 10, but there is the opportunity to push.
That even further the one caveat John though is it will always be about value.
So that that if you don't walk in and see that by beyond and go Wow. That's incredible value. Then then than we missed on on that piece of it and as far as BOPUS goes look it's a trial, we hope to have out really soon here.
And then based on on how well that trial does will determine how quickly we roll that to the chain.
We've we've been moving really fast on that sense.
We last talked in I think it's just another.
In addition, and feature we need to get added into our offering for all our customers, but I think for for 2020 think of it is as a trial and just another feature for our customer.
Thanks, John.
You bet.
Our next question will come from Brian Nagel with Oppenheimer. Please go ahead.
Hi, good afternoon, great quarter congratulations.
Hey, thanks.
My question.
With regard to store openings.
Clearly you continue to execute well upon aggressive opening plan do you want a few resource I know what that's good opening stores, particularly this environment. So the question I have is.
Maybe just talk about did that the rent negotiations as you're looking at the stores you opened doors stores you will be okay. Soon how much more.
Leverage do you have as you talked a lot more to with regard to rents.
Yeah. It's a good question and then I'd be a little veg with you, but it's not intended to be that way.
And.
Hey, I appreciate you know the call out notice on on how fast moving on that in fact that muscle of opening stores is probably what allowed us to really get our our chain reopened faster.
I never thought we'd use that muscle to reopen existing chains, but we really approached our reopening the same way we opened a new store.
But I think as as it goes to rent negotiations.
Look the landlords.
Need strong then I'll balance sheet.
Retailers thrive.
Thriving centers as much as we want to be in one and so I think the biggest difference going forward is.
I'll, certainly we're going to get better deals and I think we've already started to see that.
More importantly, we're going to be a better centers and I think our model.
Different than some other value players out there is always been to kind of being in the eight centers and so I think obviously I think the first place, we'll see a change in and rent structure is going to be in the urban locations.
And though as those locations struggle with the pandemic. The the rent concessions areas are going to be higher quicker and so it's going to be case by case, Brian, but we see it as a net positive and more importantly, we see as an opportunity to get into centers, we haven't been able to get into.
In the past.
Because we operate offer a differentiated concept that no and we've got to strong balance sheet and then certainly landlords.
In all are really, especially appreciative right now that.
Thanks, Brian.
And our next question will come from Paul is with Citi Research. Please go ahead.
Hey, guys. Thanks, I'm curious if you can talk about what your best selling categories, our online and how that might differ from.
In in store.
Also I'm curious, how you're thinking about E com growth plans for Fourq to sort of growth do you anticipate and how do you plan to manage the shipping surcharges.
Around this holiday thanks.
Yeah.
Yes, yes for competitive reasons I won't get in the specifics on the differentiation what I will tell you though is that.
Okay.
In general there the same what we really see is.
Each season takes off sooner on line than it does in the stores.
So for example, right now are our Halloween stores already up and running online it's not in the stores. So it takes off sooner. It allows us to get a better read what what we think is going to Soma stores.
Because what's selling online and there's a lot of similarities to that and.
So that's the first thing I would tell Ya.
And you know kind of the leading indicator and then look as far as the shipping surcharges.
Fortunately, we're in a good position in the sense that we don't offer free shipping today.
We charge $5 for every order, we certainly haven't made the decision to raise that price at this point in time.
But we we were not like some that have to decide if they're going to go off a free.
You can easily see a path, where we're at 555 or 595, but.
We're getting our arms around the the surcharges that have happened. It's also a small enough piece of our business that we can absorb a lot of it.
Not a retailer that E com makes up 30 40, 50% of your transaction.
And so I think in many ways, we look at this year as a one off on that.
And.
We have made any final decisions here, but we're not in any position, where I think it's gonna have a material impact on the bottom line for this year.
Thank God I show good luck.
Yes. Thank you.
Our next question will come from Michael Montani with Evercore. Please go ahead.
Hey, good afternoon. Thanks for taking the question just wanted to ask if I could about from your thoughts around media mix moving forward. Obviously, you mentioned some increased digital there. So just want to get better sense is that and then I'm related note was.
Opportunity for personalized marketing as you will you know ramp up digital.
And then lastly as loyalty.
The chance to maybe accelerate that sort of the way that you're able to deal with the mobile app.
Yeah look I think what you could tell from our media mix discussion was.
We we are now largely out of the print circular business, we probably accelerated that an extra 12 to 24 months from the path we are already.
So I see no reason to return to that.
And what you saw us doing the second quarter is likely the strategy will take going forward.
And then.
Well what was the second half of that.
So Oh boy.
Yeah, Yeah personal yeah first look as far as personalization and loyalty go Yeah look there are all on the roadmap.
Obviously this pandemic, we had to put on hold a lot of those initiatives that we were originally working on this year and it's been a focus on.
Getting the site transition getting the App up.
Getting ready for things like BOPUS and.
Honestly getting our stores we opened so several of those new features are all coming but quite honestly Michael there. They are further down the road now then than originally planned.
Thanks, Michael Thank you.
Your next question will come from.
Got sick early with RBC capital markets.
Go ahead.
Hey, guys got you correctly.
So what was there anything to note regarding the cadence of new store openings into Q and I are related to that as we do our a SNA per store calculations as about down about 17% by our math. So as you kind of think about the back half that some of these expenses come back how should we thinking maybe thinking about DNA perhaps.
Store or the next two quarters. Thanks.
Yeah, Scott with regards to the new store cadence.
It was a little bit less than last year's second quarter from a timing perspective.
And we talked a little bit before about the new store productivity and.
If you were calculating that we're probably in that you probably got 80% to 83%. If you adjusted for timing and then also for some of the things that Joe mentioned, we held back on marketing.
Also the shortened hours you probably get into the high 80% to 90% Thats why we were saying we're very pleased with.
With the new stores with regards to.
The expenses and what we saw.
In Q2, and then what we expect going forward, you're right, obviously on a per store basis.
We really held back on expenses, and we had delays and cuts and in fact in Q1 end Q2.
In Q2, a lot of that was driven by reductions in marketing expense and then also store payroll as we had we were operating under a reduced store hours, but then looking forward in the back half.
We really expect to restore the expenses to the extent that we've seen them in the past.
Now that we're fully reopened and operating so you could expect to see that as we go into Q3 and into Q4.
Got it thanks guys.
Thanks Scott.
And our next question will come from Sean Sean.
Drug with Goldman Sachs.
Hi, Yes, hi, thank for taking my question nice quarter team.
I just had a quick question about Closeouts and opportunistic buys which you had mentioned.
I thought if an opportunity in one Q, what do you see in that space right now.
Compelling compelling product open to buy land.
Taking advantage of any such opportunities.
Thank you.
It's certainly not as big as last year last year was.
Probably the largest ever and that we got a lot of those teed up and ready to go for fourth quarter this year, but.
Clearly with everybody canceling orders this year, it's not nearly as big.
For US you know, we we use those the supplemental and they're not quarter the business, but I don't see it being a big year for.
Closeouts like it has been in last couple of years.
Thank you guys. Thank you.
Matt.
Your next question will come from Michael Lasser yet.
Go ahead.
Good evening.
Taking my question Joel connecting some of the comments you made about a wider.
You should performance by category this quarter then.
Hi below seen historically, coupled with the comment around household essentially doing very well presumably.
Benefiting from consumers, adding things like tied pod.
So with pad, but you know offering how long how long do you think that continued and be do you think you're getting permission to expand further into those types of consumable category eventually drive more traffic from those products over the long run.
Yeah.
The last part of your question there would be a little speculative and little early on my part Michael but.
Clearly I think you know every time, we've seen a or some sort of trend and we have jumped in on it.
The customers responded and we pick up new customers from it certainly past trends like selfie, six or spinners that happened in this case. It happens to be you know household essentials, then and product like math and things like that and I'll tell you it's done very very well.
Michael team does a great job of pivoting quickly and as long as we stay relevant and that's the beauty of the world's Michael is it gives us the.
Permission to to shift our products and our so our customers responded trends and they are certainly responding this time to the trend and.
But it's certainly going into it I would think that it's going to lead to a.
A better response from the customers, but we don't have the data yet because there's just been been too soon but but we like what we like the early see signs and what we're seeing and.
Hence the traffic trends, we just shared with you had been strong.
Thanks, Michael.
Your next question will come from Chuck Grom with Gordon Haskett. Please go ahead.
Thanks, just on the quarter to date I think you go set up 6% possible to quantify what the impact has been from some of US operating hours a month of August and then also but you've got I would estimate for what it's just one in labor day Wells Costco set it's about 50 basis points for the for the month of August.
Sure good number thanks.
Yeah.
I can't I can't speculate on the Labor day, one it's been so long since there has been that shift than we were a lot smaller company. One that last happened I think it was fit teens right yeah.
I didn't even have 400 stores, but I mean, it's a net positive not a net negative you know for them. They report monthly so they're they're probably talking about the impact on their month, you know I think on the on the quarter. It's it's a net positive for us because remember were tied to one kids go back to schools that push a lot of schools back a little later so.
So I think.
That's kind of the way I would see it there.
Thanks, Jeff.
And our next question will come from Jeremy Hamblin with Craig Hallum. Please go ahead.
Thanks, and I'll add my congratulations on strong execution I want to come back to the store operating hours.
Think about on the longer term basis, you're starting to get a little bit back towards your more normalized hours seen expansion on the weekends.
But after we get through the holiday season, and we're still in an environment with more people working from home a more virtual schooling you don't have you given thought in 2021, too you know whether or not.
Going from a 12 hour day 28 hour operating day or something in between makes most sense now that you have a much stronger online platform an offering.
Then you've had in the past.
Potential change on a more permanent basis.
Yeah, Thanks, Jeremy for the Shout out there and Chuck I apologize you asked some similar and I Didnt touch on the store operating hours, but Jeremy.
Yeah look this is a tough one right because.
Yes, I don't think the country's ever seen a such a seismic shift in consumer shopping patterns, you know in such a short period of time and so.
I think for US you you're going to see US you know probably slowly adjust.
It's worked out really well for us on the shorter hours were much more efficient operation that way.
And quite honestly early on we tested lengthening hours and we didnt see any.
Increase in sales.
That has changed a little bit on the weekends and hence you saw us expand our weekend hours, but.
For right now I think the speculation or was it will move slowly on that I wouldn't expect us to make any other changes before the end of Q3.
We will certainly have longer hours in Q4 for nothing else that we really want to spread out the traffic and so we're we're going to use that to do that but I think for Q3, you probably see us where we're going to be.
And but we'll adjust if we need to it's pretty easy.
Easy to do that but it's made for a pretty efficient operation plus honestly, our stores me a little extra time to for cleaning protocols and and getting back in stock. So it's kind of a win win for both the customers and the stores.
And right now I'll tell you what safety is trumping everything from the customer.
Thanks, Jeremy.
Our next question will come from Brad Thomas with Keybanc capital markets. Please go ahead.
Hi, Thanks for fitting me in and congratulations here.
Question on merchandise margin and hoping you could give us some brush strokes with which to think about some of the puts and takes on merchandise margin through the back half of that you're here. Thank you.
Sure.
So Brad as you look forward and actually I mean, we've we've always said right for the most part you would expect our merged margins to remain flat.
As any benefit we get from scale will reinvest.
Back into a product.
There are a couple of things were going on.
More related to last year that we might be running up against if you remember the tariffs that came into play.
And we Didnt really start the meaningful price increases until the fourth quarter.
So we would expect to see some of that benefit in Q3, and then last year also we had some costs merge costs that were shifted out of Q2.
Into Q3.
So you'll have those two things going on in the third quarter and if you go into the fourth quarter.
What we can say about that is if you look at last year was a record overall gross margin for us at 42.1% and we would expect the fourth quarter to get back to more normalized gross margin levels that we've seen in prior years.
Great. Thanks, Brad Thanks, Operator, I think we got time for one more question.
Yep answer that question will come from Joe Feldman with Telsey Advisory Group. Please go ahead.
Hey, guys. Yeah. Thanks for squeezing me in just wanted to ask <unk> are you seeing any pressure on on freight.
We're hearing a little bit more about that as you enter the back half of the year and what impact that could have on supply chain costs are and timing of receipts, maybe Andy. So you can share on that would be helpful. Thanks.
Yeah, I assume you're talking about import freight Joe yes, yes.
Yeah look.
Yeah.
Good.
You cut off on me, but look there are some you know peak surcharges on on Ocean.
Freight, but that's largely offset for us.
You know by by some lower fuel surcharges that have certainly come down from last year and we also do an annual contract.
For our ocean carriers, so large largely.
This is where our scale really.
Benefits us.
And.
So I think some of that you're hearing out their smaller players ones that aren't growing or probably feeling it more than we are but.
Overall, the supply chain team has really done a great job with the contracts, we haven't place to help minimize that and I don't think it's going to have a material impact on us because we don't rely on spot rates as much as some people do.
Thanks, Joe.
[noise] operator, I think we're going have to conclude that I appreciate everybody joining us today, let me just close with a couple of quick concluding remarks.
Honestly, we've operated successfully through a very difficult environment, hopefully can tell by canonize comments, a how excited we are about the core that just finish our teams continue to play off fence, they've worked tirelessly to get us back up and running again I really think our associates our vendors are.
Customers for being there for all of us.
We are focused on continuing to source cool trend right products that amazing value, which we believe is right now what our customers want and need as we move into the holiday season, which you know as a magical time of year for us and we can truly help make it more affordable for our customers.
Our our customers in communities or special to US we want to get back to them. However, we can whether it's by providing a great store experience, which we talked a lot about today, helping their hard earned dollars last longer.
It might be hosting a fund raiser for local nonprofit group.
We are raising funds for good causes and one I'd love to share with you is most recently.
Through our partnership and the Kids Kids and need Foundation and honestly the generosity of our customers. We recently, we're able to donate over 350000 backpacks to kids.
Our customers continue to seek never cease to amaze us.
We hope everyone stay safe this holiday season, and really look forward to speaking with all of you. After the Thanksgiving have a great day and thanks, everybody Goodbye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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