Q2 2021 Five Below Inc Earnings Call

Good day and welcome to the five below second quarter 2021 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

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Please note this event is being recorded.

I would now like to turn the conference over to Christiane Pelz, Vice President of Investor Relations. Please go ahead.

Thank you good afternoon, everyone and thank you for joining us today for five below second quarter fiscal 2021 financial results Conference call on today's call are Joel Anderson, President and Chief Executive Officer, and Ken Bull, Chief Financial Officer, and Treasurer. After management has made their formal remarks.

We will open the call to questions.

I need to remind you that certain comments made during this call may constitute forward looking statements and are made pursuant to and within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 as amended.

Such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.

Those risks and uncertainties are described in.

In the press release and five <unk> 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.

You do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our website at five below Dot Com I will now turn the call over to Joel.

Thank you Christina and thanks, everyone for joining us for our second quarter earnings call.

I'll review the highlights of our second quarter performance before handing it over to Ken to discuss our financials and outlook in more detail.

Then we will open the call for questions.

We continue to operate successfully in a very dynamic environment, staying nimble to navigate the evolving conditions related to the delta variant and global supply chain.

Ensuring the health and safety of our customers and crew remains our priority while also delivering that much needed funds with our wild product and store experience now.

Now turning to the quarter.

We are very pleased with our second quarter results delivering sales of 647 million and earnings per share of $16.0

Versus 2019.

Which is more comparable than 2020 due to the store closures in the first half of the year sale.

Sales grew 55%.

Driven by double digit ticket growth and earnings per share grew 125%.

For the group of stores that were opened in the second quarter of 2019, and 2021 sales grew 21%.

With new and existing stores performed well with record average sales per store.

New stores the few of the five below growth engine once again delivered strong performance.

In the second quarter, we opened 34, new stores across 19 states.

Bringing our total opened for the first half to a record 102 new stores.

Three of these stores.

In California, South Carolina, and West Virginia made the top 25 list of summer Grand openings.

We now are on track to open 170 to 175, new stores this year and in fiscal 2021 with nearly 200 stores, leaving.

Leaving us a long runway ahead to reach the 2500, plus total store potential we believe exists in the United States.

The teams executed extremely well in Q2.

Our merchants did an amazing job sourcing while products and capitalizing on current trends to bring our customers. The items. They just got to have.

The supply chain team worked diligently to ensure the stores were stock with these trend right products, while managing through the ongoing global supply chain disruption.

Our store teams also delivered these results, while operating with fewer hours than in the past and very little marketing.

Overall, the team continued to focus and make progress against our three key strategic priorities of product.

<unk> and supply chain.

Which I will now discuss in more detail.

For product, we continued to see broad based strength across our world on both a one and two year basis, especially in the sports Tech Candy room in style worlds.

Customer trends were broad and diverse.

For example, renewed interest in sensory items emerged including popular new fidget toys called poppers.

Our pet business remained strong as did the gaming products, we launched the collaboration with Google last year.

We love trends as they drive traffic and bring in new customers.

We have the unique ability to participate in almost any trend through our eight worlds and the flexibility within those worlds enable us to adapt to ever changing customer preferences.

All of these are key distinguishing features of our model.

Back to school kicked off at the end of Q2 with amazing products and featured a seasonal five beyond wild wall and all our stores.

Our merchandising team source, some great value products like denim jackets, flannel shirts, and backpacks for the New school year, we were very pleased with our performance through August.

The extreme value five beyond section in our new prototype store allows us to offer products and categories. We previously would not have been able to sell in our stores.

With approximately 40 to 60 Skus in the permanent section of a five beyond prototype store at any given time the offering although relatively small provides an opportunity to acquire new customers and drive additional sales.

Approximately 270 stores featured the five beyond section of the back of the store at the end of Q2, and we expect about 30% of our chain to offer five beyond by year end with approximately 50% of the chain by the end of 2022.

The merchandising team is looking forward to continuing to delight, our customers with new extreme by beyond products as well as products priced one to $5.

On experience our second strategic priority.

We relentlessly look to enhance the in store and digital experience for our customers and crew.

By beyond as an example of the innovation we are creating in this area as his associate assistant self checkout or ACO as we call it.

ACO offers both customer experience benefits as well as store operational efficiencies.

We remain on track to offer ACO and over 60% of the chain by the end of this year.

And eventually being almost all of our stores.

Separately.

As it relates to the experience for our crew, we recently completed upgrading our human capital management system to the new Workday platform.

Since the end of 2016, we have more than doubled our workforce and this new platform is another great example of our investment and robust enterprise systems to support our continued growth.

Under digital experience, we include marketing and ecommerce.

We're both focused on increasing our brand awareness and acquiring as well as retaining new and existing customers.

We shifted marketing from Q2 into Q3, as we mentioned on the last call.

And the very small amount we did in Q2 was focused on paid search and social campaigns, which we believe were successful.

Digital continues to be an effective and efficient platform to reach customers.

Both new and current.

As for ecommerce we are focused on growing the number of new customers, while also increasing the percentage of repeat customers.

In addition, we expanded the partnership with instant card for same day delivery to now reach the entire chain.

We believe our presence on instant card is an effective brand awareness and new customer acquisition tool.

As well as a convenient service for our customers.

Onto our third strategic focus supply chain.

We're very excited to announce the opening of our Arizona ship Center.

We began shipping our stores from this facility at the beginning of the third quarter.

Which will help us better serve our five below stores out west.

E Commerce fulfillment and that center is expected to begin later in Q3.

Which will also contribute to more efficiency and sending packages to customers out west.

In addition.

The Indiana ship Center, which is planned to open in the summer of 2022.

Under construction.

Complete what we believe to be the optimal distribution center network to service over 2000 stores.

While focused on achieving our longer term objectives within supply chain. We are also continuing to manage through the current global challenges and rising costs, resulting from the pandemic.

We expect these conditions to persist through the balance of fiscal 2021.

And our teams are staying nimble and innovative as they continue to navigate the tight supply chain environment.

In summary, we are very pleased with the results from the second quarter.

As we begin the third quarter, we continued to see strong momentum in our overall business.

Playing offense pivoting and flexing as we execute with discipline and we are making the right investments across our priority as a product experience in supply chain to support our high growth.

Additionally, we're off we are focused on the all important fourth quarter.

And are excited to showcase great new product, including the holiday five beyond wild wall.

We will continue to listen to and work back from our customers to find those gotta have trend right products at extreme value and all packaged in a fund an amazing shopping experience.

With that I'd like to turn it over to Ken for the financial discussion Ken.

Thanks, Joe and good afternoon, everyone.

I will begin my remarks, with a review of our second quarter results.

And then provide guidance for the third quarter.

And commentary on the full year.

Because our stores were temporarily closed during the second quarter last year, making.

Making a year over year comparison less meaningful I will also provide a review of our results versus the second quarter of 2019.

As Joel said, we were very pleased with our second quarter results.

Sales increased to $652.0 million from $427.0 million reported in the second quarter last year.

Total sales this year grew 55% compared to the second quarter of 2019 on an average store count growth rate of 36%.

For the comparable subset of stores that were opened in both the second quarter of 2019 as well as the second quarter of 2021 sales increased 21% driven by continued strong customer tickets.

Transactions continued to be down versus 2019, given we operated the stores with fewer hours versus our standard pre COVID-19 operating hours.

These ticket and transaction trends are similar to what we have seen since reopening the chain last year.

We opened 34, new stores across 19 states in the second quarter compared to 62 net new stores opened in the second quarter last year.

We ended the quarter with 1121 stores, an increase of 139 stores or approximately 14%.

<unk> 982 stores at the end of the second quarter of 2020.

We were very pleased with the performance of our new stores, especially given the limited grand opening marketing.

As Joel noted we had record Grand openings in Q2 with three store locations in Summerville, South Carolina, Turlock, California, and Charleston, West, Virginia, finishing in the all time top 25 summer Grand opening weekends.

Gross profit for the second quarter of 2021 was $233 million versus $147.0 million in the second quarter of 2020.

Compared to the second quarter of 2019 gross profit increased by 58%, while gross margin increased approximately 60 basis points, driven primarily by occupancy leverage on the strong sales results, which more than offset higher inbound freight costs later in the quarter.

SG&A expenses were $146.0 million for the second quarter of 2021.

Versus $113.0 million in the second quarter of fiscal 2020.

Compared to the second quarter of 2019, SG&A expenses decreased approximately 410 basis points as a percent of sales.

The leveraging of SG&A expenses as a percent of sales versus 2019 was primarily driven by reduced marketing expense.

Lower store expenses on the reduced operating hours and fixed cost leverage.

As a result, we reported operating income of $88.0 million for the second quarter of 2021 versus.

Versus operating income of $34.0 million in the second quarter of 2020.

Versus the second quarter of 2019 operating.

Operating income this year more than doubled.

Net income for the second quarter of 2021 was $72.0 million.

Versus $35.0 million last year, and $36.0 million in 2019.

Earnings per diluted share for the second quarter was $16.0

Compared to <unk> 53 last year and <unk> 51 in 2019.

Versus Q2 2019 earnings per diluted share increased 125%.

We had share based accounting benefit of approximately one penny in the second quarter this year.

<unk> to approximately <unk> <unk> in the second quarter last year and one penny in the second quarter of 2019.

We ended the second quarter with $414 million in cash cash equivalents and investments and no debt, including nothing outstanding on our $225 million line of credit.

Inventory at the end of the second quarter was $347 million as compared to $294 million at the end of the second quarter last year.

Average inventory on a per store basis increased approximately three 5%.

Versus the second quarter of last year.

As last year's second quarter inventory was impacted by pandemic related order cancellations.

Versus the second quarter of 2019 average inventory per store decreased approximately 5%.

We feel well positioned from an inventory standpoint to deliver on our Q3 outlook and are accelerating receipts ahead of the holiday season.

Now looking ahead, we are providing formal guidance for the third quarter of 2021.

We are still not guiding beyond the quarter, given the uncertainty related to the ongoing impact of Covid variance a potential shift in consumer spending away from goods and towards services and the impact of the ongoing supply chain disruption.

However, I will offer directional commentary on how we are viewing the full year, which.

Which we will continue to compare to fiscal 2019 due to the disruption in store closures caused by Covid in the first half of last year.

For the third quarter, we will compare our guidance to last year as our stores were fully reopened for the entire third quarter of 2020.

We are very pleased with the start to the third quarter.

We expect third quarter sales to be in a range of 550 million to $565 million.

With comparable sales in the mid single digit range versus the record third quarter comparable sales increase of 12, 8% last year.

We expect to open approximately 40 to 45 stores in the third quarter.

Versus the third quarter last year, we expect operating margin to delever by over 100 basis points with the majority of this deleverage to occur within SG&A expenses.

We are up against record comps in sales, which resulted in higher than usual leverage on fixed costs last year.

In addition to lower marketing expenses and store hours.

We also expect gross margin to delever versus last year as supply chain disruptions are increasing our inbound freight costs.

Our effective tax rate for the third quarter is planned at approximately 25%.

Which excludes the impact of share based accounting or any share repurchases.

As you know our practices to update the tax rate outlook quarterly with actual results when we report earnings.

Net income is expected to be in the range of $20.0 million to $23.0 million with diluted EPS expected to be in the range of 23 to 30.

Looking at the full year on our last earnings call in June, though not in a position to provide formal guidance. We shared an outcome scenario in order to shed some light on how we are thinking about the business from a profitability perspective.

We provided a full year scenario, where a two year compound sales growth rate in the low 20% range versus 2019 would result in operating leverage of approximately 30 basis points versus fiscal 2019.

With more visibility now and despite the tightening supply chain environment, that's driving higher freight costs that same two year compound sales growth rate over 2019 would now deliver approximately 50 basis points of operating leverage.

We plan to continue to spend approximately $315 million in gross capital expenditures, excluding the impact of tenant allowances. This.

This reflects the opening of our new ship center in Arizona construction of a new ship center in Indiana.

Opening new stores and executing Remodels.

And investing in systems and infrastructure.

Yes.

We expect to open 170 to 175, new stores and complete approximately 30 remodels in fiscal 2021.

In conclusion, we had a great second quarter and Q3 is off to a strong start.

Our teams are executing at a high level across the organization remaining agile in this very dynamic operating environment.

As we look to the second half of the year, we expect continued challenges in the global supply chain.

Flexibility innovation and disciplined cost and capital management are key attributes of how we've always operated.

And they are even more important for us now.

We look forward to delivering an outstanding assortment of Wow products at incredible value to our customers in the third quarter and the all important holiday season, as we expand our store base improve our capabilities and relentlessly raise the bar on the value that we deliver to customers day in and day.

Al.

And with that I'll turn the call back over to Joel for a summary, before we begin Q&A.

Thanks, Ken.

As you can tell from both Ken in my prepared remarks, we are very pleased with our year to date performance. Our teams have executed well and I want to thank them again for their continued resilience and agility Ed.

Every week has brought new challenges.

Teams have worked through them and found innovative ways to address them and.

I am confident we will continue to do so and given the inherent flexibility of our eight worlds are unique merchandising approach.

And focus on innovation across product experience in supply chain.

We believe we will remain in a position of strength to continue growing five below and driving sustainable long term value for all our stakeholders.

With that I'd like to turn the call back to the operator for questions operator.

We will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

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 our roster.

Our first question is from Simeon Gutman with Morgan Stanley. Please go ahead.

Hey, guys I hope you're good my question is on freight so maybe two parts with the same topic can you do you have line of sight or visibility into sort of the when the pressures peak inside the gross margin and then if we didn't have the pressures. This quarter can you talk about I guess, how much better gross margin would've been because I assume.

Some of your merchandising initiatives are paying off thank you.

Yeah. Thanks Simeon.

I'll comment specifically.

Can talk to it from a financial perspective.

As we've said on many calls we.

Contract the overwhelming majority of our freight so relatively speaking to the industry I think that I in fact, I know our teams have done a fantastic job managing the pressures as it relates to freight and they continue to to manage those so look despite a really tough environment Simeon.

And as you can tell by the overwhelming results and the updated guidance Ken gave us a scenario there.

Despite all that we continue to deliver pretty strong bottomline on Ken if you want to comment on the financials, Yeah. Simeon just in terms of the impact on the on the financials.

With regards to the freight the cadence we really saw increased freight costs come in the back half of the second quarter and then as I mentioned expect them in the third quarter and fourth quarter.

In terms of a net impact.

It's really in the tens of basis points as we look forward. There's a couple of things going on there one.

The mitigating factors and things that we're doing internally and the logistics team is doing to be able to offset.

Those costs is helping us out so that's why I'm, saying, it's not it's not a very large number that youre seeing thats going to be reflected in the third quarter guidance and again I didn't provide our full year guidance, but.

We are doing a pretty good job in terms of mitigating but if they are in the tens of basis points in terms of a of a net impact on the financials.

Thanks Simeon.

Next question is from Edward Kelly with Wells Fargo. Please go ahead.

Hey, guys good afternoon.

Just wanted to follow up on on freight.

<unk> Ken.

Ken in relation to the tens of basis points impact that.

Can you talk about for the quarter and I'm kind of curious if there is any more color that you could give us on.

Kind of container usage.

How much business needs to be done on spot.

Versus sort of like a.

In normal times and then.

As it relates to mitigation.

You guys have a very good strong flexible pricing model and I'm just kind of curious as we saw with tariffs right with the ability to offset those issues.

Big is pricing as part of the mitigation and does that really why youre able to keep this.

Issue.

Down too.

And to the level that you are talking about.

Ed Great question, Let me, let me start with the pricing I'll work back to Ken there.

Look.

And I think this came up in the last call as well and I think had this happened three or four years ago, we wouldn't have been in a much different position as we didn't have five beyond and so with five beyond and as part of our Arsenal today.

Certainly gives us an opportunity to mitigate through pricing, having said that yes, we have always gone there last and that'll continue to be our strategy and so in addition to raising price. We also talked about we can also paused for a period of time.

The addition of new features in the product, which also we've done that in the past as we've gotten leverage from our scale.

Instead of taking that to the bottom line in gross margin. We've added new features and benefits. So theres a couple of different ways. We can go at it Ed and I can tell you our our mantra here at five below is pricing is the last place we go but it clearly now as a as an avenue and a vehicle that we will use <unk>.

Much like we did when we first implemented it to mitigate against the tariffs. So it's hard to quantify what percentage. It is but I can tell you. It will be the last one will pull but as you can tell by the scenario Ken laid out we've got line of sight on how we'll continue to.

We have a net impact and the only in the tens of basis points.

And then Ed.

At the beginning of the question I think you you spoke about kind of our contracts set up and our commitments out there you mentioned spot rates.

The overwhelming majority of our rates are contracted in advance. So we are not in the spot market.

So when you do that Youre actually locking up your capacity and your rates and I think again the team has done a great job in doing that.

<unk> through that and also working with our carriers to adjust as we move through the year here.

Some of the things we're doing around mitigation.

Obviously, just the overall investment that we've made in the business historically that we're starting to see some leverage in areas.

I'll bring up the distribution network and the ability for us to.

Have stores and are closer to our Dcs and have lower stem miles I mean that helps us out and all those things help.

We're looking at now trans loading, which we do to kind of help out now internally.

When the goods get here to the United States. So again, there is a list of things that the teams are doing to mitigate again, if we've always done this in our pass rate we've ever been faced with cost increases.

That we've got a great team in terms of being flexible and innovative and it's the same thing that we're doing now through this.

Through this increase in freight costs and again Thats why im saying that you are really looking at tens of basis points in terms of the impact in the back half of the year.

Ed.

The next question is from Brian Nagel with Oppenheimer. Please go ahead.

Hi, Good afternoon. Thank you for taking my question.

Nice quarter. So a question I have.

Thank you Paul.

Ill just you gave too much maybe in the weeds here, but with regard to sales and just kind of.

Underlying sales momentum from Q1 to Q2.

Clearly a lot of moving parts with all the Covid Covid disruption should if you look at that.

Net debt.

Apparel comp you gave of 21%.

In Q2, similar similarly, Calgary figure was 23% in Q1 again I know, it's two percentage points, but is there a way to explain kind of that shift.

The prior commentary you called out.

The benefit of stimulus is that weight or is there some other factor at play.

Yes, Thanks, Brian Yes.

Called out the right percentages there that was the calculation that we did on a.

Because you Couldnt do a true comp we picked a subset of stores that were opened in 40, 23% increase in Q1, 21% increase in Q2.

You could you could attribute the lar the difference between those two amounts really to the stimulus that third round of stimulus in March of.

This year that was in the first quarter.

That had a pretty material effect on the business and I think that was probably probably the biggest differential between those two.

Those two rates.

Thanks, Brian.

Thank you. The next question is from John <unk> with Guggenheim. Please go ahead.

So guys.

Never too early right just think about holiday you've got a bunch of levers here right. You can step the marketing backup you can increase the hours and you can do more beyond just three things. So how do you think about holiday pulling those levers right.

Maybe some level of confidence.

This year compared to prior years on those fronts.

Yeah, Hey, John Hey, Thanks, Great question.

You called out.

Several levers that are available to us.

And in addition to that you've got the pier a merchandise assortment that Michael and his team put together and we.

We called out on the call some of the trends that are out there right now.

I would also add to that just the overall scale of the business today versus a couple of years ago.

It is much different.

The operations team with ACO has really helped us on line management in the fourth quarter and so I think when you add them all up John we've got a lot of.

<unk> tools in the toolbox, so to speak that we can use to manage sales.

You can tell by the guide of mid.

Mid single digits here in Q3, as an example on top of.

Double digit comp last year that the teams are doing a great job of executing and managing through not only the examples you gave but.

The couple that I laid out there and we've got a few others. So John there's really I mean, what you're seeing is honestly. The overall maturity of the business. We are much bigger than we were a few years ago.

Sure.

Just are gaining more momentum as we continue to come outside of the post pandemic and.

We have obviously picked up some new customers that were acquired during that time period and I feel really good about Q3 as I think you heard Ken and I had a number of times strong start to the quarter.

Now look there's a bunch of uncertainties in the future and we'll we'll manage through those as we get closer to it and it's part of the reason we haven't done a long term guide.

We think about the future, but we've got a lot to use it at our disposal as we get closer to the fourth quarter.

Thank you.

Thanks, John Thanks, John The next question is from Matthew Boss with Jpmorgan. Please go ahead.

Great Thanks, and congrats on another nice quarter.

Yeah, Thanks, Matt Thanks, Matt.

Maybe Joel near term you cited like you said a couple of times the strong start to August I guess my near term question would just be.

<unk> seen any moderation in comp at all relative to the second quarter and Ken to your point it sounds like the first and second quarter. It had some pretty nice consistency and then may be just larger picture as we exit the crisis.

Is there a way to just maybe rank offensive Lee the topline drivers that you think you have moving forward as.

As we think about maybe incremental to the pre pandemic low single digit comp algorithm basically what do you think you've gained out of this period that you didn't have before.

Yeah, Thanks, Matt there's a lot to unpack there.

Yes.

On the on the comp side of things.

It's just it's not fair to like compare quarters as apples to apples.

Clearly Q2 is up against basically half closed quarter in Q1 was up against a totally close quarter end.

But Q3, where were up against a very strong quarter last year and then our lapping at with our guide of mid single digits. I mean that should give you some indication of how strong the business is right now.

And I spoke to trends, which are out there and those are really helping the business as it.

As it goes to the last part of like actually ranking them.

It's hard to rank and I think similar to the way I was answering the question John just asked.

Rather than rank it's more about.

Do you have a lot of different.

Different levers to pull and I think you could tell that what we called out was certainly.

A variety of different levers, what I might add that I didn't talk about in John's question was.

We also have we're in a much different environment as it relates to digital than we were pre pandemic.

Made the acquisition of a holler, we've rolled out instant card, we're no longer doing paper Flyers and it's now 100% digital Flyers. So that's just one example of the.

The difference pre pandemic and then the other side of it is the scale and I touched on that a little bit with John but I would tell you. Our our merchants are better than we were two years ago, where operators are better.

And all of that contributes to it.

How we are driving sales and our store consistency with George team has done great. ACL is now in 60% of the chain, which just helps and operating efficiencies. So you put all those together.

Matt and I think you can tell we're pretty bullish on the long term as we continue to.

Get in a post pandemic environment and obviously.

Writing about the back half of the year.

Thanks, Matt.

The next question is from Paul with Juice with Citi. Please go ahead.

Hey, Thanks, guys.

Curious outside of three what sort of product cost inflation.

We're seeing these days and just how you plan to navigate that and then on a related note I'm curious what percent of your assortment is that the $1.

$2 price point thanks.

Yes. Thanks.

Look I.

Obviously supply chain is probably the biggest one that we're talking about from the inflation front.

You are certainly also seeing it probably the most in wages.

And wage inflation comes in the form of the <unk>.

Two different ways, one where we've moved our base wages up.

And then also where states are moving so.

We have a variety of different wages out there we're very competitive.

But at the same time, there are state mandated wages that that continue to happen and they roll at all different times those are probably the two biggest.

And then the third one we manage always drew as raw material inflation and the merchants have done a great job on that you get more efficiency get some benefits of scale.

We might not add in some new features this year to maintain the same cost, but that's the three areas that.

We're seeing the most and inflation in terms of the the one dollar.

Yes, Paul I think you asked about the.

Penetration of certain price points I think the one to three.

Greater than 50% of the units that are in our store.

So it's still it's still a pretty significant portion of our.

The assortment that we have.

Thanks, Paul.

The next question is from Lorraine Hutchinson with Bank of America Merrill Lynch. Please go ahead.

Thanks, Good afternoon.

Wanted to hear your thoughts on the push and pull between increasing your store hours back to 2019 levels.

If you think that that might move transaction count above 2019 levels and then.

How you balance that with the associated costs over the holiday season.

Yeah, Yeah. Thanks rain.

I think the way you asked the question is exactly the way we think about it.

Clearly.

We have seen if you increase the hours that the transactions do go up.

But the balance is.

The labor market is very tight right now and hiring is tight and so those are the exact ways. We're looking at it we all probably the third factor we look at as you know.

When is the center open who's in the center with Us and what's the right hours to be but we.

We did take the hours up mid second quarter.

And we feel we're in a good spot it's a nice balance right now.

Gotten feedback from the field and they feel we're in the right spot.

When you ask questions exact way, we're thinking about it and right now we're in we think we're at the right balance between the two.

Thanks, Brian Thank you.

The next question is from Anthony <unk> with loop capital markets. Please go ahead.

Oh good afternoon, Thanks for taking my question.

I was just wondering if you're seeing any I mean, obviously had a very strong quarter and sounds like the strength of our base I was wondering if youre seeing any variations in your performance geographically based on COVID-19 infections and hospitalizations and also.

Vaccination rates thanks.

Anthony Great question.

What we look at that every week and.

Surprisingly, it's pretty consistent from week to week, and we really don't see.

A large difference.

Certainly not based on vaccination rates and.

And Covid cases, so that was pretty consistent during the pandemic as well.

Im not sure I can tell you why that is but.

It is something we look at consistently.

It's not been a.

Driver geographically.

Thanks Anthony.

The next question is from Michael Lasser with UBS. Please go ahead.

Good evening, Thanks, a lot for taking my question.

Keeping the algorithm that you laid out for this year, where if you were to achieve a low 20% compound annual growth rate. It would translate to 50 basis points of margin expansion can we also assume that that would be valid for 2022 or because of the wrap around that some of these freight costs.

A catch up in marketing and an increase in wages.

Margin expansion might be more modest next year, even if you had a low 20%.

Top line growth algorithm. Thank you.

Yes, Thanks, Michael.

What we don't want to get too far out ahead for 'twenty, two we still got a long way to go in 'twenty one.

But yes, I mean, you've probably heard the supply chain disruptions are going to have an impact obviously through the end of this year and most likely into next year also.

But as you know <unk> been with us for a long time, we've been faced with rising cost environments before.

And you've seen us navigate through those and again.

There's a lot of things that we can do out there and a lot of levers that we can pull.

I think Joel talked about a little bit earlier in terms of scale of the business is always a big one.

For us, but there's also other initiatives out there we talk about five beyond.

The assisted checkout.

Product collaborations from a traffic driver standpoint.

The distribution network that we've put in place over the years that we can start to see some leverage from that so.

We still have a ways to go but I think the good thing here and the takeaway is that we do have.

A lot of tools in the toolbox here to be able to help to offset a rising.

Cost environment.

Yeah, and I'd just add I think got asked earlier question, how much will we use pricing and price continues to be a lever we will use it.

With that that pressure persists into 'twenty two.

Youll start to see us start to move on that one a little bit more but we're just not ready yet Michael till we get our hands around it to give some 'twenty two guidance, but hopefully from our commentary you can get a sense of the levers that are out there at our disposal.

Thanks, Michael.

Michael. Thank you. The next question is from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.

Thanks, and congrats on the sustained our momentum I wanted to ask a question about the new units.

You took.

The top end of the new unit openings down by five in total and typically you are further along in the percentage of new units for the year then.

Youre, suggesting by the end of Q3.

I wanted to get a sense for what I'm sure. Some of that is maybe landlords not having sites quite done on time, but wanted to see if you could add a little bit of color on.

On the change there.

And also whether or not.

It's something for us to think about.

I know you're not guiding to 'twenty two at this point on new units.

But are we seeing a back up just on the construction side of things that.

You know may spillover into 'twenty two.

Yeah, Hey, Thanks, Jeremy.

I think it's a little less.

Oh.

Alright, we are getting a amber alert here tornado warning tornado warnings sorry.

We're in Philly and.

The tornadoes made its way here.

So not tornado but.

Something to do with the hurricane, but Jeremy back to the question is it's less about a little bit of what you were insinuating it's more about.

Getting back into a rhythm post pandemic, you've got to remember, we literally stopped all construction a year ago.

So now it's starting to start that up and if you remember a few years ago, we really didn't even give you guys a range on new stores. We just gave you a number and so the last couple of years, we've given a range obviously last year's got totally disrupted.

I think when we gave you the range at the beginning of the year, we just werent there on knowing all the inputs that go into getting the chain back up and going.

Both not only on our side, but on the contractor side on the landlord side.

And so the fact that we're still at 170.175 gives you a great sense that we're still where we thought we'd be at the beginning of the year, which was a high teens growth rate and that continues to be so the momentum.

Kind of get the engine going again and it's.

Right right in the same range, we thought we'd be getting to add on that.

Yes, I mean, exactly what Joel mentioned there.

The range is in that high teens, which still is in line with our multi year growth vision.

You had talked about next year and again I think in the near term, we're seeing similar growth rates.

Being able to hit that I think what youre seeing now and just the adjustment kind of midstream here and back to what Joe mentioned.

The pandemic has caused.

Some disruption and delays out there, whether it's permitting or equipment or.

Other types of shortages are taking place so we're reacting to that from a landlord's perspective.

But on the flip side you also see that we were able to we opened up 102 stores year to date, which is a record for us in the first six months of the year. So I think again it shows the the agility and the resilience and the flexibility of the teams.

And when you look at our real estate and construction teams and what they can do so again, we expect significant growth as we move forward.

In the near term.

Thanks, Jeremy.

The next question is from Michael Montana with Evercore ISI. Please go ahead.

Hey, Thanks, good afternoon, and good evening.

Wanted to follow up on the freight front for a moment I feel like in the past you. All may have said that you.

You had relatively kind of contracted carrier rates through December.

Wanted to see if that in fact is correct number one and then number two what.

What would be some of the main kind of levers. If you had to think about it into 2022 that you all could pull to manage that if you do have to go back to the spot rate spot market.

Yeah.

Second part of your question is really answered by the first part of your question which is.

Our rates are contracted beyond Q3 and four.

They are done on a carrier by carrier rolling basis. So.

We've started to have pretty good line of sight into 'twenty two.

So its well beyond the end of this year and so.

We're not overly worried.

Being a high growth.

Retail like we are we have a great relationship with multiple carriers and <unk>.

To manage through it I mean costs are up but not near to the impact that that youre hearing out of the overall industry.

Thanks, Mike. Thank you good luck. Thank you.

Thank you excuse me. The next question is from Karen short with Barclays. Please go ahead.

Okay.

Yes.

Sure.

Got it.

Sorry.

Alright.

As you said.

Thanks.

Julian.

Some of it.

Okay.

I'm over here.

Okay.

Pardon me. This is this is the conference operator, we're having some difficulty hearing you. Your line is very bad and hard to understand.

Yes.

Okay.

Yes.

Alright, operator I can't.

The next question is from David Bellinger with Wolfe Research. Please go ahead.

Hey, Joe Thanks for taking the question.

So you're expecting 40 to 45, new stores in Q3 that would imply something like 25 to 30, new unit openings in Q4, this year or a quarter, where you haven't historically opened a lot of stores. So how does that fit into your thinking for the holiday season.

Well those unions get ramped up in time to capture all of the sales. They can for the holiday and also anything in particular youre doing to avoid any operational hurdles that could potentially come up with just opening a larger subset of stores in the Q4 period. Thanks guys.

Yes.

Yeah, Thanks, David Yeah.

Yes, Youre right. Your obviously your estimate there in terms of opening up in the fourth quarter and that would be done early in the quarter and it is unusual for us but as you can see also we're opening we're opening more of an actual number of stores and given that.

The cadence and the timeframe for opening those stores start to stretch out right, we actually opened up stores.

Stores in February historically, we didn't do a lot of that in the winter time in the northeast here, but.

It's really something we have to do as we.

As we continue to get bigger so youll see us opening really from the beginning of the year all the way through to the beginning of November.

And then you had a part two to that question I thought.

Yes, just anything in particular, just given that you haven't opened that big of a amount of stores in Q4, just anything that youre doing to avoid any operational hurdles that might come along with that or just anything out of the ordinary that youre taking into perspective for this Q4.

Yeah, well one of the things we continue to do and we've said it over the years and Joel says it all the time investing in the business right, it's people systems and infrastructure.

And thats along with other areas of the business real estate and construction is a important area for us that we want to make sure. We continue to invest so whether it's in people or systems or technology.

To be able to stay out ahead of it right in the store opening teams. We have dedicated store opening teams that have continued to grow and we invest in those so.

If you hear what's going on with our stores I think every quarter, we call out record store openings. So that's great to see as we continue to move on and I think it's an indication of the success of the teams and the process that we have in terms of opening the stores. So we would expect that to continue as we move forward.

Yes, Thanks, David.

The next question is from Chuck Grom with Gordon Haskett. Please go ahead.

Hey, guys just a couple of quick ones for me.

First one would be on <unk>, you guided $640 million to $660 million that came in.

A little bit at the bottom end of that I guess I'm curious why and then two just bigger picture. The five beyond it seems very successful 30% of the chain, but ended the year at 50% by the end of 'twenty, two I guess why not roll it out more quickly.

Yeah.

Yes, Chuck I think.

The Guy that you got to remember in the in days past.

Our range was more like $5 million in a quarter and you can tell the range was 20 million and it's it's a good example, why we're not guiding beyond the quarters as there is theres just a lot of uncertainties, we werent comparing it to 'twenty 'twenty is there really wasn't a year to compare it to and so just due to the <unk>.

Volatility and no one's there.

Neither wider guide, but I'll tell you what I coming.

Coming in in the middle of it and then beating on the on the earnings I think is really the more important takeaway from the quarter. It shows you that we're able to deliver disciplined earnings approach. Despite wherever the sales may come in and.

But we're really pleased with Q2 and more importantly, we are pleased with the momentum we got right now in Q3 and beyond.

From that perspective.

Alright, Thanks Chuck.

The next question is from Joe Feldman with Telsey Advisory Group. Please go ahead.

Yeah, Hey, guys. Thanks for taking my question. So on the inventory I know you guys feel like you're in a good spot. It does feel like it's a little light relative to where you might want to be and if I recall, what you had thought it would be at this point. So I'm wondering just.

What you are doing to accelerate receipts ahead of the holidays and how we could kind of.

Where do you think inventory should be at the end of the third quarter entering the holidays, and maybe even coming out of it well should it be a fair amount higher than it is today or.

Yes, yes.

Yes, Thanks, Joe.

Yes, you are right I mean, we gave you that obviously the number where we landed at the end of two.

And again just to reiterate we feel like we're in a great position to be able to.

Hit the outlook that we have for Q3 sales.

Looking forward as I mentioned, we are going to be accelerating our receipts and I would expect the.

That average inventory per store to increase significantly double digits at the end of Q3 as a reflection of accelerating those receipts so the.

The buying team and everybody involved there has been working hard with the vendors to try to move those up especially the <unk>.

The holiday receipts in the seasonal receipts to make sure we have those in for the for the fourth quarter.

Thanks, Joe Thanks, Joe.

Excuse me. The next question is from Cristina <unk> with Deutsche Bank. Please go ahead.

Hey, guys good afternoon.

I just wanted to quickly follow up on the top line income growth has decelerated a bit and I guess based on your third quarter guidance. It implies further acceleration.

2019, so is there a way to quantify how much of this is due to waning stimulus, perhaps being a little bit light on inventory and then how do you guys think about five beyond rollouts, helping sustain the top line.

Yeah.

Yeah, we probably have a different takeaway than you did I mean, clearly Q1 had a stimulus Senate.

I don't think anybody should build their business based on a stimulus.

Being what sustained you're going forward. So if you look at the the Q2 number and the take some number in the middle of the guide on Q3.

You are within spitting distance of a differential there more importantly, I don't think you've ever seen us.

Have a double digit comp one year and then come back with our guide of mid single digits. The next year.

Last time, you saw a double digit out of US was probably back in the spinner craze and I think.

A lot of people wondered how we come around the horn on that with a flat comp in and so hearing coming around on a on a 12 plus comp and now you're guiding to a mid single digit so.

I dunno, how youre seeing deceleration, but we're we're we're pretty.

Pretty consistent and feeling really good about the business and I think it's just a testament to the merchants its testament to chasing trends.

And it's just a testament to the broad based appeal of the eight different world. So.

I feel pretty good about Christina.

Got it that's helpful and as we can.

Think about all the new customers that your business has seen over the last year can you maybe just speak to door productivity and just overall brand awareness opportunities ahead, especially in some of your newer stores you know call. It does there are the two year old line.

Hey, Kristina I'm, just going to ask you. If you can bring that back on and then the follow up calls because we've got people to get through when we're trying to limit it to one question to everybody.

Thanks.

The next question is from Brian Mcnamara with Bamberg capital markets. Please go ahead.

Alright. Thank you for taking the question. So you mentioned poppers in your prepared remarks, which feels like the first big product trend in some time outside of pandemic related trend. So can you compare this trend to fidget spinners in 17, and how meaningful it was to your Q2 comp and your Q3 comp outlook popper seem to be pretty widely distributed across competitors.

Relative to the early days of spenders.

Yeah.

Yeah, Thanks, Brian look.

Obviously, we knew about them last quarter and that was baked into our guide.

Yes.

Continuing now and it's baked into our third third quarter guide.

It's it's a little bit harder to calculate at this time versus last time, because you've got Q2 up against nothing in Q3 up against a big number.

But obviously for it to be in our prepared remarks, it's a pretty.

Healthy piece of the business and it's but it's probably relatively in the same range as spinners were back in 2017 and.

That's probably the best way to think about it. It's just you just don't have the year over year apples comparisons like you did back in 17 versus 16, but it's a great. It's a great trend and I'll tell you what I give a lot of credit to our our merchants for identifying it and then really jumping on it.

And making it part of our assortment and it's done really well.

Okay.

This concludes our question and answer session I would like to turn the conference back over to Joel Anderson for any closing remarks.

Okay.

Thank you operator, and thanks, everyone for joining us today, we hope to see in our stores and we will look forward to speaking to you again after the Thanksgiving weekend for Q3 results have a great evening and enjoy the upcoming labor day weekend. Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Okay.

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Yes.

Yes.

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