Q3 2020 Five Below Inc Earnings Call
Good day and welcome to the five below the third quarter 2020 earnings Conference call.
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I would now like to turn the conference average Christiana piece of health VP of Investor Relations. Please go ahead.
Thanks, Colin good afternoon, everyone and thanks for joining us today for five below the third quarter 2020 financial results conference call at the.
Today's call are Joel Anderson, President and Chief Executive Officer, and Campbell, Chief Financial Officer and Treasurer.
After management has made their formal remarks, we will open the call for questions.
I need to remind you that certain comments made during this call may constitute forward looking statements and are made pursuant to and within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act of 1995 at the amended.
Such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially kind of such statements.
Those risks and uncertainties are described in the press release and our SEC filings. The forward looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward looking statements.
We do not have a copy of today's press release, you may obtain one but visiting the investor relations page of our website at five.
Five below dotcom I will now turn the call over to Joel.
Thank you Christiana and thanks, everyone for joining us for the third quarter 2020 earnings call.
Before I turn to our quarterly results I want to make some general comments about the business.
The third quarter was an amazing one for five below.
For the results of surpassed our expectations.
It was the first period and 2025.
The <unk> stores were opened the entire quarter.
And we saw a strong customer response to our offering.
Our teams internally known as the Wow crew have done a terrific job keeping the stores clean and our customer safe.
Our merchant acted very quickly to pivot into new product areas for our customers.
And our finance organization did an amazing job.
Navigating EPS back to a position of financial strength.
Overall, I couldn't be prouder of the team's execution.
Continued hard work and.
And agility throughout the quarter and year to date.
Our performance is yet another demonstration of the discipline of our team.
Flexibility of our model.
And the Universal appeal of five below.
Oh for great, while product and the outstanding value with an incredible shopping experience for our customers.
Now onto the results.
Total sales in the third quarter grew 26% over last year to nearly 477 million come.
Comparable sales grew 12.8% driven by bigger baskets.
This was our best Q3 cash.
Since 2010.
Operating profit nearly doubled.
The D to earnings per share of 36 cents compared to 18 cents in the third quarter last year.
New store growth and performance continued to be strong in the third quarter.
We opened 36, new stores across 20 states in Q3 bring.
Bringing our new store openings.
The 120, and our total chain count 2018.
The new stores were located in diverse areas across the country.
Ranging from more established markets for we've operated for years like the Philadelphia Metro area to.
Two newer markets like Las Vegas, Nevada.
Despite reduced store hours and limited grand opening marketing compared to previous years.
One of the stores in Wilmington, North Carolina made our top 25 for Grand openings.
Delivering value and the trend right items, our customers want kind of fun safe treasure Hunt shopping environment.
Remains key to our success and.
And is a distinguishing characteristic of five below.
The strength of our model.
The resulting appeal.
Is the unique ability to flex in and out of eight worlds.
The by the wild products our customers want.
Joel the has been on for display throughout the pandemic, our buying teams quickly shifted their purchasing over the last nine months to be relevant.
And trend right.
And the new cobot impacted environment.
And to meet our customers' sudden changing preferences.
We curated an amazing assortment of products to support the new reality of work school and play from anywhere.
As a result, new trends emerged and our style room and sports World outperform.
As expected.
The back to school and Halloween selling periods were different from prior years.
Our buyers adjusted their purchasing in anticipation of this and shifted into other categories to ensure five below maintain relevancy hasn't.
As an example per.
For back to school, we bought fewer backpacks and stationery items as customers migrated to purchasing more home related products, including new items like both plants shelving and novelty lighting.
As we navigate what is expected to continue to be a rapidly evolving environment.
We will exercise the same flexibility and discipline to deliver well relevant products that make five below so unique and special for our customers.
Speaking of relevancy and Wow.
We are particularly excited about a new line of gaming products exclusive to five below.
Introduced in Q3 under the Butte blew the black brand.
With our investment in Nerd Street gamers the building of local hosts venues in the future and now our partnership would do that.
We continue the deepen our overall commitment to gaming.
For those of you who don't know him Kyle.
Calgary store known as Booger was the 2019 fortnight World Cup champion lives in the suburban Philadelphia.
The Booger launch is a great example of how the five below brand continues to evolve.
For being a retail that simply cells brands to a retail that creates some produces new exclusive and relevant brands through collaborative partnerships. This is an amazing combination of kyle's expertise in gaming.
And our expertise in sourcing product development and scale.
This exclusive line currently features seven amazing gaming items, including a headset keyboard and mouse he's.
These products represent great quality.
Incredible value at $10 and.
And reinforce five belows position as a destination for teens and Tweens.
With regards to marketing.
We continued to focus on increasing our targeted digital strategies, while shifting away from traditional print circulars.
Similar to the second quarter's kick start the fund store reopening campaign, we developed authentic content focused on our shopping experience and extreme value.
We integrated this across our channel through videos that brought fun to life.
We believe this approach creates a customer connection to our associates and stores.
We also consider E com a part of these digital marketing strategies and continued to be very pleased with the execution of our E com team and the strong growth of our online business the.
E Com investments, we recently made are paying off.
Newly integrated platform offers functionalities such as bundling.
Our first ever five below lab and.
An additional fulfillment capacity from our newly acquired Cincinnati facility.
These along with increased digital marketing of helped drive sales.
During the third quarter, while we are executing of preparing for the holidays is important to note that we continue to innovate and invest in people systems and infrastructure to support our significant growth.
Most notably we.
We completed the initial rollout of our new core merchandising system the Oracle retail.
This was a huge project and we're excited to have this major systems implementation behind us.
On the innovation front, we are making progress in several areas including.
Including our stores and E com the stores, we continue to build out our new prototype with five beyond that.
As a reminder, five beyond refers to two different areas in the store.
One permanent and the other seasonal.
Where we offer a selection of extreme value products, the vast majority priced between six and $10.
The majority of new stores and many of the Remodels. This year have the five beyond permanent section in the back of the store.
Where the room and tech worlds now reside.
Interspersed within these worlds and clearly marked our several sections with the five beyond the assortment.
Which display unbelievable products, often in new categories for us the.
The second area, which is our seasonal five beyond section is currently in every store for the holiday.
The space allocated to the section varies from eight to 12 feet.
And one of the biggest areas we are investing in is gaming.
We are pleased with the five beyond results, thus far and look forward to discussing them. Our next earnings call. Once we've completed the fourth quarter.
Another area of innovation has been focused on finding new ways to interact with their customers.
A new service, we are offering the same day delivery and about 300 stores.
Our partners Instacart, who is doing a great job in helping us market the service and provide ordering as well as fulfill orders and deliver the product to customers.
This is another example of providing a safe fast way for our customers to experience five below.
With our new Tech platform and expanded capabilities. We are in a good position from an E commerce per se perspective, and we'll continue to innovate and elevate our customers experience five below of.
Across all channels.
Now I'd like to turn into the all important fourth quarter.
We're very pleased with the strong start to queue for including the Black Friday weekend.
I want to take a moment to thank our customers for shopping with us and for their continued generosity and contributing to our annual toys for Tots campaign, which will raise over $1 million this year.
We have spent months preparing for this holiday season.
And are ready for the big shopping days that lie ahead.
We are confident in our ability to offer unbelievable and affordable gifts and stocking stuffers for our customers and to provide multiple shopping options for them.
Well, we don't know exactly how much of the holiday season has been pulled forward.
Or what kobin impacts we might see.
We believe we have made the right investments and are ready with great while products in.
In a safe store environment.
Due to this uncertainty we will again not be providing formal guidance.
The Ken will give deeper direction on some of the numbers for Q4.
That's for marketing and merchandising, we have been communicating our holiday campaign largely through digital content.
The now reaches over 90% of our stores.
As well as traditional TV the reaches about 25% of our stores this year.
We will also not have any paper circulars this holiday.
Our borrowing buying team source, the amazing fresh new and relevant products like snarky piece wireless earbuds, a guitar and squish models all at of outstanding values and we believe our inventory is in a very good position.
In our stores, we continue to prioritize health and safety and improved operations to provide a safe.
Customer experience during this important time of year.
For example, we converted over 100 of our existing stores to self checkout.
And now about half of our stores have assisted self checkout capabilities.
As the fourth quarter began.
We also started increasing our store hours in order to help spread the traffic.
All of these initiatives improved the customer experience and throughput pricing.
By significantly increasing registered capacity, which is especially important this cove it impacted holiday.
In addition to the company specific initiatives I just discussed as.
As we mentioned on our last call.
We believe the December holiday selling period itself is more favorable this year.
Allowing more time for holiday shopping.
Specifically number one there are two more days between Thanksgiving and Christmas number to Christmas.
Christmas is on a Friday, providing a full week post Super Saturday for last minute holiday shopping number.
Number three.
Monica is earlier in December than it was last year.
The number for schools are also doing virtual for hybrid models for letting out earlier in the December providing more time and flexibility for holiday shopping.
These for factors along with potential continuation of consolidated customer trips will help spread out the holiday shopping and store traffic even further.
We are ready to help our customers shopped safely in this new environment and can't wait for them. The CR, an amazing assortment of while holiday gifts and stocking stuffers had incredible prices.
So in summary.
We continue to manage five below as we always have the flexibility agility and great discipline and with our.
Customers at the forefront of every decision.
We are adapting quickly to this new environment.
Pivoting to meet customer needs.
Innovating for the future.
And maintain the operating discipline that is crucial to running the business successfully.
We remain laser focused on providing extreme value for our customers.
Which matters, even more when times are difficult.
We are executing our growth strategies like gaming.
Opening and remodeling stores with five beyond sections.
Accelerating our digital strategy.
And ensuring the relevance of our merchandise assortment.
The reflect our customers evolving preferences preferences.
With that.
I will turn it over to Ken true.
More details on the financials Ken.
Thanks, Joel and good afternoon, everyone.
I will begin my remarks with the review of our third quarter results and then provide some commentary around the fourth quarter.
As Joe said with our chain reopened for all of the third quarter. Our teams did a great job keeping our stores sales for our customers to shop.
And adapting our assortment to respond to evolving customer preferences.
Our sales for the third quarter of 2020 were $476.6 million up.
Up 26.3% from $377.4 million reported in the third quarter last year.
We operated our stores with about 25% fewer hours versus the standard pre cobot weekly operating schedule.
Comparable sales for the third quarter increased by 12.8% with our stores delivering the double digit comparable sales increase.
Customer shopping patterns from Q2 continued into Q3.
With higher average ticket and lower transactions than last year.
While comparable transactions decreased for Q3, they improved over our Q2 results.
E Com sales were strong in Q3, yet they still represented a low single digit percentage of our total sales.
We opened 36, new stores in the third quarter compared to 61, new stores opened in the third quarter last year.
We ended the quarter with 1018 stores, a net increase of 124 stores were 13.9% versus 894 stores at the end of the third quarter of 2019.
We continue to be pleased with the performance of new stores, especially given the reduced operating hours and lower spend on grand opening marketing.
Turning to profitability gross profit increased to 27.3% from the third quarter of 2000 $19 million to $151.1 million and gross margin increased approximately 30 basis points to 31.7% comp.
Compared to 31.4% in the third quarter last year.
Leverage on fixed cost components, and the benefit of lapping unmitigated tariff costs from last year were partially offset by the mix of merchandise sales this year.
SGN a expense of $126.9 million for the third quarter of 2020 increased 19.7% from last years third quarter.
As a percentage of sales SGN aid decreased approximately 150 basis points to 26.6% from 28.1% last year.
The primary drivers of the SG in a rate decline were fixed cost leverage and savings from the lower store operating hours versus last year.
As a result operating income almost doubled the $24.2 million for the third quarter versus operating income of $12.7 million in the third quarter of 2019.
Our effective tax rate for the third quarter of 2020 was third 13.4%.
Compared to 24.2% in the third quarter of 2019.
The effective tax rate includes the benefits of discrete items related to the impact of the cares Act and share based accounting.
For the third quarter net income of $20.4 million and earnings per diluted share of 36 cents doubled versus last year's third quarter results.
This year's third quarter had a share based accounting benefit of approximately four cents.
Versus an approximate one penny benefit last year.
We ended the third quarter with $214 million in cash cash equivalents and investments and no debt, including nothing outstanding under our $225 million line of credit.
Inventory at the end of the third quarter was $430 million as compared to $419 million at the end of the third quarter last year.
Average inventory on a per store basis decreased approximately 10% versus the third quarter last year, when we accelerated receipts as a result of terrorists.
We continue to manage inventory carefully and are well positioned with our inventory levels for the holiday season.
Now looking ahead.
As Joel said and similar to the last two quarters, we're not providing explicit guidance due to the continued uncertainty surrounding coded including the possibility of additional kobin related restrictions that could impact customer shopping behavior and store operations.
We are very pleased with the strong start to the fourth quarter and the Black Friday weekend.
However, it is hard to know how much of the quarter to date performance reflects the pull forward of holiday sales versus an underlying trend.
Additionally, the biggest selling day for the season are still ahead of us.
What we do have line of sight to our some gross margin dynamics that we expect in Q4.
As I indicated last quarter, we expected more normalized gross margins in Q4 this year versus last year.
We also now expect continuing merchandise mix headwinds that we experienced in the third quarter in response to customer preferences, including a higher level of pandemic related products.
As a result gross margins are expected to be in the 39% to 40% range.
We also mentioned last quarter that we expect SGN a headwinds in Q4, due primarily to higher incentive compensation versus last year.
As a result, we currently expect approximately 50 basis points of SGN, a de leverage versus last year.
With regards to our new store program, we have now completed our new store openings for the year after adding two more stores in November and we expect to end the year with 1020 stores or unit growth of 13%.
With respect to gross capital expenditures, which exclude tenant allowances, we continue to plan to spend in total approximately $200 million in 2020.
This reflects the planned investments in the new Texas and west of distribution centers, new stores, and Remodels and investments in systems and infrastructure.
In conclusion, we had a great third quarter, and we are ready and excited to provide a differentiated shopping experience for our customers during the holiday season keep.
Keeping their safety and that of our associates top of mind.
While continuing to run our business with the operating and financial disciplines that are core to five below.
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 we will now begin the question and answer session.
You ask the question you May Press Star then one on your Touchtone phone.
If you're using the speakerphone, please pick up your handset for for pricing the keys true.
George Your question. Please press Star then two please.
Please limit yourself to one question. If you have further questions you may reenter the question queue.
At this time, we will pause momentarily to assemble the roster.
In the first question today will come from Matthew Boss with JP Morgan. Please go ahead.
Great Thanks, and congrats on the performance.
Yes, Thanks, Matt.
So Joel maybe 10 stores reopened comps of pretty consistently exceeded the models historical performance. The net net corridor is clearly an inflection could you help us break down the driver of the inflection that you are seeing how much do you attribute this to new customer acquisition or basket growth from five beyond and then.
Post the vaccine, what's the best way to rank initiative as we think about you moving offense, which I think you started to talk about last quarter to accelerate the market share opportunity that you see.
Thanks, Matt.
It's a great question.
And.
It might be a little vague in the answer to the as you know we don't have a loyalty program or a credit card. So it's hard to be specific but I think the way you've got to think about this is in the broader sense like we always think about trends and you followed us for a long time and whether its been the spinner trend or adult coloring.
The or sell fees I think the pandemic itself presents itself as an as the new trend and the.
Five below does well anytime there is a trend or whether it's the fad license and in this case I think it's really about relevancy and bolt on our store operating teams.
And especially our merchants, we really pivoted from the time when we are stores were closed.
To make sure our store was relevant from a product side, you know with amazing value and I'll give you. Some examples and the at the store experience matched what the customer is looking for and in this case the gone out of our way to make sure. They're very safe you know we've done the social distancing we've added.
A lot the extended cleanings, we added the plastic and so the customer feels really safe in our stores for a product standpoint, Matt.
I called out style room in sports and.
You know that those are the as examples and all of those like you think about style.
The amount of T shirts, we're doing is just been fantastic and the the team's done an amazing job of making sure. They are on trend. The relevant one of my favorites is I told the Miss humans I wear that t. shirt. All the time, it's just one example, but the.
At the end of the day, Matt It's really about the merchant group staying relevant and this is a massive trend that caused the big shift in customer buying patterns and we took advantage of it in many different departments. So that we stayed relevant as you start to look for.
Word.
We're constantly always playing offense I think blew the.
And our focus on gaming is an example of that booger launch at the end of Q3, Matt. So it had very little impact on on the Q3 business, we expected to have a big impact on Q4 in and go forward.
But that's part of a bigger gaming initiative, our investment in Nerd Street.
For our pivot to building local host venues in the future and I think those are just the examples I could share with you. The good that give you example of how we're thinking about playing offense. So look we're we're already back to what we do which is.
Opening new stores continued to improve the experience.
The the new prototype now includes five beyond and everything.
And were starting to really see our us as the destination clearly were on holiday right now where the customers are coming in shopping our five beyond section as it truly provides the main gift opportunity. So those are just a few examples.
Long winded answer to their map, but it's hard for me to net.
Put exact which one matters more since we don't have the loyalty program or for on that but the overall, it's just the the strength of the model and we will continue to be flexible and pivot through the eight worlds is as the trends change.
Thanks, Matt.
And our next question will come from Simon Gutman with Morgan Stanley. Please go ahead.
Hey, everyone. It's Simeon pardon my short Termism on this question. So two parts of the first is regarding the fourth quarter.
I don't know of if we're supposed to interpret the.
Strong as the pickup from the third quarter not sure. If that's the right way to read it but you've mentioned the potential pull forward. So curious if you could talk about that and maybe if it accelerated all Q3 does would point to that it is more sustainable and then with regard to some of the margins the Ken.
Spoke to I guess, you're pointing to de leverage to fight for my follow that right, but yet you're not guiding on sales and so I just wanted to reconcile that point on the yesterday in line.
Yes, and those of the questions.
Can you want to start on SGN can I just get some color on the quarter, yes Simeon thank.
As for the question.
With regards to margins specifically around Q for again of most of that was the kind.
Kind of a repeat of what our expectations were earlier in the year.
We continue to see some.
Some of those challenges on the gross margin line again going up against last years, which was out of our normalized gross margin range. The I think we had said before we.
We do expect to at least.
Initially fall within the range that we've seen in years prior to 2019.
And then also some additional de leverage.
With the ongoing merchandise mix similar to what we saw in Q3.
And then the SGN, a deleverage around incentive compensation and you're right. We did not provide any type of specific sales guidance, but I would expect we'll I would still expect that level.
And that the leverage in both of those areas.
When you look at a wide range of results and that's one of the reasons why kind of put that out there and then also did the especially with SGN agents, an approximate number but it would assume a wide range of of sales results.
I think thats good I think semi in the the reason for no guidance is really trying to understand.
The strong start the queue for that I talked about.
Actually coming off the Q3 results and not understanding since the first time, we've gone through a pandemic.
For any of US is how much of its pull forward of sales.
Are there for further covert restrictions in various states.
And we still got the the biggest volume days ahead in front of us, but like I said very pleased with how we start and.
Looking forward to bringing home the great quarter. Thanks.
Thanks Simeon.
And our next question will come from David Buckley with Bank of America. Please go ahead.
Hi, guys. Good afternoon are you running into any capacity issues with store traffic. If so how are you managing it and then can you just discuss briefly the the mix of items that are now several products in stores. Thank you.
Sure.
The short answer is no on the capacity.
I think the steps the operators made this year.
I called out specifically, we took over 100 of our existing stores and converted them to assisted self checkout.
And typically that that then takes the store from five registers, the nine and that really helps on the throughput. So in cases, where we do have capacity limits.
Instead of having people stuck in a line, we're really getting them through the store quicker and therefore, we don't have to create a line outside so.
Quarter to date, we have not.
Experienced anything meaningful on on the capacity constraint, but you know the David the Big days are still in front of us, but the operators are doing a great job, we're trying to process customers faster than we ever have and feel feel real good about it.
The David have a second part to the around essential it was oh essential.
Look essential there's still very low single digit.
To the business and I think it's more about what I said the Matt on the question.
What's driving a lot of this business is us having our product the relevant and so certainly the the pandemic.
Cause people to buy essential product, but more importantly, the change their buying behavior of.
What they were looking for.
Fitness goods T shirts, I talked about and.
Merchants did a great job, making sure we're in stock on that.
Thanks for them in our David.
And our next question will come from Paul Lejuez with Citi Research. Please go ahead.
Hey, Thanks, guys.
Thank you talk about maybe quantify the gross margin pieces during the quarter curious what the net.
Cash drag was.
Just in terms of what selling stronger versus weaker.
And Im curious line Joel maybe more for you can you talk about the.
Percentage of your transactions heading.
Net include an item above five box.
What's the average ticket.
Of those transactions versus those.
Those of don't include an item above five and what's your what's your provision going forward in terms of ultimately what will the assortment look like what percentage of the of the business can be above that range. Thanks.
Yes, Paul look on five beyond let me just clarify for Q3. It was very small. We then we don't set the the wall until the fourth quarter start and.
But the overall vision is something I think we will spend a lot more time talking about as we start to look at 21 and beyond but it's obviously as you can see our new prototype income includes a permanent section of the five beyond products. So it's just an example of what I was talking about with Matt about the or Matt was.
Asking about us playing offense and we will continue to evolve. This this concept and five beyond is going to be a big part of it.
We'll get into more of the specifics next year.
Yeah, and then Paul you had asked about the gross margin and then kind of the mix of the merchandise. The just go back on that too for.
For Q3.
We did see significant fixed cost leverage meaningful fixed cost leverage up in gross margin within the cost of goods sold obviously with the with the assume around an item like occupancy.
And then the the anniversary of those unmitigated tariff costs.
That was pretty meaningful too.
And then all of those the.
Were offset in part by the merchant mix and the merchant mix again, just in responses as Joel talks about relevancy in how we respond to customers preferences.
Was this the items that we've been selling in Q3, and we expect to sell the also in Q4, there the the pandemic related items and then just the other areas of we talk about work in school in play at home.
And just the margins associated with those are or what's driving the the merchandise mix.
The next question will come from share growing with Gordon Haskett. Please go ahead.
Hey, Thanks, a lot.
Pretty impressive the drive the comp of you did with 25% fewer shopping hours. So I guess I'm curious the made you rethink the the model longer term loans also if you could just remind us where you are.
November on the metrics.
And then also.
On the digital front for putting the BOPUS test and the Instacart can you give us a little bit of color, where the basket sizes today, and then I guess also kind of where the where the where.
For the merchandise margin of flux is out on those baskets. Thanks.
The the the.
The BOPUS test is still very small it's it's the.
Like in the less than 40 stores.
As for the Instacart, it's in about 300, and and and Chuck It's it's really early on that.
Like all our E com initiatives, the the bats, the size run bigger than the store.
I hesitate to start to like.
Get into the specifics on that because we're just so new in it and I think we got to kind of get through the the holiday period and so.
See where it where it ultimately plays out, but we expect the basket size to be bigger.
Our E comm basket tends to be double.
We just need a little bit more time on this before we kind of can establish the trend it's.
Really brand new out the door and back the expansion. The the 300 stores was literally earlier this week so.
It was more important we continue to provide a safe way to shop, especially for those customers that are stuck in their homes and modern alternative way for five below and then as far as sales go.
Very great start to Q4 and.
Weve been a little vague there just because we want to kind of get through the quarter here and really understand how much of it is.
And the new shopping trend versus some pull forward but.
We really feel the it's going to turn out the great quarter for us and.
I think operating hours was the operating hours.
Okay, we have expand them here in Q4 were pretty much like for like right now.
To make sure again, we spread out the traffic and will will be opened when the when it when we think it's right for the customer. The clearly there is an opportunity in Q3 the two.
The mirror a a much shorter trend that we're seeing from customers, but I don't expect that to be long term I don't think we have to go in the law older will be opened any longer than we have been but I don't think we will.
We'll see of long term sure operating hours.
Thanks Chuck.
And our next question will come for John Heinbockel with Guggenheim. Please go ahead.
Joel two questions.
The allowance for this holiday it looks like you have I don't know.
Lead times, maybe as many items as you had last year.
Yes share and then when you think about kind of flow and good and last of the items were pretty similar throughout the season. So the idea here, you'll kind of rotate that out and has fresh products.
Closer to Christmas number one of them to how is Michael thinking about net.
Next year right in terms of demand and how you want to plan and flow product in particularly of spring and summer.
GAAP.
John of five below is a great example of the first question is absent the mad about playing offense and.
If you go back the last year, John you follow that nicely with us.
We were it was really opportunistic buys.
We really broke the five dollar price out of playing defense largely driven by the tariff and we turned it into an offence and weve turned it into some incredible value and Wow for our customers and the feedback we've been getting is just been very positive.
I think what you're seeing now is Michael in the merchandising team switching from opportunistic onetime buys to plan strategic specific buys and so I think you're right on about the number of items you're right on the flow of last year was pretty much one and done.
But as the year as the holiday season goes through you're continuing to see new items come in and that's a great.
Example of us the.
Being planned.
Out and using our scale to our advantage so it's.
Really worked out well as for next year, we're still planning that together, but I'll follow the trend, it's going to get bigger and.
In the north of the seasons and than we have in this past.
Thanks, John.
And our next question will come from Scott a security with RBC capital markets. Please go ahead.
Hey, guys Scot Ciccarelli, so inventory levels, obviously got better kind of during the quarter, but still down quite a bit on a per store basis. Do you think inventories were a drag at all in your third quarter results and as you guys talk to your vendors do you have any inventory availability concerns as you kind of for the.
Call. It the next couple of months here.
Yes, they were a drag.
The 12.8 comp would be.
Some of the <unk> to the.
I don't know that I'd ever call of 12.8 comp, but a drag due to inventory.
No look seriously Scott.
The you remember I mean, we we went through the closure in the first half of the year like everybody did canceled hundreds of millions of dollars inventory, but.
But if you go back to my opening remarks, I couldn't be more proud of the the team at five below.
The got the orders back placed.
In fact, we buy placed more relevant items than what we had ordered initially and we were back in stock and so while we're we're chasing it and it's flowing.
It is coming right from our D season, right onto the stores in under the on the the floor. So.
I don't think inventory impacted the the quarter at all but it was certainly not a hand to mouth and Ken anything then yeah and Scott I'll, just just to add to that too you probably heard in our prepared remarks, the real driver that average.
Store inventory year over year was the pull forward last year at the end of Q3.
Of of tariff related items and as I look forward into at the end of Q4, we made some similar moves last year also so I would expect it to continue to be down when we fast forward to the end of the year, but that was really the key driver of that.
Negative ratio inventory is in good shape.
Thanks Scott.
And our next question will come for Karen short with Barclays. Please go ahead.
Hi, Thanks, very much I just had a couple of housekeeping and then the bigger picture first of all the how many stores do you actually have five beyond right now and then second with respect to your relationship with Instacart can you just talk about the pricing infrastructure.
With respect to a mark up and then the bigger picture question as you've always said that.
Your co anchors drives 50% of traffic I'm wondering where that stands today and how you're thinking about real estate going forward given the changes in the retail landscape.
Yeah. Thanks, Karen.
No Ken if you know the exact number on five beyond stores is about 150 stores, yes ft.
You know instacart pricing works similar to everybody else the on their platform.
If the customer is a member and they spend over $35. The there's no charge to them and.
We like every other retailer.
For the on every order to the Instacart and.
It's.
Reasonable fee that you know is.
In line with where everyone else is paying and then in terms of co anchors.
Karen we haven't measured again that the statistics since the pandemic started but.
But clearly if anything our.
The connection to the landlords and and.
Vibrant.
Strip centers is more important than ever and our brand awareness, we know continues to grow.
And we've got a strong balance sheet I called out the great job the finance teams done and so we're in it we're in a great place to drive more and more traffic than we ever have before.
Landlords Love US, we drive young youthful traffic.
And we pay the bills and.
I think we will be more discerning as we continue to build out new stores.
But what won't change is we're committed day centers, we're committed to being Instrip and power not mall based and.
No, but we love all anchors that drive traffic I, just can't tell you whether the the mix has changed or not but that's something we'll certainly look at next year.
Thanks, Karen.
And our next question will come from Brian Nagel with Oppenheimer. Please go ahead.
Hi, good afternoon, great quarter for us Thanks, Brian Thanks.
I wanted to ask GAAP.
Yes that the asset.
Last question is little bit different way, but look as we've studied the the five for will you be quite low model you have set off of that you capitalize all the traffic of of your neighbors, you'll clearly with these results in Q3 of them, which talking about your to the Q4 at the same time, we're hearing about so much weaker traffic.
Two other retailers out there across the board of mid the pandemic I guess the <unk> what's changed the that dynamic of you are there specific initiatives you've taken here to really become more of your own traffic driver than you have been in the past.
Yes, it's a great question, Brian in a.
I think those that have been following us for a long time and I you know maybe of been repetitive or maybe I haven't been.
Vocal enough, but then the day, we've been you know investing in people systems and infrastructure, which translates into better merchants.
Better distribution centers.
You know the products getting stronger.
We're playing offense the.
The experience of the store continues to grow and every one of those little tweaks, Brian continues to add up over and over and over again.
Two.
Were five below the slowly becoming the destination and so as we continue to get better at that we become the first stop instead of the of the secondary stop and you know somebody asked earlier.
And as I said, we don't have a loyalty card. So it's hard to put our finger on that but.
You know anecdotally and as we do receive our marketing research. After the fact that the customer continuing the tell us that you know it's been a great experience in the store they love the product the value has been amazing and I think as we grow five beyond as an example, the grow gaming.
The just going to be more and more reasons for that traffic to get better and so.
It's still important to us that we'd be in a strong vibrant center is good is we like the think we are we know our strong centers performed better than our week centers.
But for your slowly seeing as this organization gets.
More mature better scale.
The we become the kind of the driver of the traffic. So hopefully the answers your question of how we think about.
Thanks, Brian.
And our next question will come from David Bellinger with.
Wolfe Research. Please go ahead.
Hey, guys. Thanks for taking the question.
For you mentioned last quarter some of the volatility category current somewhere upwards of 30% comps or others were trending negative. So did you see that wide disparity sort of even out throughout the Q3 period and also on the start to Q4 for are you seeing strength in the same three world you called out this quarter or have you seen some type of cash.
And in the complexity of sales trends.
Yes, Brian or David It's a great question and.
You know that disparity I talked about in the last quarter.
Continued into the into Q3 and.
And we expect into can you continue into for into Q4.
In fact, that's way.
One of the enough people really understand how powerful this model is around these eight worlds.
And we simply flex in and out depending on whats trending and what's not trending I mean, clearly party right now is just not trending it's.
The negative comping.
Is that a bad thing well it is if thats your only business.
It is if our merchants don't change and Michael does a great job of it.
If you look in our store our party of we've shrunk our party area, but we're we're growing some of these other worlds we talked about the gaming is trending teas are trending.
Our room world as people are nesting and at home.
Thats really important the we've grown that area of blankets, and pillows and and full flow plants and that type of thing. So it's as wide as it was in Q2 and we expect that to continue in Q4 here.
Thanks, David.
And our next question will come from Paul Trussell with Deutsche Bank. Please go ahead.
Good afternoon, and great quarter.
Just to follow up on the real estate commentary from some earlier you did opened a number of doors. This quarter, maybe just a little bit more color on.
What you've seen from this year's class of stores.
Whats.
Happening in new markets you.
You know and just any early color or away. The we should be thinking about store openings and real estate availability you know into next year and then lastly.
You did give some color on digital spend maybe just touch on how that looks on a year over year basis.
And just curious to the extent that you are thinking about more permanently walking away from from circulars.
Yeah. Thanks, Paul.
Look I'll tell you.
I honestly couldn't be more pleased with how these.
The the class of 2020 is performing.
When when you consider that.
We opened with shorter hours, we really had no.
Grand openings campaigns, it doesnt make sense to invite people in a pandemic to to generate a crowd I personally was in our Denver market and like it was shocking to see new customers finding us.
Immediately as we opened Weve done great in Las Vegas, where in Northern California Sacramento.
And I think what it at the end of the day, if I put some color commentary around it. It just is another great example of how the brand awareness is growing and what used to take us five to seven years to get in the run rate. We enjoy is happening much sooner so despite shorter hours and less marketing.
You know still seeing great new store productivity from the stores and so and then on the digital span.
You know, it's less about the change year over year and it's more about it's just a great example of us being relevant and shifting and so.
Yes.
Okay.
Quite simply I don't expect us to go back in the in the print circulars.
You know, even if you compare us last year to this year, we shrunk significantly the amount of TV markets, but we grew as a share them over 90% of the stores are getting digital.
And it's just another great example of us being nimble quick and pivoting fast.
The how the customer is.
Where the customers eyeballs are in right now the eyeballs are non paper.
Think about our own personal habits, everybody's binge watching and and Netflix and the like in the and that's where we put our advertising dollars. So.
We're still spending money in advertising, we feel good about the the amount there is just in different vehicles to get a better use of the thanks Paul.
And our next question will come from Edward Kelly with Wells Fargo. Please go ahead.
Hi, guys. Good afternoon, obviously, great quarter I wanted to ask you about this this is the hard question because you don't even have real guidance for for Q4, but as we look out into next year consensus numbers on the EBIT margin are below what you would normally do right in the 19, you did a lot of an eight.
18, you to 12 even.
Is there anything.
Do you think that would prevent you from getting back to that type of number next.
The next year.
And then just a follow up did you give the tax rate for Q4, I don't think I heard it.
Yes.
Thanks, Ed on the.
The EBIT margin.
Again, we'd like to try to get through this year and get through the holiday season.
Then we will give that guidance as at the end of the year as we talk about 2021.
But we would expect this off off the top of would expect to be much more normalized in terms of what you called out and what we've seen.
In the past.
And then with regards to the second part of your question right.
On taxes.
Yeah that you could see there there is some flow.
Fluctuation there in our tax rates obviously.
With what we have called out earlier in the year and then this past quarter in Q3.
Around share based accounting and the impact of the cares Act and.
No well carry backs and things like that so.
I would expect at this point for Q4, it probably would be more normalized in terms of what we've seen historically, so in and around that 24% range for Q4.
And then you could probably do the math on that for for the full year.
But yeah, I think looking out Ken there's nothing the would expect our model of the change from.
More normalized the get back dip to get back to those levels, we saw historically, yes.
Okay next.
And our next question will come from Jeremy Hamblin with Craig Hallum Cup for group. Please go ahead.
Congrats on the strong results in the the store Thanks, Jeremy Athletic mix.
Thanks, I wanted to first just to clarify your response to I think Chuck's question on a.
Future store operating hours and you know as you think about the model going forward you know.
Possible that you might consider having a.
You know kind of these covert operating hours as we get kind of through the coping mess of moving forward. So just wanted a clarification there, but you know my other question is actually regarding tariffs I know the income incoming administration.
He has made some comments that they don't initially plan to change any of the terrorists.
Im good from China, but I wanted to get a sense of what percent of your goods today originate in China.
And if the tariffs are lowered or removed would you expect to give the savings back to the tumor.
You've raised prices obviously on on the tech.
Tech World, especially but the is there any potential benefit.
The earnings power or is that going back to the consumer we do see.
Yes, Jeremy its a good question on tariffs and look I know we heard the comments this morning, too and I think it's a little early for us to speculate on what that means but but I will tell you you know and we said at last year, when we were putting the terrorists.
Would the if they went away would you roll the price is back and you know I think weve not only of we've broken the $5 price point I think we've actually found something.
In our in our development of five beyond debt is way more beyond this tariff thing in fact, it has nothing to do with tariffs and the customer loves the value and I think it's going to allow us to continue to migrate to being more center of the plate. If you will instead of being the stocking stopped for it and what I mean beds.
The main gift right so.
But you know if there is some you know call.
Oh, the winter, though from the tariff rolled back you know, we'll deal with it appropriately, but our first reaction is always to deliver value to the customer. The most important thing we do but we also.
You know give Michael back you know so he can reinvest in product. So I think it's less about rolling price is back and it's more about adding new features and benefits. So that we can continue to stay relevant and.
And deliver incredible value and as for the future operating hours look I think our assumptions were working for them is the the vaccine is real I think.
In other things will.
Slowly change in 21 for the good and.
So if there is a period of time post holiday that the until that's widely dispersed that we're operating on cash.
Sure hours, we'll do that but I think certainly by holiday of 21, we'd be back in a more normalized pattern.
Pattern for holiday hours. Thanks, Jeremy.
And our next question will come from Michael Lasser you'd be EPS. Please go ahead.
[noise] Michael Lasser Your line is open.
I guess, we'll go to the next one.
The next question will come for Michael Montani with Evercore ISI. Please go ahead.
Hi, Thanks for taking the question.
I wanted to ask first off on the transaction count if you could give a sense of if that's starting to stabilize non meaning getting closer to flat or kind of still double digits similar to last quarter and then I just had a follow up on the cold the costs and wage inflation.
Yes, so Michael Thanks for the question of take that first one on the transaction count.
You probably heard us in the in the prepared remarks say that the.
You know the transaction comps of.
Although still negative did improve during Q3.
Versus what we saw in Q2.
And we have seen some slight improvement as we've moved into the fourth quarter. We still have a ways to go obviously from a sales perspective as we go through the holiday season.
But we have seen improvement.
With the the comp transactions although.
Still still negative.
And sometimes getting close to flat, but again improvement as we've worked through the year here from Q2, all the way through to the Q4.
Okay, Great and then just on the cost front I guess first off of Theres anything I Miss that you could share on coal the costs that you incurred during the quarter.
To think about that maybe moving forward and then secondly was one of the wage inflation front, you've had multiple competitors kind of talking about that and just wanted to get a sense of the number one what you all were experiencing today in terms of wage inflation and the number two you know Jim.
The continued ability to kind of bring out efficiencies to offset that if it does persist.
The Michael Yes, and a lot of questions there and we got a lot in the queue. Let me just take.
Take the Cove of cost one and we're going after the move to the next one weekend spend future time on wage the take a long time, but.
Look we're we're managing through the covert costs.
I think we would expect to see them to continue to moderate as we move through the quarters.
And then can you called out some of the impacts on gross margin, but we're continuing to yeah still seeing some of those and we saw some in Q3, but.
Definitely materially less than what we saw obviously going back to Q1 and Q2.
All right. Thank you.
And our next question will come from Johns the leaders with core voters capital. Please go ahead.
Hi, guys. Thanks for taking my questions.
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Yeah.
Yeah.
Thanks.
Yes.
So.
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Right.
Yes, John you were hard to hear but I think you're asking if the pandemic has changed our long term earnings.
Okay.
I think the the pandemic.
At its core of the way we approached it is like we do with everything we play off fence and we pivot and we say how do we stay relevant in this new trend and this is probably the biggest trend we've seen.
You know since I've been here that required us to really pivot our merchandising assortment and.
Like we did with spinners of few years ago, the Michael in the merchant team reacted as fast as they could to.
To get out of certain goods and into new goods, we got a great partnership of other big group of the supplier community.
And they just really support of throughout this whole thing. So if anything I think it's one the allowed us to realize we can pivot quicker.
It certainly also forced us to look at every expense and the teams. The led by the Finance group you know really helped US you know look at how we can operate more efficiently and those are all things of though really carry forward John as we continue to to grow this business and.
Make the experience even better than before so.
You know it's a.
And.
Made us a better company as a whole thanks John.
And this concludes the question and answer session or the interest around the conference back over the Joel Anderson for any closing remarks.
[noise]. Thank you operator, and thank you everyone for joining us today.
Clearly this wasn't an amazing quarter for five below and I am truly blessed to work with such a great team.
Again want to thank our Wow crew and all our vendors for being there for us and honestly of for our customers for letting them.
Letting us be there for them, we will continue to listen to our customers and the source awesome trend right products at amazing value.
Which we believe is just what they want and need to make the holiday special.
As you and your loved ones get ready for the holidays, we wish you a safe and happy healthy holiday season look forward to speaking with all of you again in 2021, I certainly hope you'll shop five below this holiday five.
Find some amazing value for you and your families. Thanks again have a great evening and we'll see in 21. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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