Q3 2021 Five Below Inc Earnings Call

Good day and welcome to the five below third 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.

After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please.

Please note this event is being recorded.

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

Thank you Gary good afternoon, everyone and thanks for joining us today for five below the third quarter of 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 <unk>.

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.

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

The obligation to update our forward looking statements.

You do not have a copy of today's press release.

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 third quarter 2021 earnings call.

Before I discuss the specifics of our third quarter I wanted to share my appreciation for the many teams throughout our organization that produce such phenomenal results, which far surpassed our expectations and set records for five below and a period, where the global supply chain environment continued to be very difficult our teams were proactive.

And nimble sourcing pool trend right products.

Working diligently to ensure merchandise sky to our stores and onto shelves in a timely manner.

I am proud of the team's execution hard work and agility.

We have consistently demonstrated throughout this extremely challenging and complex here I.

I'm also grateful to the hundreds of vendors, whose partnership and collaboration continues to help fuel our success.

As you will here.

When I discuss the underlying drivers of our third quarter financial results. Our performance also demonstrates the inherent flexibility of our model and a universal appeal a fireball.

We offer incredible Wow products at outstanding value with an amazing shopping experience that resonates positively with our customers now onto the results.

Total sales in the third quarter grew 27% over last year to $608 million or $131 million higher than last year's third quarter comparable sales increased 14, 8%.

Driven by transactions and it was our highest comp of any quarter.

Since going public.

We also achieved the highest average store sales for the third quarter in our history operating profit grew 75% leading to earnings per share of <unk> 43.

New store growth and performance continued to be strong in the third quarter, We opened 52, new stores across 24 states.

Our new store openings to 154 at the end of the third quarter.

The new stores are located in diverse areas across the country ranging from established markets such as the Philly Metro market to new states like New Mexico, which we entered in September.

Five of these new stores from Jersey City, New Jersey to Marino Valley, California made our top 25 in summer or fall Grand openings.

Including the 17 stores, we have opened in the fourth quarter, our new store program for 2021 is now complete.

US to 170 net new stores for a total chain store count of 11 90.

1100, 90 stores in 40 states.

During the third quarter, we continued to make progress against our strategic initiatives of product experience and supply chain.

On product as you know it all starts with delivering our customers value and an assortment that's got a half trend right products and our funds saved treasure Hunt shopping environment.

That is who we are and what we do.

And you saw that reflected in our Q3 results.

The ability of our teams to recognize trends and capitalize on them quickly is a key distinguishing characteristic and strength of our model.

This is the while that makes the by-blow concept so unique.

We were very pleased with the broad based performance across our worlds and.

And especially the outperformance in the sports room Candy and create worlds.

Merchants worked closely with our vendors to source some incredible products and I want to again, thank them for being such great partners.

To that end.

The sensory trend, which we mentioned on our last earnings call continued throughout Q3 and.

In addition to poppers and digitize renewed interest in squish malls emerged as teens and Tweens collected them in all new shapes and sizes.

Our merchandise and supply chain teams quickly source fresh merchandise, which was particularly impressive given the global supply chain environment.

And our store and marketing teams had some fun coming up with compelling social media and in store campaigns to feature them.

During the quarter as expected back to school and Halloween returned to more normalized seasons, backpacks, and stationery items, including art supplies.

In demand along with candy for Halloween.

In addition, <unk>.

Gaming kept growing as a trend and we are really excited to continue to offer an exclusive line of gaming products under the <unk> brand.

As a reminder, last year, we entered into a collaboration with Google for 2019 Fortnite World Cup champion.

To bring affordable gaming products to the masses. The line continues to expand and represents great quality and incredible value, while reinforcing <unk> position as the destination for teens and Tweens.

Turning to our second strategic initiative experience, we continue to innovate both in store and digitally to enhance the customer experience.

In store our go forward prototype with five beyond sections in the back of the store.

As in about 30% of our stores.

The seasonal five beyond Whitehall featured back to school items during the third quarter.

Such as a study from home desk and a studio runway both for only $10, which are two great. Examples of the incredible Wow and value we are delivering.

We also mentioned how it assisted checkout or ACO as we call. It has really helped with the customer's experience as throughput is much higher than our traditional checkout.

We added over 100 Acos this quarter.

Bringing our store count with ACO to approximately 60% of the chain.

Also new to the checkout experience see addition of venmo and Paypal as payment options, which are now available in all of our stores.

Another enhancement to the experience for our customers.

<unk> partnership that we rolled out over the summer.

We are attracting new customers and getting positive feedback on the experience of shopping by below in this manner.

We believe that this is a service as a value add to our customers.

Especially during the busy holiday season.

Even more beneficial after the e-commerce shipping cutoff.

On the digital experience, we continue to grow our E. Commerce operations. We are excited to have opened our third fulfillment center, which is located within our Arizona ship Center.

And we shipped our first e-commerce.

Commerce order from there in September.

Having this additional fulfillment capability will greatly enhance our efficiency speed and ability to meet the high demand during the fourth quarter, especially for our customers in the Western States.

We're attracting new customers to buy below dot com through both our digital marketing and buy below in store experience.

While also growing repeat customer visits are digital marketing brings to life, the fun and value that five below is all about.

For our third strategic priority supply chain.

We continue to proactively manage the ever changing environment, while growing our distribution network.

This has been a challenging year for the for supply chain as you certainly know, but I am extremely proud of how well the teams have managed through it.

From securing additional container capacity.

Adding our own truck fleet at our ship centers and implementing trans loading.

The team has done an outstanding job thinking out of the box and being proactive and nimble.

As of today.

We have received the vast majority of our holiday inventory.

And believe we are in a strong position to deliver our customers a great assortment of gifts.

Talking Stuffers and more.

This year.

Having the Arizona ship Center open will drive additional efficiencies.

And getting products to our stores.

And we expect the opening of the Indiana ship Center next year.

Further enhance supply chain capabilities.

Now I'd like to turn to the all important holiday season.

We are pleased with the strong start to Q4.

Including the Black Friday weekend.

This is our 20th holiday seasons since five below was founded in 2002.

And while today, we now offer more than stocking stuffers for the holidays, what has not changed as a customer promise of Wow and value, which I hope you will experience firsthand when you shop, our stores and online are.

Our teams have worked hard throughout the year and combined with the investments we have made in key strategic areas.

We believe we are well positioned to meet demand, while providing customers a safe and exciting shopping experience.

You may have seen our press release, highlighting seasonal and holiday gift ideas ranging from tech items for gamers to Disney character toys and pet products.

We also have while holiday products like a four foot Christmas tree and the core match.

Matching pajamas bottoms, and slippers, including for the family Pet and tech items, such as selfie kids to help customers or their social media presence.

All for $5 or less.

We have been communicating our holiday campaign largely through digital content.

Which reaches nearly every market.

In addition, we were thrilled to recently be feature on two nationally syndicated television shows the.

The balancing act with Montel Williams and the Ellen show.

But the Ellen show, we formed a partnership to provide support for several kids and their families.

Tomorrow, we began the 12 days of Christmas with Ellen so be sure to watch.

In addition.

Our five beyond wild walls for the holiday our merchandise in all stores with extreme value guests like a $12 telescope and six what basketball hoop for $25.

This is the third holiday with the wild wall.

And we are very pleased with the results thus far.

We believe that adding these higher value items helps our customers with their holiday shopping as we become more of a one stop shop for holiday gifting.

With the combination of fun gifts.

<unk> stoppers and the new Fiat beyond products, along with more stores, featuring assisted checkout registers as well as our enhanced distribution capabilities E Commerce and instant card. We are prepared to give our customers an amazing shopping experience. This holiday.

So in summary.

It was an outstanding third quarter as we continued to grow the buy below brand.

Expand our footprint and delight our customers.

While also navigating the challenges of the current supply chain environment and preparing for the all important holiday season.

We believe a key driver of our success is our customer mindset.

We think back from the customer in everything we do which drives our associates to operate and plan with the customer at the top of the list.

Flexibility innovation and operating discipline are also hormone hallmarks of five below.

Which has served us well, especially in the last several quarters.

We remain laser focused on providing extreme value for our customers and consistently executing our growth strategies.

While we build for the future with 2500 plus stores.

With that I will turn it to Ken to provide more details on the financials Kevin.

Thanks, Joe and good afternoon, everyone.

I will begin my remarks with a review of our third quarter results and then provide guidance for the fourth quarter and the full year.

As Joe mentioned, we were very pleased with our third quarter results.

Our sales for the third quarter of 2021 increased 27, 5% to $607 $6 million from $476 $6 million reported in the third quarter of 2020.

These results exceeded our expectations driven by multiple strong product trends, which we believe drove traffic and new customers to our stores.

We opened 52, new stores across 24 states in the third quarter compared to 36, new stores opened in the third quarter last year.

We ended the quarter with 1173 stores, an increase of approximately 15% versus 1018 stores at the end of the third quarter of 2020.

As Joe mentioned, we were very pleased with the performance of our new stores with five stores, making the top 25 grand openings for summer and fall.

Comparable sales increased by 14, 8% driven by an increase in comp transactions of 14, 3% and a comp ticket increase about half a percent.

Versus the pre pandemic third quarter of 2019 average ticket was up 25% and average transactions were down 4%, which is consistent with results since we reopened the chain last year.

Gross profit for the third quarter of 2021 was $202 $4 million versus $151 1 million in the third quarter of 2020.

Gross margin increased by approximately 160 basis points to 33, 3% driven primarily by occupancy leverage on the strong sales results, which more than offset higher inbound freight costs.

Also contributing to the increase in gross margin was lower distribution labor and store freight expense, primarily due to the shift of our receipts and flow of inventory to stores from Q3 into Q4.

This distribution benefit is expected to reverse in the fourth quarter.

As a percentage of sales SG&A for the third quarter of 2021 decreased approximately 30 basis points to 26, 3%.

SG&A expenses as a percent of sales were lower than last year, driven primarily by fixed cost leverage offset in part by higher incentive compensation.

With the sales B, we were able to generate leverage of 30 basis points versus our expectation when we provided guidance for SG&A to delever by approximately a 100 basis points on the lower expected sales.

As a result operating income increased 75, 1% to $42 4 million versus $24 2 million in the third quarter of 2020 with operating margins expanding 190 basis points over last year's third quarter.

Below the operating income line, we recorded a charge of approximately $9 $7 million related to the write down of an equity investment.

Our effective tax rate for the third quarter of 2021 was 24% compared to 13, 4% in the third quarter of 2020.

Our tax rate last year was favorably impacted by the benefits of discrete items related to the impact of the cares Act and share based accounting.

Net income for the third quarter of 2021 was $24 2 million versus net income of $24 million last year.

Earnings per diluted share for the third quarter was <unk> 43, compared to last year's earnings per diluted share of 36.

We ended the third quarter with $311 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 third quarter was $521 million as compared to $430 million at the end of the third quarter last year.

Average inventory on a per store basis increased approximately 5% versus the third quarter last year as certain receipts shifted into the fourth quarter.

While the level of uncertainty related to the ongoing supply chain disruption from Covid remains we believe we are in a good position to meet the holiday demand from an inventory perspective.

As of today most of our holiday product has been received at our ship centers with the remainder arriving in time to stock our store shelves for the last minute holiday rush.

Now onto guidance for the fourth quarter.

We will compare our guidance to last year as our stores were fully reopened for the entire fourth quarter of 2020.

For any full year commentary, we will continue to compare to fiscal 2019 due to the disruption of store closures in the first half of 2020 caused by Covid.

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

Based on our current trajectory, we expect fourth quarter sales to be in a range of $985 million to $1 billion and $5 million with a comparable sales increase in a range of 2% to 4% versus the record fourth quarter comparable sales increase of 13, 8% last year.

<unk>.

Comparable sales for the nine week holiday period are expected to be stronger than the total fourth quarter comp.

Given we are Anniversarying extraordinary January sales last year, which were driven by stimulus checks.

The record sales results last year generated significant leverage on fixed costs.

Additionally, last year, we reduced marketing expenses and store hours, which drove further operating margin improvement.

Given these dynamics last year, we expect operating margin to Delever by approximately 125 basis points in the fourth quarter. This year with the majority to occur within SG&A as store expenses and marketing are expected to be higher.

We expect gross margin in the fourth quarter to Delever slightly versus last year as some of the costs associated with the handling of delayed inventory receipts shifted from the third quarter into the fourth quarter.

While we are experiencing higher freight costs, resulting from supply chain disruption in.

In the fourth quarter, we expect to partially offset these through efficiencies and leveraging our scale.

Our effective tax rate for the fourth quarter is planned at approximately 25%, which excludes the impact of share based accounting or any share repurchases.

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

Net income is expected to be in the range of $133 million to $140 million with diluted earnings per share expected to be in the range of $2 36 to $2 48.

For the full fiscal year of 2021, we expect sales in the range of $284 billion to $2 86 billion.

Which is an approximate 54% increase over fiscal 2019.

And which represents an approximate 24% two year compound annual growth rate.

We now expect operating margin for fiscal 2021 to reach a record at 13% or leverage of over 120 basis points versus fiscal 2019.

Net income is expected to be in the range of 272 million to $279 million with diluted earnings per share of.

$4 82 to $4 94.

Which at the midpoint is a 56% increase over fiscal 2019, and a 25% two year compound annual growth rate.

We are planning to spend approximately $310 million in gross capital expenditures excluding.

Excluding the impact of tenant allowances.

This reflects the opening of our new ship center in Arizona, and construction of a new ship center in Indiana, opening new stores, and executing remodels and investing in systems and infrastructure.

In conclusion, we had an exceptional third quarter and are off to a very good start for the fourth quarter.

Our merchants and overall operations.

<unk> to proactively pivot and respond as customers adjust their preferences and behaviors and as macro events unfold.

We are confident that we are prepare to provide our customers an amazing shopping experience for the holidays.

And with that I will turn it over to the operator to begin the Q&A portion of the call.

We will now begin the question and answer session.

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

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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.

Our first question comes from Matthew Boss with Jpmorgan. Please go ahead.

Thanks, and congrats on another great quarter guys.

Hey, Thanks, Matt appreciate it.

So Joe on the first quarter 2020 call I remember you cited moving your model to offense.

Six quarters later.

Clearly done that successfully.

I guess two questions when you look across the world.

Where do you see from here opportunity to further accelerate market share and then second on the new customer acquisition do you believe you have sustainably broadened your customer base as we exit the crisis.

Hey, Thanks, Matt really great question in fact.

A lot of other words offense and we it's not only our words that we talked about on this call. It's something we talk about internally every week.

As it relates to your question I'd call out two world specifically.

I think we continue to see opportunity to grow.

One is in tech and specifically game.

Gaming is an area.

My prepared remarks in that scenario, we continue to expand in and then the second area really isn't a world, but it's it really speaks to the concept of trends and I would tell you, Matt we've gotten much better at identifying trends and then.

Racing to get them.

Speed to market much better than we were even when the spinners happened in 2017, which we were one of the first then too but you know.

The examples of.

Poppers and squish in century.

Are all great ones, where we're one of the leading retailers to get those into our stores.

First hand for our customers. So those are just a couple of areas on the product side.

The other one you talked about was.

New customer acquisition.

And that's an area that.

We are really putting some resources into we now have <unk>.

Throughout our entire fleet.

The best part about that feature Matt is that we will be able to now really track and understand.

At the individual rather than specifically, how many transactions we have of whether we're attracting new customers are not attracting new customers. So more to come on that but I think that's it.

A really good opportunity and then your big picture was.

How do we accelerate market share and what I would tell you for.

For five below its all about driving growth, we have multiple levers to pull and each one of those levers kind of fuels. The momentum in the couple of key ones I would call out for you Matt New stores. It remains a growth engine you can tell we completed 170 for this year.

We will get together with all of you in January at ICR and talk about our plans for next year, but you Shouldnt expect our growth engine around new stores to slowdown.

We continue to innovate just.

Just in the last four years, we've had two new prototypes one we launched in 2017.

Then in 2020, we started with the <unk> beyond prototype.

Our brand awareness continues to grow and then finally I think as we've said many times on this call. We continue to reinvest in the product and that's all about keeping the quality and freshness front and center to our customer and really we now are in a position now that we have scale in that.

Gail helps us introduce new licenses, new exclusives, new collaborations and new venture so a big mouthful, there, Matt, but it's really all about.

Playing offense and driving market share and then hopefully those give you some.

Good overview on it great.

Great color best of luck.

Hey, Thanks, Matt appreciate it.

The next question is from Paul <unk> with Citi. Please go ahead.

Hey, Thanks, guys curious if you can talk about the performance of the stores that have the highest beyond assortment and then just relative to the rest of the chain and just just a follow up on Matts question I'm kind of curious if anecdotally you think that that your existing customer buying some of the higher price.

Product or if you are attracting a new customer because of the deals that you are able to offer at those higher price points.

Yes.

Thanks, Paul look on the first one about.

The performance of five beyond.

Yes.

Question, you should ask me again after we get through the holidays.

<unk> has largely been in our new stores and now it is.

A few of those stars are starting to turn new and I'm talking about the five beyond prototype we do have.

By beyond at holiday in the entire chain.

And from last year at holiday can help me on the exact figures and we'll certainly have more for you for this holiday, but any transaction that that had five beyond and it was about double the rate doubled.

Yes.

Well Walter right, so you're clearly seeing customers that come in our stores.

Spend more money if they have a five beyond item in their transaction and then as I just talked to or answering matts question about <unk>, that's really going to help us start to understand.

As Joel new to buy below as Paul knew to buy below or was that an existing customer so.

That all went in start in the fourth quarter here and we will start to track that.

Every quarter and it will really help us track specific customers and whether they're new we do know.

We do marketing surveys every quarter.

And we do know, we're attracting new customers, but that's kind of remember that self reported by the customer and this will actually give us actual customer data.

Hopefully that answers your question Paul Yes, you bet yeah. Thank you good luck.

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

Hey, guys. So two quick things.

Number one demand. This is obviously good so.

Step up in marketing and store hours.

Is that when you think about that driving incremental demand.

Demand.

It will it will do that.

Encompass in the 2% to 4% right.

Because I guess.

You don't have to do that and then secondly.

When you think about share of wallet.

Now on.

Embracing a loyalty program.

And being able to do more personalised offers right to your customers.

Yep.

I I.

On demand I mean, clearly third quarter John was <unk>.

Huge demand.

Yes.

And then here as we go into fourth quarter.

Two to four comp is.

On top of last years.

Almost 15 comp just a reminder, as Ken said, we expect the holiday comp to be higher than that as we're up against that January stim.

Stimulus so.

We feel really good about that that piece of it so and then finally on share of wallet.

And I just mentioned.

John in terms of hours their exact almost identical Q4 year over year, So really no change there.

On share of wallet.

<unk> was the next key step, we really needed before we could consider.

Our loyalty program and.

I think we got.

But rightfully distracted with Covid and supply chain and.

That kind of work had to take a back seat.

Making sure we kept the business stabilized I think as we've gotten.

Over some of these macro issues, we can now turn our attention back to to that program.

But listen we're in a fortunate spot that what really drives our our business John is that differentiated shopping experience with exceptional value and so that will be our first pass will go down but look I think loyalty won't happen next year, but it is something we will start to bring back towards the beginning.

In front of the burner to start working on again.

Thank you.

You bet Jon Thanks.

The next question is from Simeon Gutman with Morgan Stanley. Please go ahead.

Hey, everyone nice quarter.

My questions I think are more for Ken I wanted to ask how much was the GM impact from the movement of some of the receipts from Q3 to Q4.

I guess, how much of that was expected or was that because of supply chain issues. And then can you also speak to freight in and of itself how that impact played out versus how you expected and then tying this all together and Ken I Hope you see this is all really one question is that.

Sales do surprise positive in the fourth quarter relative to what you've just set up we should then see torque both in the gross margin given these higher costs and in the SG&A line just wanted to confirm that.

Okay. Thanks, Simeon I think there are about 15 questions in there but.

I think the first one.

You threw out was around.

Supply chain.

And the changes there and kind of the movement of the inventory from Q3 into Q4.

And obviously that was not expected as we provided the guidance at the beginning.

The third quarter.

But as events unfolded throughout the quarter, there was a shift towards from the from kind of the end of Q3 into Q4, but I also mentioned, we feel really good about the position of the inventory going into the holiday season that it just came in earlier in Q4.

And we've got the majority in with US now to be able to fuel those sales for Q4.

In terms of the magnitude of that.

You can you can look at it really of what took place in Q3, because its pretty similar as it moves from Q3 into Q4.

If you looked at the we had about 160 basis points.

Leverage in gross margin in Q3 about a third of that was related to the benefit from distribution.

<unk> distribution expenses that would be shifting into.

Into Q4.

And then your question on outperformance versus the guide.

I don't see anything.

Out in front of us here that would not prevent us.

From having some flow through obviously, if we outperform from a sales perspective in other words I don't see any other.

Impact with outperformance in sales that would drive higher expenses. So we should achieve a flow through.

Thank you Richard.

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

Good evening. Thanks, a lot for taking my question, so youre going to be on pace to have average store volumes in the $2 4 million dollar range. This year.

If you had to guess how much of that volume do you think came from stimulus how much came from trend.

And is this a reasonable base from which you can roll over.

Hopefully the mix.

12 to 24 months.

On a same store basis.

Yeah, Matt.

I would tie it back to the question.

Michael tie it back to the question Matt asked me.

About playing offense and.

I think it just goes back to what we're talking about about driving growth.

So if you believe the four or five things outlined and I'll repeat myself real quick here new stores.

Beyond continuing to innovate.

Brand awareness going up and then reinvesting in the product.

We obviously believe in our and that all five of those are still in their infancy.

And so as we.

Mature those five levers that drive growth. There's no reason that our average store number shouldnt Shouldnt continue to go up.

And it wasn't too long ago that that average store number was.

1618, I think when I got here.

And if you just looked at comp stores, it's over two five so.

Look.

Five levers Michael are are really what we're going to use to continue to drive the average store volume up so short answer is yes, we believe.

We can continue to grow that is it going to happen.

All quarters equally and smooth absolutely not right.

There will there will be some times when you're up against the height of a trend, but just like in spinners. When we came around the corner on that because we attracted new customers. It helped us lap that positively and I think this quarter is an outstanding example of we were up against double digit comp quarter end.

Actually produced double digit comps two years in a row so.

It won't be smooth Michael but.

We're just really at the beginning honestly in terms of driving.

Average store sales performance.

Thank you and good luck with the rest of the holiday.

Thanks, Michael you to stay warm.

The next question is from Charles Grom with Gordon Haskett. Please go ahead, hey, thanks.

Great quarter. My question was on self checkout.

If you could speak to how it's helping from a labor perspective.

That is helpful from a from a sales throughput perspective, particularly during the months of November and then also from a customer engagement perspective.

Yeah, Hey, Great question, Chuck and obviously, the fact that we added a 100 more than in Q3, when we only opened 50, new 52 new stores.

Look.

We always knew it would have a labor component to it but it's really the efficiency for the customer.

In Q4, specifically.

The benefit is sent book many of you that have been following us for a long time, we've talked about the lines. We have in our stores at Q4, and I think last year was a huge unlock for us.

That ACO really honestly eliminates those lines.

That's probably.

It adds to the satisfaction level that the customers have.

<unk>.

It certainly helps us on the labor side, because we've kind of always have opened nine registers.

Now look we call it ACO for a reason assisted self checkout because look there are some customers that just want help checking out and we lean in hard to.

To help them.

It's really easy we're not a grocery store, where there's 50 items in a basket.

I think what we've landed on is it is really the answer for five below and you should expect to see us continue to grow the percentage of stores that have ACO.

Great. Thank you.

Hey, Thanks Chuck.

The next question is from Karen short with Barclays. Please go ahead.

Hi, Thank you very much and great quarter.

Thanks, Karen I, just want to ask a little bit about freight can you just give me some give us some color in terms of where your contracted even through 2023, and then maybe some color on what the 22 contracted rate is versus 'twenty, one and what the 23 rate is versus 'twenty, two and I guess a follow on to.

That is.

What would that mean generally for pricing architecture in terms of raising prices obviously in light of the recent announcement of another competitor raising prices across the board.

[laughter].

Look.

Hopefully you can understand Karen for competitive reasons I can't get into the specifics on the rate, but I can tell you.

We continue to not play in the spot market.

It's a very small percentage of our freight that goes through the spot market.

The teams have always been proactive on.

Locking in rates I mean, we had this year's rates locked in even before 2021 started and I think the biggest change we've made is.

We've locked in for multi year and so while the rate is going up.

I can tell you that.

Certainly what we hear from from the industry.

We're well below what the industry is paying for it and I look part of that I had talked a little bit earlier about scale and this is the advantage of us growing at such rapid rates.

These carry has got to be careful of.

Sure.

Excluding us.

No because at some point in time, its going to level back off and.

They want us as a customer and so.

They've.

Been great partners, one of the best they've hit their commitments to us where we're getting the freight we expected hasn't been easy, but it's it's been a good year working through a really tight situation there but.

Hopefully gives you some.

Colored commentary on freight and you can tell by the by the results can yes.

Yes, Karen and the other thing too and I think I'd mentioned it on the.

Our second quarter call that we had expected the impact of these freights net to be just in the tens of basis points. Because there are some other things we're doing along with what Joe mentioned in terms of locking up rates getting those commitments going out a little bit longer term and getting favorable rates given given our scale. There's other things we're doing internally here.

Starting.

Looking at truck fleet.

Truck efficiency, and let's not forget about the distribution centers.

We mentioned that we opened another one in the quarter in Arizona. Another one coming on in Indiana next year that helps to reduce the stem miles to the stores I know thats not inbound freight, but thats. Another freight cost Nonetheless that comes into cost of goods sold that were going to be able to manage even better now given our centers are closer to our stores.

Great. Thanks, Karen Thank you.

Okay.

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

Hi, good afternoon.

Congrats on a great quarter.

Thanks, Brian.

A question just with respect to the.

Historically this holiday season, particularly black Friday, so the comments you've made it sounded like you were very pleased with.

With the performance in your stores on Black Friday, we are hearing from many other sources for the black Friday across retail, it's rather disappointing so.

So I guess maybe.

We think about the five below business model, one that used to feed off traffic of other retailers. Just further indication that that five below is generating its own traffic and likely better than that of other retailers and then the second question prescribed pilot and just how do we.

Put together.

The comments really upbeat comments you made towards the start of the fourth quarter. The holiday season, and then the guide for 2% to 4% comp, which would be some type of step down from the performance we had in Q3.

Yeah. Thanks, Brian.

Look as it relates to Black Friday.

We were very pleased.

I can't comment on other retailers, but I think it continues to go back to honestly. The first question I outlined with Matt on the.

The multiple levers we have to drive growth.

Black Friday, specifically, we had squish models out there early Friday morning, and that was a traffic driver for us but.

That's all about one day I think in general the start the fourth quarter, we're pleased with which leads to your second question in.

It's really hard to understand this quarter.

Given what we're going to be up against in January. So just let me remind you what Ken said in his prepared remarks, we we do expect that.

All important nine weeks to be.

Higher than that two to four guide we gave you and then I think the.

Sure.

You think about last year I think we came in the nine weeks at about 10% and then we finished the quarter at almost 14%. So it just shows you.

What an impact that stimulus had.

We'll get through that over the few weeks of January.

If that's not a big as big a headwinds as we expect then the <unk>.

It will be higher and then the last one Brian is just.

Trying to understand there is a lot of noise out there about pull forward.

And.

It remains to be seen in these next four weeks how much is pull forward if its not as much pull forward and we are driving our own traffic.

I think we will.

We will be pleasantly surprised on the quarter, but I think look having a two year stack.

That is averaging 9%.

Annually, it's 18%.

Two year stack is a pretty amazing fourth quarter for US and then the last thing I'd remind you Brian.

If you look at it in dollars rather than percent.

The Q4 growth year over over you have to go back to 2019, because Q1 or two or wonky versus 2020, but our 2021 growth over 19 on average store basis is going to be about 300000, and the guide there represents about 75000.

The quarters on a dollar basis are about the same Brian is just not the same in percentages because youre talking about a much bigger number so hopefully that helps give you some.

Some color commentary on how we thought about the quarter.

Very helpful. I appreciate it thank you.

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

Hi, guys good afternoon.

I wanted to just follow up on the Q4 gross margin. So it looks like based upon the guidance that the margin is probably going to be I don't know 100 to 150 basis points below what your sort of normal Q4 gross margin would be sort of thinking back.

Historically, I think maybe about a third of that is the shift.

So the rest of that is that just is that the freight is that the additional freight pressure and then looking out.

2022, and I know, it's still a little early here, but.

Just curious as to how you are thinking about the sustainability of the margin.

From the current year level and the puts and takes on that.

Okay.

Thanks, Ed.

On on Q4, I guess, one way to look at it and to answer your question.

I called out a 100, and we expect about 125 basis points of deleverage and total operating margin in Q4.

The overwhelming majority of that is going to come in SG&A. So a small percentage will be in <unk>.

Gross margin for Q4.

And really the entire amount of that is that shift in inventory receipts in those additional distribution center handling costs that we're going to incur in Q4. So that's really what the driver is in Q4 and kind of the breakdown between.

Gross margin and SG&A in terms of the in terms of the deleverage.

Go forward in terms of our operating margin percentages, I mean, thats something that obviously, we're going to get into as we get further on in.

We get to our fourth quarter call when we talk about that.

Our guidance for 'twenty two.

There's going to be some puts and takes in next year, obviously, the freight cost piece that we've spoken about towards the end of this year.

That could have an impact in the beginning quarters of next year, but again, we still have a ways to go we'd like to get through the holiday season, first and we will take a deeper dive into.

Into next year and be able to lay that out on our fourth quarter call.

Just give us a little more time on that.

Thank you. Thanks, that's good thank you.

The next question is from Scott <unk> with RFID capital. Please go ahead.

Hey, guys. Thanks for taking my question, so maybe a little bit of a softball here, but looking kind of stepping back what you guys just put up which was just tremendous numbers.

If you look at other companies they are struggling from labor issues or stroke from freight issues. There is massive in stock problems.

We've got a competitive change in a multi price points and other things what makes <unk>.

Below so much different than a lot of the other companies that you're.

Kind of similar to you guys. If you had to summarize it.

Well I always like softball questions Scott So look.

You bet.

I might be a little broken record.

So sure on this call yet, but I've said to you guys before.

I think whats winning in retail today.

The successful retailers today need to offer either a differentiated shopping experience.

They've got to be in the value space.

I believe we offer both to drive traffic.

There is no other <unk>.

National retail out there that is specifically.

Targeting teens, and Tweens and kits and toys R. US went out three years ago, and we do it with a great shopping experience and it's all about value. So I think that's number one.

And the second one as long as I'm here, we're going to keep investing for the future and so we're keeping the stores remodeled we're constantly updating the the prototype.

We're continuing to innovate we talked about ACO, a few questions ago, and so you put all those together Scott.

A cohesive.

Offering and the customer is noticing it and so it's amazing shop with great value.

But that's what I would tell you is really kind of been the big difference.

And then you layer in one last thing I'd tell you is what's different from its hard to believe only five years ago. Our total sales for the year was $1 billion.

We just guided to you all that we are going to a $1 billion in one quarter. So we're at that tipping point of having scale and that scale benefits certainly has helped us in the headwinds against supply chain.

It has helped us.

Really continue to reinvest in product and every other tailwind is just gets magnified for the positive so little bit of a long winded answer there Scott but.

I would just summarize that you put all those together and Thats the key differentiation for us.

Yes, I mean from my perspective, a lot of bigger companies are having much more challenges.

Many more challenges and you guys have so you're obviously executing at a higher level. So congratulations to the team I appreciate that you know what everyone down below.

Yes. Thank you.

For all those listening in I'm sure. They appreciate your comments on that.

We pride ourselves on people, we spent a lot of time talking about culture.

And.

It really has made a difference we have seen very low turnover in the last two years. So that continuity also helps as we.

To execute at a very high level, but appreciate the kind words Scott.

Hopefully that gives you some insight into how we see the business.

Thanks very much.

You bet.

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

Thanks, I'll add my congratulations.

I wanted to ask a couple of questions here five beyond.

I think you mentioned you're at 30% of your stores today with a dedicated section.

I wanted to get a sense for your timeframe that you would expect to complete that.

In all stores.

And then secondly is can you give us a sense at this point in time on the <unk>.

With that you get on the stores that have five beyond <unk>.

Versus the.

The rest of the chain.

Yes, Thanks Jeremy.

And certainly.

I appreciate answering any questions on <unk> and I think it's an area that.

We owe all of you some deeper dive on next year to give you.

Some bigger colored commentary on where we're going with it.

And.

How fast we will convert the chain.

I will tell you that we're extremely bullish about <unk> beyond its.

And about 30% of the chain today it'll be in roughly about half the chain at the end of next year.

The one thing I will tell you is look we've got a lot of feedback from the customers.

As we pivoted from playing defense to playing offense. If you remember a few years ago, we call. It 10 below and to me. That's an example planned defense. It was just about raising prices. This is about driving driving and delivering value and so what we're not going to do is rapidly expand by beyond in or not.

On <unk>.

Beyond prototype.

It was very important to our customers that we keep it separate and segregated from from the main business. So for all of you that walked in a five beyond store in a non fi beyond there are certain times of the year.

Namely holiday, where we have made an exception.

And delivered five beyond upfront, but other times, it's we're only going to buy beyond if we can develop it in a prototype remodel a store in and put it in the back. So hopefully that gives you some of that and Jeremy will certainly give you some more outlook on the long term.

As we get to our fourth quarter call.

Yes.

Alright, thank you.

Thanks for taking the question excuse me. The next question is from Anthony <unk> with loop capital markets. Please go ahead.

Thank you so much for taking my question congrats as well.

Just wanted to get a little bit more color on the.

Right down the equity investments I don't mean to nitpick I mean, it was obviously a great quarter, but I just wanted to get more color on that in terms of including what that would have been on an on an after tax basis. Because you can make the argument you should've excluded them in you would beat consensus by even more thank you.

Yeah.

Yeah. It's.

Good question.

Yes.

As we.

Look at all our investments and.

With the pandemic and some that just weren't performing at that rate.

What drove that.

The noncash write down and it largely is behind us and we will.

Look forward going forward, but it's all noncash below the line there I don't know Ken anything to add on that yes, I think Anthony you asked to ramp up after the tax side of it I mean based on the nature of the write down.

It did not have a.

Typical tax benefit from a deductibility standpoint, so the amount that was written down.

<unk>.

Above taxes, basically that full amount flow through down to EPS.

Got it that's helpful. Thank you you bet.

Thanks, Thanks Anthony.

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

Thank you operator, and thank you everyone for joining us today.

I will just standby and reinforcing a lot that was set on the call. This was truly an exceptional quarter for five below from both a results perspective as well as.

Honestly, making progress against our strategic priorities.

Continuing to listen to our customers as we kind of source.

<unk> unbelievable and new products at extreme value.

And we believe that will deliver an incredible holiday for us.

I don't want to finish by also saying, we really pride ourselves in what we're doing to get back to the communities through our annual toys for Tots Fund raiser. As an example, we are expecting to raise over $2 million. This year. So important part of who we are and what we stand for and so on that note.

Wish you all a safe happy and healthy holiday season, and encourage you to shop by below we will look forward to speaking with you all again in 2022 at the ICR conference. Thank you and have a great night.

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

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