Q1 2022 Five Below Inc Earnings Call
Good day and welcome to the five below first quarter 2022 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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I would now like to turn the conference over to Christiane Pelz, Vice President of Investor Relations. Please go ahead.
Thank you Gary good afternoon, everyone and thanks for joining us today for five <unk> first quarter 2022 financial results Conference call on today's call are Joel Anderson, President and Chief Executive Officer, and Kendall 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 the press release and our S. E C filing.
The forward looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward looking statements.
We do not have a copy of today's 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 first quarter 2022 earnings call.
When we last spoke at our Investor Day in March we unveiled our vision for future growth.
The triple double <unk>.
Characterize 2022 is a unique year within that framework.
Given the lapping of stimulus and ongoing macro issues, including record inflation the warm Ukraine.
And continued lockdowns in China.
2022 is indeed proving out to be a unique year.
The customer response to our new prototype has been overwhelmingly positive.
We remain excited about our future and are focused on execution to convert our store fleet to the new prototype.
Key initiatives related to this rollout include opening all new stores and the beyond format.
Executing store conversions, and adding new products and services to celebrate ritual and milestones to further enhance the store experience now.
Now onto the first quarter.
The first quarter was challenging from a sales perspective, as we had to anniversary the impact of stimulus.
Amid the uncertain macro environment.
Sales in April came in softer than expected, we effectively managed costs and delivered solid bottom line results in line with expectations.
Total sales in the first quarter grew 7% over last year to 640 million welcomed.
While comparable sales decreased three 6% driven.
Driven by a decline in both basket and transactions.
We delivered diluted earnings per share of 59 cents.
Driven by strong cost discipline.
A key growth driver new store growth continued with 35, new stores opened across 23 states.
The new store in Albuquerque, New Mexico ranked in the top 25 spring Grand openings of all time other.
Other highlights of the first quarter include opening our 200th store in Union Square Manhattan and to other stores in the New York boroughs as well as a new store in downtown Chicago.
During the first quarter. We also continued to make progress across our strategic initiatives, our product experience and supply chain.
On product.
The key distinguishing features of our model.
Our team's ability to recognize trends and capitalize on them quickly.
The flexibility of our model with our eight worlds and ability to quickly shift.
That's what makes the Buffalo concept so unique during.
During the quarter, our merchant stayed on top of the Swiss small trends. We spoke about previously sourcing New addition, squished miles for our popular squished Sunday events.
Which our store marketing teams featured on social media and in store marketing campaigns.
The strong performance of the squished trend drove outperformance in the sports World.
While our candy world benefited from novelty candy snacks and drinks.
<unk> also continues to be a strong category and the room world.
Turning to our second initiative experience as I outlined in my opening comments. We are excited about the latest prototype unveiled at our Investor day.
This newest model features a five beyond destination.
Our store within a store concept, which showcases re imagine tech and room world. While also doubling the skus dedicated to buy beyond.
As we mentioned at the Investor Day, we are planning on converting over 750 of our current stores into this latest format over the next four years.
Our mission is to bring by beyond everywhere in 2022 we're on track to convert over 200 stores to the new beyond prototype.
Regarding the digital experience, we are focused on developing deeper connections with our customers and communities.
Better engaging our carew.
Through more effective digital marketing, we're growing brand awareness and are gathering data and our customers to better understand and market to them.
We are also focused on enhancing the customer experience even further.
Letting them experience by below and the way they want to.
That N.
We are working on a bulbous rollout this summer.
Moving on to our third strategic priority supply chain.
Call that we spoke in detail about the theme of controlling our destiny on Investor day.
This area continues to be challenging given the impacts of Lockdowns in China. Our teams remain nimble putting us in a great position to flow the majority of our expected product into the ports distribution centers and our stores.
This is a great example of how focused we have been on execution.
I am extremely proud of the progress we made.
We were proactive in our approach from securing additional container capacity to adding to our truck fleet at the ship centers, we have improved our inventory in stock position significantly since the beginning of the year.
And have the freshest inventory since I joined five below.
This sets us up nicely for the second half and allows us to take advantage of Closeouts and onetime special buys that have already begun to emerge.
As it relates to our distribution infrastructure.
We're excited to officially open the Indiana ship Center this summer to further gain efficiencies and speed to our stores and ultimately our customers.
As a reminder, after we opened this distribution center, which will enable us to service approximately 90% of our stores within one day.
We will have completed our five node network.
We will then take a pause from opening distribution centers for a couple of years.
The entire supply chain team has made great progress.
Set us up to serve incredible value to our customers this upcoming holiday season.
In summary, we remain focused on our growth strategies with disciplined investments in people systems and infrastructure to support the execution of our future growth.
Growth is at the center of our long term strategy and throughout the organization. Our attention is solely focused on execution to deliver our triple double strategy.
We now have a full line of sight on delivering our goal of approximately 160 stores in 2022.
And have made significant traction on our 2023 goal of opening over 200 stores for the first time ever.
Our scale continues to benefit us.
And our customers as we continually reinvest in wild products and provide the fun experience they expect from us.
We are also poised to take advantage of dislocations in the marketplace <unk>.
Including merchandise and real estate.
And we will aggressively pursue the opportunities we are seeing which.
Which we expect to grow given the current environment.
While the pressures facing some of our customers due to the reduction in stimulus and the current inflationary environment.
Weigh on our near term results here.
History has taught us that consumers will seek out value even more when times are tough.
And nobody is better positioned to deliver fun.
Standing values.
And five below.
With that I will turn it over to Ken to provide some more details on the financials Ken.
Thanks, Joel and good afternoon, everyone.
I will begin my remarks with a review of our first quarter results and then provide guidance for the second quarter and the full year.
As Joel said, the first quarter was more challenging in April than we expected.
As we cycle the impact of large stimulus payments amid an uncertain macro environment, while consumers experienced record high inflation.
Our sales for the first quarter of 2022 increased 7% to $639 6 million.
From $597 $8 million reported in the first quarter of 2021.
As we have said on previous earnings calls, we believe that a meaningful measure of our performance in the near term is to compare our results to pre pandemic results from fiscal 2019.
Given the outsized stimulus impact in 2021, and the impact of Covid in.
In 2020.
Sales for the comparable set of stores open in both the first quarter of 2019, and the first quarter of 2022 increased 17%.
Or five 4% on a three year compound annual growth rate.
Comparable sales decreased by three 6% versus the first quarter of 2021.
The decrease in comp ticket of one 9% and a comp transaction decrease of one 7%.
As we have seen since reopening our stores in 2020, our average ticket continues to be strong increasing over 20% when compared to 2019.
We opened 35, new stores across 23 states in the first quarter compared to 68, new stores opened in the first quarter last year.
We ended the quarter with 225 stores, an increase of 138 stores or 13%.
Versus 1087 stores at the end of the first quarter of 2021.
In line with our guidance operating margin was six 6%, which declined approximately 400 basis points versus the first quarter of 2021.
With approximately one third of the decline in gross margin and the remainder in SG&A expenses.
As a comparison to a pre pandemic period. These operating margin results were in line with the first quarter of 2019.
Gross profit for the first quarter of 2022 was $206 $8 million versus $200 9 million in the first quarter of 2021.
As expected gross margin decreased by approximately 130 basis points to 32, 3%.
Driven primarily by fixed cost deleverage on the negative comp.
As a percentage of sales SG&A expenses for the first quarter of 2022 increased approximately 280 basis points to 25, 7%.
As expected SG&A expenses as a percent of sales were higher than last year, driven primarily by fixed cost deleverage higher store wages and increased marketing.
Our effective tax rate for the first quarter of 2022 was 22, 3% compared to 29% in the first quarter of 2021.
Net income for the first quarter of 2022 was $32 $7 million versus net income of $49 $6 million last year.
Earnings per diluted share for the first quarter was 59.
Compared to last year's earnings per diluted share of <unk> 88.
We had a share based accounting benefit of approximately <unk> <unk> in the first quarter this year compared to a benefit of approximately <unk> <unk> in the first quarter last year.
Now looking to our balance sheet, we ended the first quarter with $320 million in cash cash equivalents and investments and no debt.
Including nothing outstanding on our $225 million line of credit.
We repurchased approximately 247000 shares in the first quarter of fiscal 2022 at a cost of approximately $40 million.
Inventory at the end of the first quarter was $504 million as compared to $327 million at the end of the first quarter last year.
Average inventory on a per store basis increased approximately 37% versus the first quarter last year.
Average total units of inventory on a per store basis increased approximately 20% year over year.
Accelerated merchandise receipts and higher inbound freight costs drove the year over year increase.
As Joe previously mentioned, we are pleased with the makeup and level of our inventory and are well positioned for our summer selling season.
We remain disciplined and flexible in our inventory purchasing so that we can adjust the customer demand and preferences chase trends and be opportunistic in a dynamic supply chain environment.
Now onto guidance.
As we stated at our Investor Day in March we expected 2022 to be a unique year for several reasons.
First lapping significant government stimulus.
Second the uncertain environment with residual pandemic impacts primarily on supply chains and store openings.
Third ongoing inflationary pressures, especially fuel costs.
And fourth cycling, a very strong year of multiple merchandise trends.
Given our Q1 performance in Q2 sales trends to date, we believe it is prudent to adjust our outlook.
Our guidance for the second quarter includes opening approximately 30 new stores.
Sales of 675 million to $695 million.
Comps of between negative two to negative 5%.
A 25% effective tax rate.
Net income between $41 million and $48 million with diluted EPS of <unk> 74 to 86.
At the midpoint of this guidance, we expect operating margin to be down approximately 450 basis points over last year.
Driven by deleverage in both gross profit and SG&A expenses.
We had originally planned for our second quarter operating margin decline that moderated from first quarter levels due primarily to an anniversaried freight costs higher store wages and increased marketing expenses.
However, due to fixed cost deleverage on the lower sales outlook, we now expect a larger operating margin decline than in the first quarter.
Our current outlook assumes lower sales than originally planned for Q3, and an operating margin decline year over year of approximately 350 basis points due primarily to fixed cost deleverage higher store expenses and increased marketing spend.
As we look out further to the fourth quarter, our current outlook assumes that more consumers overall at our customer specifically, we'll be looking for better value.
We have seen in the past during difficult economic periods.
For Q4, we currently expect an improvement in year over year sales trends from Q2 and Q3 levels.
And we still expect significant operating leverage.
We believe several factors will drive a sales improvement in Q4.
Including improved year over year inventory position and merchandize in stocks.
Expanded five beyond assortment and penetration of store count.
And increased and more effective marketing.
For the full year of fiscal 2022, we now expect sales of 3.04 billion to $3 one $2 billion.
Which is a reduction of approximately 5% versus our previous full year guidance.
This sales range is an increase of approximately 66% versus fiscal 2019, total sales or an approximate 19% compound annual growth rate.
For fiscal 2022, we also expect comps in the range of flat to negative 2%.
Which assumes an approximate 17% increase for the same subset of stores opened in 2019, and 2022, which is in line with a similar comparison I mentioned for our first quarter of 2022 results.
We also expect an effective tax rate of 25%.
Net income in the range of 271 million to $293 million.
And diluted EPS of $4 85 to $5 24.
We expect operating margin of about 12, 2% at the midpoint of guidance with a decline versus last year, driven primarily by deleverage on fixed costs and higher SG&A expenses from a more normalized marketing spend.
For fiscal 2022, we plan to spend approximately $225 million in gross capex.
Excluding tenant allowances, primarily for opening approximately 160 new stores.
<unk> over 200 conversions to the new five beyond prototype.
Opening a new distribution center in Indiana, and investing in systems and infrastructure.
We still plan to open approximately 60% of new stores in the second half of the year, including approximately 20 openings in January .
And over the next two years, we still plan to open between 375 and 400 new stores.
In closing, we remain committed to delivering an amazing experience and exceptional value for our customers something that is even more important now than ever before.
And we will continue to manage our cost structure and spend with great discipline, while staying focused on our long term vision in sales and profitability targets.
For other details related to our results. Please refer to our earnings press release.
That concludes our remarks and with that I'll turn it over to the operator to begin Q&A operator.
We will now begin the question and answer session to.
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Our first question is from Matthew boss with JP Morgan. Please go ahead.
Great. Thanks, So Joel maybe could you elaborate on the softer than expected April across your world have you seen any change in consumer behavior. So far in May or June and then for Ken are you embedding any improvement in the macro backdrop into this revised outlook or maybe could you help walk through the.
Underlying comp build for the back half of the year relative to trends in the business that youre seeing today.
Yes, Matt I mean, obviously for the first quarter, we we guided zero to two and we were with you guys pretty late in March so yes.
For us to come in at.
Three and a half ish negative comp.
The April results were obviously softer than what we expected.
I would also just tell you that.
Like many retailers. This is an extremely hard time to predict exactly what's going to happen is we're in the height of.
The stimulus from 2021 and it is.
While you know when the dollars were distributed.
Really hard to tell exactly when they were used you know honestly, we probably.
Focus a little too closely to when they were distributed.
Didn't give enough tailwind.
Into April and May from the stimulus I think the other thing in May was there was a lot more tax return dollars in May last year. Then then there was this year and we didn't factor that into it. So I think the the the <unk>.
Right.
The biggest headwinds are behind.
Behind us in that one nine trillion.
The emulous.
But you know the consumer continues to face a lot of hurdles. Most recently being the the formula shortage, which you know for families. It's got to be something that's front and center on their mind.
Et cetera et cetera. So I think you can tell by our our guy that were.
Expecting Q2 relatively in line with Q1 and then.
I think as the consumer gets out of their frozen mode, we'll start to seek out value and Thats, where we start to do better.
And then Matt your question around the <unk>.
The assumptions I guess in our guide her.
Outlook around the macro backdrop I mean as Joe mentioned, we're we're really looking at the current environment at this point and I think one of the other pieces, we add into it is the comment around customers returning to value and really going after value in these difficult periods. So we do expect that.
To kick in we have not seen that full benefit yet up to this point.
When you translate that into the you mentioned comps when you when you look at comps obviously with the guide.
Negative comp for the first half of the year and then given the guide that we provided for the full year of a flat to a minus two I would assume positive comps in the back half of the year.
We feel really good about the fourth quarter, given some of the things that I called out some of those factors, especially inventory positioning and in stocks and five beyond.
And our outlook right now assumes that we see.
The what we're seeing in Q1, and Q2 kind of moderating sometime in Q3 and then.
Much bigger benefits in Q4.
Thanks, Matt.
The next question is from Simeon Gutman with Morgan Stanley . Please go ahead.
Hey, guys.
Let me go back to your ability to drive.
Okay.
I'm an aspirational somewhat.
Retailer how to use voice traffic.
Okay.
Simeon I'm.
Having a hard time, you're asking how do we drive traffic as a discretionary retailer.
Yes, so when you think any facts that you.
Lean in June where you changed given that the backdrop.
All of them.
Well I mean look I think first of all we we certainly look back to last time, there was a recession in OE and that was a pretty successful time for for five I wasn't here during that time I was at Walmart at that time, we saw the same thing at Walmart.
And I think for us.
That's why so many of our remarks and comments we're on value.
And the opportunities we are starting to see around one time.
<unk> and special buys in that type of thing and you know and I think as we especially get closer to holiday the back half of the year.
We're going to see a lot of customers start their trip at five rather than finish their trip.
Because they know the value that they're going to find there and so.
We start to move as we get into the back half of the year from a discretionary retailers into our needs retailer is the history would tell us certainly from her days days at toys R us as well as the last place the consumer will cut is for their kids and so we see no reason that doesn't change this year.
And.
That is why we are so focused on the value message as we look ahead to the second half of the year.
Thanks Simeon.
And the next question is from John <unk> with Guggenheim. Please go ahead.
So Joel two related questions right. So how aggressive do you want to be on Closeouts.
What categories and price points.
And then secondly, maybe just remind us your philosophy on markdowns versus pack away.
Yeah.
It's a good question both of them.
I think pathway is something.
You really have to balance I'm, taking your second question the second part of that first.
We have a few years ago, where we're too heavily invested in pathways I think that worked really well when we were just a small regional player.
But as you've become national that becomes a really complex thing.
So.
I don't expect us to see Mac pathways, becoming a big change in our philosophy going forward and then you are.
Yeah. Your second part of that is how aggressive on on markdowns.
Im sorry on one time buys look.
If if they presented to us in any category and it relates to our core customer will be in the market buying and we're starting to see those opportunities present himself that's been a pretty dry area for last two years.
But we're.
Michael has given full carte blanche to be him and the merchants to be chasing that that product in across all eight worlds.
We expect our inventory to be very clean by the end of the year. This.
This is product itself extremely well at holiday.
Got a good track record in how to manage that but we'll be aggressive.
All eight worlds.
Thank you thanks, John Yep.
The next question is from Paul issues with Citi. Please go ahead.
Hey, Joe can you just frame the close out from special buys like what percent of your sales are typically represent versus where you think you might be going this year next year and then you mentioned capitalizing on some opportunities in real estate I was curious if you could just dig into that a little bit in terms of what you're seeing there. Thanks.
Yeah look.
Regardless of how you look at Closeouts and special buys it it is a very small piece of our business.
Was much much bigger when we were a small chain, but we can't rely on closeouts to drive our business.
Sure.
They're not going to be sitting on 2040 60000 units of an item that we can constantly uses a flow of goods, having said that Paul.
They really serve as traffic drivers and so well.
Well it will still be less than double digits of our total we can use those in orange and emails and social media and really try and use that to lure customers into our store with incredible value. So its more opportunistic and it's more about.
We be able to drive traffic, we can use them for online exclusives.
But it's really a nice piece of our strategy, but it doesn't make up the overwhelming piece of our business.
And then as far as real estate goes.
You know I I.
As you've listened to some of the announcements of several retailers.
We're just coming back from ICSC.
A couple of weeks ago, which is in Vegas, but probably the biggest re sales real estate show of the year, which really hasnt occurred in the last couple of years because of Covid.
Our team came back energized the landlords are talking to us Dave the landlords are getting excited and ready to get back to growth. They are starting to see some some of their bottlenecks start to loosen up and so I think that it's.
<unk> really been a sea change from where we were at the beginning of the year, where everything was kind of backing up into the back half of this year and into next year. So we pretty much are done with all the deals for this year and that's why as my prepared remarks said.
We've got great line of sight of the 160 for this year and next year is really starting to shape up with the added.
Commentary.
The kind of the tenor of the meeting.
Out in Las Vegas, a couple of weeks ago.
Draw those rates coming in better than you anticipated at the beginning of the year.
It's less in rate change.
And clearly if we went into the CND should centers, we could easily take rates down, but we're still staying committed to the AMB centers and it's just more about the opportunity opportunities presenting themselves as opposed to at least at this point of change in rate.
Got it alright, thanks, Bob.
The next question is from Brian Nagel with Oppenheimer. Please go ahead.
Hi, good afternoon.
She is my question.
If you look at the sales performance during the quarter and particularly in the month of April you're falling short of a modest with short of the guidance.
Under the underlying driver is that more a function of just lapping this really difficult comparison last year, where you see within your business. Some signs of a consumer they're actually pulling back and enforcing that Daryl maybe you could help us understand what that would be.
Yeah, Brian it's kind of a combination of both and I think because they both hit at the exact same time.
It's really tough to tease out, which one weighs more than the other.
But clearly the.
Consumer and you know what.
We can measure that because our lower household income markets.
Not performing as well as our higher income house market. So you know that clearly those dollars have dried up from last year's stimulus.
Customers have less discretionary income and therefore, that's where we've seen a tightening in sales.
But kind of separating those two out.
Because they happened at the same time, it's hard to weight one over the other but we are definitely seeing both.
Got it. Thank you thanks, Brian you bet.
The next question is from Karen short with Barclays. Please go ahead.
Hi, Thanks, very much I just wanted to go back to guidance for the second half more specifically.
I mean, obviously I appreciate that things are very volatile right now, but when you look at your second half guidance with respect to and I'm looking at this on a three year basis pets treated ourselves by of the three year comps to your EBIT growth and margin expansion implied it just seems that there is.
You know you really need to see meaningful strength in the second half that doesn't necessarily seem realistic and I wanted so I wanted to tie that into the fact that I know you feel good about it your inventory, but obviously inventories are up quite a bit.
Year over year and the question is like what's the rest of that you really have to have much greater markdowns in light of the ongoing weakness in the consumer.
Okay.
Yeah. Thanks, Karen.
There is obviously different ways to look at the numbers now given.
The challenge in comparing things year over year right with the.
Pandemic and other challenges there so one way to look at it and I'll put out there is to go back again as we did for our Q1 results is go back and look at 2019.
One way you could do it is to go back and look at the average sales per store in 2019.
Which again was a more normalized year pre pandemic and when you look at that you'll notice that the increase.
On a quarterly basis.
As relatively consistent when you look at the first quarter and the third and fourth quarter Theres, a little bit of a shortfall in the second quarter again based on the current environment and what we're seeing so it really kind of gets back to first quarter levels.
We saw so when you look at it that way and I think when you look at it from a geometric stack basis also you see that same trend where the back half of the year is getting back in line with with the first quarter. So you don't see it as much as the.
I guess, a hockey stick that youre that youre mentioning there.
In fact, all you have to do is believe will perform at the exact same levels as Q1, so I'm not sure. What numbers you are looking at but that's kind of how we thought about it in terms of.
The back half versus first quarter.
And just the inventory.
Risk.
You know what.
And maybe are bad we should probably talk about it at the at the Investor day, but I mean this it was part of our plan to be up significantly year over year.
Some of it was about just pulling forward I mean, we.
We did not have the inventory levels. We wanted in Q4 last year and we wanted to ensure we were ready for summer here a piece of it is inflation costs are.
Our inventory levels include all the.
Added shipping costs et cetera, that's all in it that wasn't there a year ago. So.
As it.
Is it up a little bit more because of the sales miss but salesmen's isn't that much isn't that far materially off of what we guided so few percent, but overall, there's really no concern from our and in fact I'll tell you what is the cleanest inventory I've had since I've been here in terms of newness.
That should really bode well for the customer.
Thank you alright.
Alright, Thanks, Karen Thanks, Karen.
Next question is from Edward Kelly with Wells Fargo. Please go ahead.
Yes, hi, guys good afternoon.
So just additional sort of color one.
Got you. Thanks, dragging the most recent slowdown and what I mean by that is like how.
How have the trend rate trend right product <unk> like how has that been performing has that slowed at all I know you're taking some price hike aspect for the inflation has elasticity on that pricing changed much and then just one more on Q4 I know you've had trade down in the past like in Hawaii.
But that was also a big stimulus environment, which we probably won't say.
Just curious is there other things that have you're optimistic about Q4 like product pipeline into holiday, maybe you could speak to that.
Okay.
Yes.
If you go back to my prepared remarks, I mean, squishes continued to be very strong for us.
We are up against poppers from last year, which is that that trend is pretty much over.
P. S. Anyone worried about markdowns were very very clean on on that.
But so I think squishes and is a great example of it.
As we fine.
<unk> trends.
Customers still buying those trends lie.
Licenses has been a nonexistent trend for a couple of years now.
We see that as an area that could potentially start to emerge with finally, having movies out there again, so we will chase trend as much as we'll chase value and then for Q4.
Theres just a we'll have over 200 new stores in the prototype we've got.
A lessening of stimulus impact we've got everything I talked about earlier, how we become a need store instead of a one store in Q4, so all of those.
And really lean towards a positive outlook on the back half of the year.
As we kind of get through the worst of the headwinds from from prior years Ken.
Add a little bit more on the Q4 I mean, we mentioned in the prepared remarks to the better inventory position than we were last year. I mean, we all know about the supply chain challenges last year and again.
The supply chain teams and the buying teams have just done a great job in terms of.
The right amount of inventory and what we need to have and then also the marketing right. At this we're getting better at our marketing more effective in our marketing, especially on the increased digital so you put those into the mix.
That's why you're hearing those comments that we're making around.
The potential for for Q4 and holiday.
Alright, hey, thanks, much Ed take care. Thanks, Ed.
The next question is from Michael Lasser with UBS. Please go ahead.
Good evening. Thanks, a lot for taking my question. If you do a minus three to minus four comp for the full year rather than the flat.
Two for the full year would you look to more or less than 50 cents.
Yes, rich to your full guidance full year guidance in light of the dealer.
Deleverage on negative comps you would experience in the back half thanks a lot.
Okay.
So so Michael you're asking okay. If we do a minus three to four weeks at a flat too yes.
I have the exact figures here from an EPS impact, but it's not going to be could you. If you mentioned a <unk> 50 impact is there.
I would be saying would it be more or less in a 50 cent impact.
Yes.
This is the overall takeaway from the earnings release for folks who set the outlook for the back half of the year is optimistic. So if you could frame a downside case scenario for earnings for the year in light of that viewpoint it would be helpful.
Yes, I think Michael one of the.
One of the ways to look at that.
As you listen to us today.
I mean, we're being impacted by things like fuel surcharges and increased fuel costs that other retailers are but you didn't hear us really talk about that in terms of the total impact for the year. So what's going on embedded in our operations and results is cost mitigation strategies that we're working on it's one of the thing.
You've known us for a long time. This is where Joel has mentioned, we're a nimble organization that we respond to these things. So if you look at the assumed a reduction in sales from our prior guidance for the back half of the year. You are right you would probably assume a larger negative flow through to earnings.
But all that we're doing internally here, it's pretty significant.
In terms of cost mitigation strategies and other cost efficiencies that we're using to offset that.
That probably helps.
Frame up that back half that youre seeing that looks.
It looks a little bit better when you're.
And then what you would expect given the sales changed from the last example of real time first quarter.
Yes, it's roughly two percentage points of Tom Hello, the Guy.
And yet earnings came in right at the midpoint so yes.
I think we've got flexibility on our side to really manage the business and I certainly wouldn't forecast that big of a decline in earnings.
Okay.
But we're doing that without putting the math together on Michael but hopefully that gives you. Some some outlook on how we're thinking about.
Yes.
Michael Thanks.
Sure.
Your next question is from Chuck Grom with Gordon Haskett. Please go ahead.
Hi, I thought Joel I mean, when you unpack them evaluate the world keep countless I still don't understand what is it frequency that change towards the basket size. You may you talked about your basket being our ticket being 20% higher than in 2019. So has the frequency was a basket and then it sounds like may and into June has been soft which is.
Frankly countered to what a lot of retailers have said, so I guess I'm curious why you think that's the case for five below.
Yeah.
On the first one it's roughly 50 50 on that and as for May honor.
Honestly, we didn't give enough credit to.
Lapping the Popper peak Popper trends peak from last year in May that was our biggest.
And much bigger than spinners were back in 2017, and I think that combined with.
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The.
At the end of the stimulus and the.
Yeah.
Everything from Formula Sherry, So all the other things going on that we've been talking about it. We just we didn't put enough in the forecasting may correctly there.
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As you can tell.
By our conversation here, we see the back half of this this quarter.
We're already starting to improve but it was mostly driven by a really soft may relative to our initial forecast.
Okay. Thank you.
Thanks Chuck.
The next question is from Joe Feldman with Telsey Advisory. Please go ahead.
Yeah.
Yes.
Thanks for taking the question guys.
Wanted to ask you.
Dan I may have missed this you said it earlier, but like.
Did you start to see any trade down in the quarter and I know you.
Whether it's customers that you hadn't seen before coming in or maybe even kids starting to buy fewer items or.
I don't know a lower priced items.
The basket.
Yeah, No look we have yet to see a meaningful.
Signal of the trade down happening.
That's not too unusual in the beginning of a tough period of time.
So at this point in time, Joe we haven't seen it.
As far as you know ticket goes.
A little softening in the.
The number of units and that's more than offset by the.
The AUR as we have taken prices up but.
Overall, no we haven't seen any.
Got it thanks guys.
Thanks, Joe.
Question is from Jason Haas with Bank of America. Please go ahead.
Hey, good afternoon. Thanks for taking my question. So you had mentioned that.
Sure.
Stores in lower income markets underperforming I'm curious what you've seen in regards to the reception to five beyond in those markets and just broader question about how you feel about rolling out there's probably a higher price point items in an environment, where the customers can be a little bit more cash constrained.
Yeah.
As far as five beyond goes.
We haven't seen.
Any.
Differential there.
Because it's all about value I mean, it's an incredible value that that we deliver in <unk> beyond that.
My comments were largely about the overall economy and.
Our.
Negative comps are being driven more by our.
Low household income stores versus a higher household income stores, but no concern and have not seen any on the buy beyond I know that might sound counterintuitive, but what they they appreciate the extreme value.
Our customer notices.
That's good to hear thank you.
Youre welcome. Thanks.
The next question is from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.
Thanks, and I wanted to see if I could ask maybe it's a totally different question.
Ken.
The China tariffs.
That have existed.
Inbound from China over the last few years had an impact that hasn't been talked about a lot, but it's in the news.
In the here and now given that it sounds like we're moving in a direction, where a bunch of tariffs are going to be removed. So I wanted to understand one what percentage of your inventory is subject to tariffs.
Day, two if all terrorists were removed on the products that you're importing.
Would the potential.
Margin benefit would be for the for the firm on that on a total basis.
Okay.
Jeremy Thanks for.
For that question, yes, I haven't thought about tariffs for a while.
Like that's been years, but.
There is just to start off Theres nothing assumed in our guidance that.
For any reduction or change in tariffs, we're assuming that they would be at the same level.
I haven't heard or read or anything yet of any definitive action that's going to be taken.
They were primarily on.
A lot of it was on kind of tech product for the most part.
In terms of the percentage that were impacted it was probably between about 20% and 25%.
Of our imports.
That were impacted for the tariffs so I apologize I haven't done any math on if those were reversed weather and partially or in full what impact they would have.
On the business or operations overall, just keep in mind also.
Jeremy if that does get reverse which we'd appreciate it will take that.
Yes.
All our exists unless they do it retroactively.
We still got to move through our all our existing goods before.
You'll start to feel the positive impact of that but.
It's roughly in that 2025% range.
Obviously important endpoint, yes, a much much smaller portion of total totally yes, yes, yes, yes.
Yeah, I think it's more thankful 2023.
Yeah, Oh, yeah, absolutely, that's where the focus would be on that but we take it to be a nice tailwind.
Alright, Thanks, Matt Thanks, Jeremy.
The next question is from Scot Ciccarelli with Truest. Please go ahead.
Oh, Hey, this is Joe on for Scott I, just had two quick questions. The first just can you provide a breakdown on the lower income versus higher income consumer base that you have just because of the impact that it had here and secondly, just following up on the traffic issue that you guys saw.
Would you say that maybe the lower income consumer is just cutting all discretionary spending in general or do you think theres, something where they're driving less to shopping centers because of higher gas prices or something like that.
You know, it's it's hard to tease all of that all at the same time, Joe because don't forget that same customer is up against stimulus from last year. So.
It was an inflated strength, but roughly a third of our fleet.
Consists of stores, where the household.
Income is less than 50000, so just give you some perspective on that.
Yeah.
I certainly can't per Se say that they are not spending any money on discretionary income, but I think all of the stuff youre talking about are.
Certainly.
Possible outcomes of consolidating gas trips in et.
Et cetera, et cetera, but it roughly represents about a third for us.
Got you thanks.
Alright, Thanks, Joe.
The next question is from Michael Montana with Evercore ISI. Please go ahead.
Hey, Thanks for taking the question.
Just wanted to ask if I could on three specific areas of input costs, which was basically what you guys are seeing in terms of transport cost if youre able to see any relief with spot rates were to come down on ocean freight.
In the back half or if you've kind of termed that out. So that you may not participate secondly was around diesel.
If you've baked in any relief in the back half or if that assumes kind of record levels persist and then lastly was around wages.
Any signs of peak there in terms of input cost inflation from wage rates.
Yeah.
You know.
We largely do not participate in the spot rate in Canada yet.
I think just on those Michael on those three areas on kind of inbound freight ocean freight and containers.
Recall.
We locked up a significant almost all of our.
Capacity in rates and we did that at the end of last year really for a multi year period. So those are those are locked in we've got.
Real clear visibility to capacity and rates, which is good for us to have so thats baked into our guidance.
You mentioned diesel.
Of course, the fuel surcharges are at historic levels and increases from what we've seen over in the past.
We've assumed those amounts current levels.
For the rest of the year. So we've not assumed an improvement in fuel surcharges.
And then with regards to wage rates.
We said this before I mean, obviously, we're going to remain competitive.
Out there with our crew and out in the field.
And getting the best talent that we have but we.
Any anticipated increases whether it's based on.
Mandated minimum wage increases by state or anything that we anticipate has been baked into our guidance so unless the states change.
This year there is.
We've got everything baked baked in and I wouldn't expect any surprise changes coming on this year.
Alright, Thanks, Mike Thank you.
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 thanks, everyone for joining us while the first quarter as you can tell was certainly challenging we are focused on being nimble as we navigate this dynamic operating environment.
We continue to believe five below as an innovative and resilient retailer with a long runway for growth, we have an industry, leading new store payback model and a strong balance sheet. None of that changes, we remain focused on delivering incredible value and quality merchandise with a commitment to strong expense management.
And cost discipline.
These attributes are distinguishing characteristics, which will service well as we continue to grow.
Closing wish you all great summer and end of the school year.
Summer Fun list is out there with amazing list of products and as always I encourage you to shop at five below for all your outdoor pool and beach needs. We look forward to speaking with you again at the end of the summer have a great evening. Thanks, everybody.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Okay.
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Okay.