Q2 2022 Five Below Inc Earnings Call
Good day and welcome to the five below second quarter 2022 earnings Conference call all participants will be in a listen only mode.
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I'd like to turn the conference over to Christiane Pelz, Vice President of Investor Relations.
Hey.
Please go ahead Christie on it.
Oh hi.
Thank you Paul good afternoon, everyone and thanks for joining us today for five <unk> second quarter 2020 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 question and each reminds 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.
Looking statements are subject to both known and unknown.
Certainties that could cause actual results to differ materially from such statements.
Risks and uncertainties are described in the press release and our SEC filings.
Forward looking statements are made today that are made today are at the date of this call and we do not undertake any obligation to update our forward looking statements.
Do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our website at <unk> Dot Com I will now turn the call over to Joel.
Thank you Christina and thanks to everyone for joining us for our second quarter 2022 earnings call.
Ken and I will discuss three broad topics on today's call.
First review the second quarter results.
Second discuss our updated outlook for the third quarter and the year.
And third discuss our strategic initiatives, we are focused on to execute our longer term vision for growth that.
The triple double.
Despite near term challenges in 2022.
We remain very excited about our business model and future opportunities for five below.
Now onto the results for the quarter.
Total sales in the second quarter grew three 5% over last year to 669 million and comparable sales decreased five 8% driven by reductions in ticket and transactions.
This result was lower than expected, we still delivered diluted earnings per share of <unk> 74 cents at the low end of guidance due to disciplined expense management.
We believe our sales were impacted by both the macro environment as well as factors specific to five below on the macro front on top of lapping an unprecedented year 2021 due to payments of significant significant stimulus dollars in 2022.
And to.
Consumers are experiencing inflation levels not seen in.
In decades inflation.
Inflation and the needs based areas of food fuel and housing.
Cutting into consumers budgets, and we believe changing their spending behaviors.
In addition.
We are seeing a much more promotional retail environment than in years past due to the excess inventory across the industry.
On top of these factors with Covid restrictions largely lifted.
Travel and other experienced based sectors increased substantially over last year, which also had an impact on retail traffic and sales in the summer.
Specific to five below we had a phenomenal year last year to boldly due both to the healthy consumer backdrop I just mentioned and also due to multiple significant trends that drove customers to our stores.
And collectively are less of a driver this year.
Taken together with the macro environment.
<unk> last year's robust sales and trends was more difficult than we had expected.
As we shared with you at our Investor Day in March.
We expected 2022 to be a very unique year for us given many of these factors I just outlined while we do see some specific positive emerging drivers for our Q4 performance, we do not see all the headwinds just mentioned discipline dissipating.
In the near term.
As a result, we have reduced our sales and earnings outlook by nearly 3%.
And 13% respectively.
For the year, Ken will discuss our outlook in detail in a few minutes.
Amid this challenging environment, we continued our journey of ramping back up our growth plan.
Opening 27, new stores across the country in Q2.
Ken will share the details of our planned Q3 openings, but I can tell you the numbers over 50% more than Q2.
This is a great sign that our long term vision is intact and we are collectively shifting from strategy to all out execution.
As for Q2. These three of these new stores ranked in the top 25 summer Grand openings of all time, one each in New York.
Texas and California.
In addition, we made progress with our key strategic initiatives product experience and supply chain.
On product, we continue to source amazing new merchandise to capitalize on our existing and emerging trends and also expanded our five beyond assortment for the popular squish offering.
We created cool new squish models for our customers collection.
We also source products for newer trends like Sanrio, which some of you know is the creator of Hello Kitty.
The ability to participate in almost any trend is a unique differentiator of five below and all.
Our eight worlds provide the flexibility to react to result to evolving customer preferences.
Our unique approach to the consumables business.
Resonated with customers and we saw outperformance in categories like novelty candy snacks travel accessories pet.
In health and beauty.
<unk> also continued to be a growth driver for us.
As we introduced our first ever summer Wild wall.
With brand new five beyond products for pets and other items from our eight worlds like an outdoor tent and our giant tumbling tower game.
In addition, during the second half of July we kicked off our back to school campaign with Amazing Backpacks, cool Ts and fun items for dorms and bedrooms, all at great value with.
Our teams focused on social media and in store marketing campaigns.
Finally, I'd like to add that we are seeing more closeout opportunities and one time special buys in the marketplace, which we are choosing selectively to drive even more value for our customers.
Turning to our second strategic initiative experience, we are diligently working to update our fleet into the latest prototype unveiled at our Investor day in March.
We are excited about the opportunities the new five beyond store within a store concept provides.
With the re imagine tech and room worlds and doubled the skus dedicated to five beyond product.
We are on track to deliver over 250 stores and the new buy beyond prototype this year.
This is another example of how our long term vision is firmly intact and we are back to playing offense. We believe this offering will be both the traffic <unk>.
And comp driver for the holidays and into 2023.
Another important aspect of the overall customer experience is the digital component.
Which encompasses marketing customer data and analytics as well as e-commerce.
Through increased and more effective digital marketing, we are focused on gaining new customers and growing brand awareness.
Our continued investment in digital platforms like Tictoc is gaining traction as evidenced by our Bluetooth speaker video with over 9 million views.
Separately, we are also developing better knowledge of our customers.
Gathering data to <unk> to better understand and market to them.
For E Com, we enhanced our offering by rolling out <unk> to over 100 stores in July and we will.
We'll complete our chain wide rollout by the end of this September .
<unk> allows our customers.
To shop by below when where and how they like furthering our goal of becoming an omnichannel retailer.
This is yet another example of the ongoing implementation.
Our long term vision to connect with our customers.
And deliver an even better experience for them.
With respect to our third priority supply chain.
We continue to be proactive and look for ways to control our destiny.
We are pleased with our inventory position as we deliberately accelerated receipts to ensure good in stock positions for the key holiday season.
And to avoid the out of stocks, we experienced earlier this year and last holiday season.
As a healthy retailer with a strong balance sheet, we were able to quickly execute strategic decisions like this to better serve our customers.
As it relates to our distribution infrastructure.
We are very excited to have officially opened our Indiana, Indiana Shipping center. This summer to further gain efficiencies and speed to our stores and ultimately our customers.
As a reminder, this DC completes our five node network and provides us the capability to service approximately 90% of our stores within one day.
We are now taking a pause from opening Dcs for a couple of years.
Currently.
We are finishing up our back to school season and over the next several weeks will be converting the now section of our stores <unk>.
While preparing for the all important Q4 holiday.
We are excited about some of the cool new products, we have found that offer extreme value to our customers.
And can't wait to share them with you.
In summary.
As I said earlier this year has proven more challenging than expected.
We remain focused on playing offense and delivering our triple double growth strategy.
It is triple the number of stores by 2030, and approximately double the sales and earnings per share by 2025.
We are committed to continued high growth throughout the organization with our teams focused on preparing our people.
Systems and infrastructure.
Next year's new store openings.
Use me.
Represent a significant milestone over of over 200 for the first time.
We feel confident in our ability to open them with the same consistent results we have achieved in the past.
In this environment. In addition to the product opportunities I already mentioned.
We are starting to see some signs of potential dislocations in real estate.
And are ready to capitalize on these opportunities.
Our growth in scale continues to benefit us and our customers as we continuously reinvest in products and keeping inventory fresh.
We are a go to retailer for our customers.
<unk> the combination of extreme value.
And a fun shopping experience.
We believe as this inflationary environment continues.
And we near the all important holiday season.
<unk> will become even more relevant.
As customers rely on us for amazing.
Portable gifts and stocking stuffers to celebrate the season.
With that I will turn it over to Ken to review our financials in more detail Ken.
Thanks, Joel and good afternoon, everyone I will begin my remarks with a review of our second quarter results and then provide guidance for the third quarter and the full year.
As Joe noted the second quarter was more difficult than we expected our sales for the second quarter of 2022 increased three 5% to $668 $9 million from $646 6 million reported in the second quarter of 2021.
Comparable sales decreased by five 8%, which was driven by a decrease in comp ticket up four 3% and a comp transaction decrease of one 7%.
On a three year geometric comp stack basis second quarter sales increased 15%.
Our average ticket remains strong increasing over 20% in the second quarter as compared to the corresponding pre pandemic period of 2019.
We opened 27, new stores across 18 states in the second quarter compared to 34, new stores opened in the second quarter last year.
We ended the quarter with 252 stores, an increase of 131 stores or approximately 12%.
<unk> 1100, 21 stores at the end of the second quarter of 2021.
Yes.
Operating margin was eight 4%, which declined approximately 500 basis points versus the second quarter of 2021.
And which was relatively in line with our outlook, where we expect to deleverage in both gross margin and SG&A largely driven by the negative comp.
This deleverage was offset in part by cost management.
In comparison to our pre pandemic period.
This operating margin result was relatively flat to the second quarter of 2019.
Gross profit for the second quarter of 2022 was $228 $5 million versus $233 million in the second quarter of 2021.
As expected gross margin decreased by approximately 150 basis points to 34, 2%.
Primarily driven by occupancy deleverage on the negative comp as well as higher freight expense versus last year.
As a percentage of sales SG&A for the second quarter of 2022 increased 350 basis points to 25, 8%, primarily driven by higher store expenses are planned to increase in marketing spend and fixed cost deleverage on the negative comp.
Our effective tax rate for the second quarter of 2022 was 26, 3%.
Compared to 23, 8% in the second quarter of 2021.
Net income for the second quarter of 2022 was $41 $3 million versus net income of $64 $8 million last year.
Earnings per diluted share for the second quarter was 74.
Compared to last year's earnings per diluted share of $1 15.
We ended the second quarter with $272 million in cash cash equivalents and investments and no debt, including nothing outstanding on our $225 million line of credit.
Inventory at the end of the second quarter was $569 million as compared to $347 million at the end of the second quarter last year.
Average inventory on a per store basis increased approximately 47% versus the second quarter last year, while average total units on a per store basis increased approximately 28% year over year.
The increase was driven by the planned acceleration of merchandise deliveries and higher inbound freight costs versus last year.
Our logistics teams continued to do an excellent job managing the supply chain disruptions and our buyers remains flexible and disciplined in their purchasing to adjust the customer demands and preferences chase trends and capitalize on closeout opportunities.
Overall, we are experiencing significant improvements in the supply chain environment versus the back half of last year.
We are pleased with the progress we have made in accelerating our fall merchandise receipts and believe we are well positioned for our holiday selling season.
We expect significantly improved in stocks this year.
And for our average per store inventory levels and year over year comparisons to moderate significantly as we move through the back half of this year.
Now onto guidance.
As we stated at our Investor Day earlier this year in March we expected 2022 to be a unique year for several reasons first the lapping of significant government stimulus.
The negative residual impacts of the pandemic, primarily on our supply chain and store openings.
Third the ongoing pressures of inflation, especially fuel and food costs and fourth the cycling of a very strong year of multiple merchandise trends.
The impact of these factors on our business was greater than we had planned.
As a result, we have updated our 2022 outlook.
For the second half of the year, we are reducing sales by approximately $70 million at the midpoint of our guidance, which assumes an approximate negative 4% comp.
On a three year geometric comp stack basis. This sales estimate for the back half of the year is slightly lower than the results achieved in the first half.
Specifically for the third quarter our guidance includes the following.
Opening approximately 45 new stores.
Sales of 600 million to $619 million.
Comps of between negative 7% to negative 9%.
A 25% effective tax rate, which excludes the impact of share based accounting.
Net income between $4 million and $11 million with diluted EPS of 8% to 19.
At the midpoint of this guidance, we expect operating margin to decline approximately 540 basis points over last year.
Due to deleverage of fixed expenses on the negative comp higher store expenses and increased marketing expense.
All offset in part by tighter cost control.
About one third of the deleverage is expected to be in gross margin.
And two thirds in SG&A.
As we look out further to the fourth quarter, our current outlook implies comps of negative low single digits.
The fourth quarter itself is unique because it is driven primarily by holiday gifting and stocking stuffer purchases and with the current macro environment is expected to continue we believe that more than ever customers will be looking for places to save money for holiday shopping.
We are in a great position to be the go to shopping destination.
Specifically for the fourth quarter, we expect an improved inventory position and merchandise in stocks versus the fourth quarter last year.
And expanded five beyond assortment in more stores.
And increased and more effective marketing.
We also assume operating margin expansion in the fourth quarter versus last year as the fixed cost driven deleveraging gross margin and SG&A from the implied negative comp is more than offset by tighter cost management and expense reductions.
Our first half performance combined with this moderation in the second half outlook.
Reduces our full year guidance for sales at the midpoint by approximately $85 million or nearly 3%.
For the full year of fiscal 2022, we now expect sales of $2 97 billion to $3.02 billion.
And comps in the range of negative three to negative 5%.
This assumes we would end the fiscal year 2022 with average unit volumes of approximately $2 4 million versus 2019, $2 2 million.
We expect operating margin for the full year of 11% at the midpoint of guidance, which represents a decrease of approximately 120 basis points from our prior guidance.
The decline versus last year of approximately 230 basis points is driven primarily by deleverage on fixed cost and higher SG&A expenses from a more normalized marketing spend offset in part by cost management.
We expect EPS in the range of $4 26 to $4 56.
Which represents a reduction from our prior guidance of approximately 13%.
For fiscal 2022, we plan to spend approximately $235 million in gross capex, excluding tenant allowances, primarily for opening approximately 160, new stores executing over 250 conversions to the new five beyond prototype.
Opening a new distribution center in Indiana, and investing in systems and infrastructure.
Further details related to our results. Please refer to our earnings press release.
In closing as we navigate the near term headwinds that are pressuring our performance we continue to focus on our longer term strategy and financial goals.
We remain fully committed to delivering an amazing experience and exceptional value for our customers, while maintaining the financial and cost discipline that has always been core to how we operate this business.
That concludes our remarks and with that I'll turn it over to the operator to begin Q&A operator.
Thank you and we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two please limit yourself to one question and if you have further questions you may reenter the question queue.
And at this time, we will pause momentarily to assemble the roster.
And our first question today will come from Edward Kelly with Wells Fargo. Please go ahead.
Yes, hi, good morning, everyone.
I wanted to start my question really is on Q4.
The guidance for Q4 holiday is always seems to be.
Is it tough to predict.
And this year, it's probably not going to be any different obviously.
But as we think about we're using you know we're talking a lot about sort of three year.
<unk> metrics.
But when you go to Q4, you have four more selling days and you have like 2019 and I think.
If you look at guidance versus sort of 18, which maybe becomes more realistic.
Does imply some deceleration there so I'm just kind of curious as to your thoughts around how you thought about rebate.
Re basing that guidance.
You mentioned the potential for some positive emerging drivers.
That doesn't I'm not sure how much of that is actually in your outlook or thoughts there and ultimately just trying to figure out how much around Q4, you kind of derisked with the guidance because it does seem like it's quite a bit.
Yeah, and let me just a couple of thoughts and I'll turn it over to <unk>.
Can I talk about it financially, but it clearly as we think about Q4, and especially coming off this last quarter.
The last thing we wanted to do is speculate at all on any emerging trends I think Ken laid out.
Pretty nicely for you several bullets on whats different in Q4 this year over last year things like better inventory position in marketing.
You mentioned more more days. So those are all nice tail winds that are in there.
<unk> got some of the headwinds.
The unknowns of macro things that we certainly talked about at length.
So you put it all together in.
I think what you see in Q4 is certainly calling out potential.
Potential tailwind emerging but not.
Taking all those into into the guidance.
Ken maybe if you could talk about it.
Geometric stack I think it all starts to make sense, yes.
Add to Joe's point.
Obviously.
We focus on the things that we can control right and we talked about improved inventory expanded five beyond assortment.
<unk>.
Better and more increased and increased marketing.
When you look at the macro piece I think what we did we kind of looked at the first half of the year now to.
To see what's going on and as I mentioned when you look at the full back half.
As a geometric stat stacked at slightly less than we saw in the first half and then we kind of break it out into Q3 and Q4.
We are seeing some things have having the benefit of going through August and seeing some improvement there and that's why we're guiding to the comps that we're guiding to for Q3.
But to Joe's point from a macro perspective, I mean, obviously there is still some uncertainty down there. So we feel it was appropriate.
To put forward the negative low single digit comps, which when you push that into a geometric stack comp.
You had mentioned there the kind of puts us in line with where we landed for Q2.
And we felt that was appropriate in terms of our guidance, especially at this point in the year for us, but specifically around Q4.
Thanks, Ed Great. Thank you.
Yes.
And our next question will come from Polish way with Citi. Please go ahead.
Hi, guys.
On for Paul Thanks for taking your question.
I'm just curious if you could elaborate there.
The comments around <unk>.
Getting a bit more opportunity.
Closeout buys what are you seeing out there in the market.
Each category.
Benefit.
Is it showing up mostly in <unk> and then get on.
That same line just curious if the margin profile.
Thanks.
Yeah. Thanks Kelly.
Aye.
You called out the opportunistic.
Buys close out.
Last because of the material out ality and more because it is something we haven't really seen in the last couple of years. So the fact that they are starting to emerge.
And our buyers are getting more inbound calls.
I think a positive too.
Some opportunities we're going to have to really showcase value even more than we had originally plan. It's still though I mean, our business is very different than where we started 20 years ago. Most of our buys are planned and it will be still in the low single digits of the overall by then.
And then Kennedy commentary on margin.
Yes, Kelly I don't know if that was around you were talking about merch margin, our overall margins, but from a merch margin perspective, we feel that we're going to have and expect to have healthy merch margin.
Going into into Q4, and then we did call out I know, it's unusual, especially on the negative low single digit comps to be seeing.
The what I'm, calling out is.
Operating margin expansion for the fourth quarter, but that's solely due to the work that we've done internally here to adjust our cost structure and really go after.
<unk> cost controls and expense reductions and the majority of those are taking place in the fourth quarter. We started there was a little bit later in the year. So we're really going to see the benefit in the back half, especially the fourth quarter.
And the magnitude of those are going to more than offset any type of deleveraged, it's going to happen on fixed costs due to the negative low single digit comp.
Thanks Kelly.
And our next question will come from Matt Boss with JP Morgan. Please go ahead.
Great. Thanks, Joe.
Joel you called 2022 is unique which obviously has proved pretty spot on.
I guess larger picture does anything you've seen this year alter the components of that multiyear triple double Triple double plan and then Ken to your point the <unk> comp guide it does stand at 400 basis points better than the second quarter on that geometric stack. So could you elaborate on improvement that.
<unk> seen in August that supports the guide.
Yes, Thanks, Matt.
Yeah.
We certainly called out knew that 2022 was going to be unique we talked about in March.
March Investor call.
And clearly.
As we have now played through six months. Since then it's proven out to be even more unique than we originally thought.
As far as the long term goes.
You know you put the unique aside we are still very confident in our long term store growth opportunity and with that the profit profile I called out in today's remarks, specifically some examples of that.
The growth in our new stores starting to accelerate.
The incredible progress we've made in last six months on moving from strategy to execution around conversions to the new beyond prototype being over 250 for this year I think both this is another example that we're not sitting back any more playing defense. We're moving ahead with.
<unk>.
Systems Rollouts in both this is one example of that so.
Really excited to continue to innovate and.
Clearly this guide was meant to be a real focus on 22, all our efforts around 'twenty two but behind the scenes. The teams are working.
And really accomplished a lot.
Maintain our triple double and at this point in time, we don't see any reason to be backing off of our long term strategy.
And then Matt I think the second part of that question was around the.
Confidence in the guide for Q3, and a little discussion around August .
Celebration and Geos versus Q2, correct, yes, so and you're right. It's it's accelerating about 400 basis points over Q2, but.
But just to go back to Q2, we did see a deceleration right coming off of our guidance and then in June and July and then now that we have August in the rearview mirror, we have seen an increase in the geos that are comparable to what we saw back in.
At the beginning of Q2 and August performance is in line with our comp guide.
And the other piece out there is when you look at last year, we are up against the.
The larger impact of trend items happened early in Q3, so that was in August so when you put all that together.
We feel good about the guidance that we're putting forward for Q3.
Thanks, Matt Thanks, Matt.
And our next question will come from Michael Lasser with UBS. Please go ahead.
Good evening, Thanks, a lot for taking my question.
You bet.
Alright go ahead bill.
Looking past the next couple of quarters in the 2023.
Will the business be at a point, where you can start to comp again, especially.
In light of having four or five beyond store.
A cleaner macro environment, who knows.
Two even if the business flat next year, given that some of the cost reduction initiatives.
Along with all the the large increase in new stores is it possible if I below could experience margin expansion like I said, even on a flat comp just considering that.
This year, it's on pace to have an 11% operating margin versus an 11, 8% operating margin in 2019, and Theres a $1 billion of increased sales this year versus two years ago.
Yes.
Michael I think what Youre asking really good question.
I don't think this is the call to go speculate on giving you guidance for 2023.
If you read in the summer.
Some of my commentary, especially around the conversions.
We will start to be both traffic and comp contributors.
<unk>.
The commentary, we just had around Q4.
And you can already start to seed from a comps perspective, let's put <unk> aside for a second here.
Yeah.
Starting to see the comps start to accelerate again for us and I I I don't think any of US are looking at 'twenty three and beyond is not being back to positive comps, let's forget even flat, but you know everything is pointing towards.
Cleaner environment.
Brazil, saying that.
<unk>, it's also true that sales exposes things in.
I think in some ways. It has helped to make us a leaner organization can comment in a lot of costs, we've taken out of the business and those will benefit us as we go into 'twenty three.
Start to open over 200 stores.
You really it will leverage your fixed cost significantly so I think what you're implying is all directionally correct.
I just you know.
I'm not prepared here to sit and give you a.
Concrete.
<unk> forecast for 2003.
But youre thinking about it the right way.
Yes.
Just.
Michael to add to that I mean.
Over the years, you've heard us reduce our.
Leverage point in comp I mean, you're really asking the question can we lever on a flat comp and to Joel's point I mean, let's get through this year and we will look at it but we will continue and carry through those cost efficiencies that we've that we've looked at and found this year into next year and obviously, we had the new <unk>.
Store growth that we're talking about and then the opportunities for comp and some of the various areas including.
The <unk> beyond conversions, but more to come on that as we kind of get through this year and then we get into the beginning of next year to provide some guidance.
Thanks, Michael Thanks, Michael.
And our next question will come from Simeon Gutman with Morgan Stanley . Please go ahead.
Good afternoon, John Ken.
So kind of two follow ups the first on the fourth quarter.
Would you say, whether the ticket benefit that you're seeing in the second quarter. I think you cited the 20% versus 19.
Does that stay the same through the fourth or maybe just share the ticket.
Traffic assumption through the fourth quarter and it feels like it would moderate given that last year's fourth quarter was.
It was helped by by ticket or merchandising initiatives, which assumes traffic gets better which it seems consistent with some of Joe's commentary. So thats. The first question just any more detail on traffic ticket for the fourth and then to the last question.
Thank you answered it that expenses that you saved this year that becomes more muscle to the company. It's not that there is a recapture of a step back up so that these incrementals that youre doing in the back half of the year they could set the precedent in <unk>.
Can be sustained into next year.
Thanks Simeon.
So the first part of your question around traffic and ticket again kind of we're out ahead of a little bit trying to predict where that's going to come in Q4, but I think looking back really helps us predict go forward and that's one of the things with a few have heard we've maintained.
That improvement.
Improvement in our ticket when you go back to pre pandemic levels back to 2019, I mean, we've consistently been 20% and above.
And we also saw that again in Q2 and given some of the things that are inside that we I would expect us to continue along that path as we move through this year.
And potentially in the fourth quarter.
There could be some opportunities you write in transactions I mean, it has been down consistently since we've reopened post pandemic, let's not forget we are down.
Down in terms of hours when you look at us versus 2019, and we'll continue to look at what the optimal store operating hours are as we move forward.
And then your comment or your question about the expenses Yeah. Those are the things that we've come across here are those reductions and efficiencies will definitely carry that into the future I don't I don't view those in total as being kind of a one off for this year those are things will carry on into the future.
Thanks Simeon.
And our next question will come from Chuck Grom with Gordon Haskett. Please go ahead.
Hey, Thanks, good afternoon guys.
New store productivity over the past five quarters, it's averaged around 70, 677% give or take that's much lower than the pre COVID-19 run rate that you guys formally ran close to almost 100%. Many quarters you know when you look at the fleet openings.
I'm curious if youre seeing any greater uptick in cannibalization or new markets still successful. It sounds like it is I'm just trying to understand why why the NSP has been compressing.
Yeah, Hi, Chuck your Youre right. It is kind of averaging when you look at it on an adjusted basis, it's averaging around 80% as we kind of look back over the last handful of quarters.
There's a couple of things going on there, especially post pandemic wherever we kind of pulled back on Grand opening marketing.
And inventory levels and things like that where the supply chain got really tight we favorite existing stores versus new stores, so that probably drove that that reduction in productivity versus what we saw.
In pre pandemic periods.
I think you mentioned cannibalization.
That's been relatively consistent from our calculations. It did increase over the last couple of years and we call that out we expected that closer to about 100 basis points.
It's embedded in our guide.
And in terms of just overall performance, we continue to be really pleased with the new stores I mean, Joel called out.
Again every quarter, we run across stores that have records for openings and we had three stores and it was great to see those stores.
<unk>.
Come out throughout the country right, one in California, Texas, and New York, So overall really pleased with where.
Our new store performances.
Thanks Chuck.
And our next question will come from Scot Ciccarelli with <unk> Securities. Please go ahead.
Hey, guys Scot Ciccarelli can you provide any more color on the magnitude of the inventory increase and specifically can you provide some color, but you know kind of where do you think the year will end and does that become a good kind of go forward figure.
Wherever you end this calendar year.
Yes, Thanks Scott.
As we've mentioned on prior calls, we're actually really pleased with where we've been with our inventory levels post pandemic I think that was the opportunity for us to even get tighter and leaner.
Operate really better from an inventory perspective, and we've been able to continue that.
You are seeing a high number at the end of the second quarter, but that is because we've advanced deliveries because we wanted to make sure. We got out ahead of any supply chain disruptions. So our point was that we'd rather have it in our distribution center than somewhere else. So we really push that and I did call out kind of cost versus units, which shows you.
That.
A chunk of that increase is due to the increase in freight costs, because that's embedded in that number.
The other piece as you move forward.
You've won and what my expectations are that those numbers are going to moderate as we go into the end of Q3 and even down into.
Into Q4, I think youll see significant moderation.
Even getting closer to like flatter year over year numbers as we get down to the.
End of the year and then my gut is that we'll be able to continue to perform that way as we move forward.
Yes, I think the important thing on that Ken is.
And I called out in my prepared remarks. This was intentional on our part and it was strategic I think when we sat back you know let's call it.
April may a year ago.
And you are planning out when your goods are going to come in for fourth quarter, I don't think anybody that far back expected.
Beer and unprecedented backlog that went on for months and months and months and so as we started thinking about this year and making sure. We don't have a repeat of that.
Now sitting with a balance sheet with no debt, we were able to make the decision to accelerate.
And then you add in the freight and fuel that Ken just talked about it.
Did you see most of it is it's a large increase in in transit says most of our holiday stuff was on the water by the time.
<unk>.
But thanks, Scott Great question. Thanks, Scott.
And our next question will come from Jeremy Hamblin with Craig Hallum Capital Group.
Go ahead.
Thanks.
Wanted to ask about what youre seeing from a demographic perspective, what kind of color you have on performance across geographies, but then also what kind of color you have given the you know the.
The softness that you've seen slowdowns since you know kind of going back to end of March in the Investor Day are you able to track our.
Or have a better sense of whether or not it's.
This change I think in trends overall is that really coming from the bottom 50% of income earners and your customers you.
How much data do you have around that and how much is it changing how youre thinking about inventory presentation for Q4.
Yes, Jeremy Good question look we we track all of our stores and assign them or now a demographic profile.
I'd tell you geographically for the most part it's a pretty tight range.
In this case decline in comp across the board.
And then you know.
From a household income.
We did see more of a compression in our low income.
Demographics than in our higher end and I don't think that should surprise people I think as I called out in my prepared remarks, as you get into the fourth quarter, though.
Is that kind of comes our needs quarter as opposed to right now we're living mostly in the wants.
<unk>.
We did call out how our needs categories outperformed, but our whole box becomes our needs.
As people think about the holiday and they think about.
Needing to.
Fulfill Christmas gifts, and Hanukkah and <unk> and <unk>.
Celebrating the holidays with their families.
We become more of a go to so I think there is one where we're not looking at changing presentation.
We do have the capabilities with our inventory teams that we will refill stores based on sell through and so in the cases, where stores are selling better.
We will certainly replenish to that is we have a good amount held back in the Dcs and it's not all shipped out upfront. So we can make decisions closer to real time as the quarter plays out hopefully that gives you some look into the demographics a little bit.
And our next question will come from John <unk> with Guggenheim. Please go ahead.
So guys two quick things number one I mean.
This is a holiday a fourth quarter that we haven't seen.
Very long time, how do you think tactically right about tweaking what you do in terms of marketing.
Store operating store operating hours.
Things like that right to drive a little bit better brand awareness.
And then secondly, right.
Environment will probably persist into 'twenty three.
Michael thinking about merchandise content for 'twenty, three different price points right because I know.
He does mandate right.
The buyers might find stuff.
And to book not just five beyond just a thought on 'twenty three changing in terms of content.
Yes.
Look on Q4.
I don't want to give away my whole holiday playbook, yet John .
But I can tell you I feel really good about it.
One or two things I would say is you know.
We do think it'll be earlier.
We do think we've got to be prepared sooner and so youre going to see some of that.
And I think I also called out a number of times.
I think value becomes in the past I think I've always said value is important and I think the words I would use now is relevant.
And you're absolutely right you have to go back to seven or eight since we really saw a.
A recession of.
That we can point back to and of course with inflation, you've Gotta go back even further but.
As we think back to <unk> what happened there.
Relevant and see a value.
<unk>.
Came into play so you can bet, our messaging will probably tilt a little bit away from Wow and more to value <unk>.
We really focus in on and be sharp on our price points to to get that value message across and as far as 23 goes.
You know it.
We believe you we think it does continue into 'twenty three.
We always pick up new customers at holiday time, I think that will bode well for us going into 'twenty three.
And beyond.
From Michael's perspective.
It's again going to be sharp on value.
Really probably a refocus and look at our $1 $2 price points and also on.
Our version of consumables.
A couple of insights into it John .
Thanks.
And our next question will come from Michael <unk> with Evercore ISI.
Go ahead.
Hey, Yeah. Good evening. Thanks for taking my questions. Just wanted to ask first off if I could can you just remind us about the tailwind that you see the comps from some of the store Remodels kind of what the cadence is there and then also the capex costs to put against that.
Okay.
Yeah look.
Okay.
It's a little too early to quantify those Michael as we've really just started ramping those up here in the last 30 days.
We did call out at Investor days, and Theres, No reason to deviate from it that the remodels for us kind of in the mid single digit range and then Ken on Capex, Yes.
Michael.
Depending on the type of conversion that's out there for store, whether it's a full on conversion going from a vintage store.
Or it's just kind of a.
We would call plus up from an existing fresh store I mean, it can vary if its a small plus up you're probably talking 40 to $50000. If its a full on.
<unk>.
Conversion of a.
Of an older store, it's going to cost as much as an existing store really it's the same thing at the end of the day and several hundred thousand yes.
Okay.
Thank you Michael.
And our next question will come from Brad Thomas with Keybanc capital markets. Please go ahead.
Hi, good afternoon.
Wanted to come at the holiday question.
From the perspective of some of your higher price point items from the fab beyond perspective, and was hoping you could talk a little bit more about how.
How much more assortment youre going to have this year, how many more stores are going to have that expanded selection and any more quantification you'd be willing to give about how much of a potential comp driver that might be for you in the fourth quarter. Thanks.
Yeah look I think as far as the comp driver at this point in time.
Brad I think it's embedded in the guide we gave you.
And I think as we get more clarity.
These are starting to come online.
Tune of hundreds of them.
By the time, we get into fourth quarter.
We'll give some more insight into that but.
It it's roughly a doubling of skus.
We've seen a very positive reaction.
Even in these really tough economic times, we have not seen a slowdown in it and I think that points to the question I was answering to John a few months ago that values, becoming more relevant.
And.
The customer is our customer walks in our stores, even though it's over five they recognize the value.
And Thats, just as important as the 1% to five having to deliver value. So.
That's kind of the early insights and looks into it but I think the final thing is you got to remember it's also that far beyond his newness, especially.
200, plus 250 this year.
Newness they've never seen before so you have got.
<unk> value at the one five <unk> got newness and value in the <unk> beyond.
And.
We believe thats going to drive traffic and we've outlined kind of the comp thoughts as we focus on.
Q4 here.
Thanks, Brad.
And our next question will come from Joe Feldman with Telsey Advisory. Please go ahead.
Yes, thanks, guys.
To take a different question about the growth in the go forward with regards to the real estate you.
You had mentioned seeing some more dislocation and you know that the risk of giving up your sources there commenting too much I was just curious where you're seeing that like are.
Does that mean youre seeing better locations available or companies closing stores. So therefore, creating new opportunities for you.
Hey, Thanks, Joe.
I'm not going to give up on my sources, but hum.
Publicly I think even several hours ago bed Bath <unk> beyond just announced 150 closures. So.
For the last decade.
Taylor's have ebbed and flowed in and we really haven't seen that dislocation in the last two years like we have in the past so.
Look part of a significant part of our growth strategy is not about greenfield and.
I think the.
Dislocation retailers will help us only accelerate and Thats what were starting to see and hence why we've actually started to give you. Some insight into 2023, which is probably the earliest we've ever done some of that and I can't remember and I think we outlined at the Investor day, our Densification.
<unk> strategy going into detail about what we've done in Philadelphia and that will continue to get easier as some of these dislocations start to emerge but.
The specifics as to what our real estate teams working on and I can tell you the pipeline starting to grow.
Thanks, Joe.
And our next question will come from Jason Haas with Bank of America. Please go ahead.
Hey, good afternoon, and thanks for taking my question Joe could you elaborate more on your comment that you're seeing some of the trends that were successful last year start to wane I'm curious if that was a reference to some of the century toys.
Or anything else and then I'm also curious it seems like the squish miles are still pretty popular I'm not sure if you'd be able to quantify.
Any sense for how much how meaningful that is to comps right now.
Just given the concern that that trend may wane in the future.
Sure well I believe in my prepared remarks, I did callout Squish and you did hear an absence of me talking about <unk>.
Copper is a century, so you can deduce whose waning and who's not there, but that's the nature of something that five below probably accelerates in identifying trends and then getting out of them and it is kind of the nature of trends they come and they go.
Trends are always a part of our business and the fact that poppers and centuries of started to moderate.
Not unusual to us.
But <unk> on the other hand.
We will probably continue to be with us at least through the balance of this year.
Teams have done a great job with that we've created the squish events on Sundays.
Still continue, especially when Theres, you squish to see lines in the stores.
That's just the a great example of.
<unk> has been known as the place to go when a trend starts to emerge.
We're starting to see a couple of others I don't know if they're going to be bigger little at this point in time.
Not in the position I want to talk about it publicly but you know thats.
We just got a great merchant team and they're constantly finding new things in there in the market that that plays out on the newness and fresh.
I appreciate it Jason.
And our next question will come from David Bellinger with MK and partners. Please go ahead.
Hey, Thanks for the question.
So you mentioned the areas of the store that performed well in Q2, So where did you see the largest deviation versus your plan on that on the downside.
Inventories in those categories and also as a category makeup shifted with trends improving somewhat into August just any other detail on what's changing or early into Q3 up will be helpful.
Yeah look I think in this case.
What I would say it's not.
More outperformed I would say other than the ones I called out we pretty much saw an across the board decline in the back half of Q2.
Obviously missing our sales guide.
But it was the the trends in food and consumables and all of those I called out that accelerated and.
That's what gave us confidence it wasn't something that we did internally there to really turn off our customer it was truly the macro environment and I don't need to repeat all of those.
About him a number of times that that turned around.
Or why the business ended in a shortfall.
We are starting to see the moderation I'm not worried about inventory anything that we were.
Carrying over into the third quarter, we will just go away in third quarter, we're not expecting any big markdown.
Like that David.
Thank you.
And our next question will come from Anthony <unk> with loop capital. Please go ahead.
Oh. Thank you so much for squeezing me in I have a little bit of a longer term question.
You have a deep pocketed competitor and dollar general that has this new content has been rolling out pop shelf and I guess.
Two questions, but it's really sort of one question I mean, how do you think about the.
How their merchandize assortment compares to your merchandise assortment and store experience and then and then does the fact that they're playing to overtime open 1000 stores.
Change your view at all in terms of your long term.
Store potential thank you.
Hey, Thanks Anthony.
Take the second part of that first no it doesn't change our outlook at all.
Very much aware pop shelf like any other retailer and competition and other retailers all the time.
Specific asks about the merch assortment.
I'll tell you it to me it feels much more like a.
Our homegoods than it does a five below.
And it caters to a different age segment than we do so.
The fact that we now have some stores in our same centers and we haven't seen any impact at all and in fact in some cases, there might even be some improvements, but it's a very small sample size because you're just you're driving more footsteps, we always want to a vibrant center and a center that.
Drives any store that dry subsets is good for us so.
But.
They're largely in what I would call the home goods categories, and so very different and we target teens.
Thanks Anthony.
I think we've got time for one more call.
No.
That will.
Listen you would like to ask a question. Please press Star then one.
I don't want to ask any questions operator.
Okay.
Okay.
So listen I'll I'll just.
Finish up in.
Appreciate everybody joining us today.
I truly believe by below as an innovative and resilient retailer with a long runway for growth a lot of your questions were about growth.
We are still focused on that we've got an industry, leading new store payback model.
And our strong balance sheet.
In these current economic times, we believe that value is going to be even more relevant we talked about that several times today, we were going to continue to deliver a compelling trend right merchandise at incredible value.
So I want to thank all of our teams. Most importantly, they've just done an amazing job through some really tough times here. Their continued hard work is really paying off and making five below a great company and brand. We look forward to speaking to all of you again after Thanksgiving Thanksgiving. Thank you and have a great night.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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Yes.
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