Q3 2022 Five Below Inc Earnings Call
[music] about losses.
They go on.
And welcome to the five below third quarter 2022 earnings conference call. All participants will be in a listen only mode did you need assistance. Please signal conference specialist by pressing the Darcie followed by zero. After today's presentation. There will be an opportunity to ask question to ask a question you May Press Star then one on your touch tenfold.
Your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Christiane Pelz VP of Investor Relations and Treasury. Please go ahead.
Thank you Carl good afternoon, everyone and thanks for joining us today for five below third quarter 2022 financial results Conference call on today's call are Joel Anderson, President and Chief Executive Officer, and Ken Bull, Chief Financial Officer, and Treasurer. After management has made their formal remarks, we will open the call to questions.
I need to remind you that certain comments made during this call may constitute forward looking statements and are made pursuant to and within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 95 as a message.
That's 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 our press release and our SEC filings. The forward looking statements made today are as of the date of this call and we do not undertake any obligation.
To update our forward looking statements.
If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our website at five below dotcom.
I'll now turn the call over to Joel.
Thank you Christina and thanks to everyone for joining us for our third quarter 2022 earnings call.
We delivered a third quarter that substantially beat our guidance against a difficult macro environment.
Especially given the comparison to last year is extremely strong sales.
We are playing offense staying nimble and controlling what we can all the while keeping our customer promise of delivering value at the center of our decision making.
We are also executing on our long term growth initiatives.
That underpin our triple double plan of which store growth is key.
And we are pleased that the conversions to our new five beyond store format are being met with a very positive customer response.
All of this helped drive total sales growth of 6% to $645 million.
Comparable sales decrease of two 7%.
And earnings per share of 29 cents.
Which were all ahead of our guidance for the third quarter.
The sales beat was driven by both ticket and transactions results improving throughout the quarter.
We opened 40, new stores across the country and the third quarter.
In the quarter was 102 stores opened year to date.
Three of these new stores ranked in the top 25, Paul Grand openings of all time.
Two of them.
We're in our new state.
Of North Dakota, and South Dakota.
We were also very excited to open our third Manhattan location in times square.
In addition, we have already converted approximately 250 stores this year to the new Fi beyond prototype.
We are very pleased with the pace and execution of this rollout as well as the customer response, which is driving higher sales and traffic to the stores.
This past year, we continued to focus on our strategic initiatives the product experience and supply chain.
Which were key to our performance and were important enablers of our past long term targets next year, we will outline our strategic pillars that will enable our triple double golf.
Product.
The trends, we mentioned last quarter continued.
With our version of consumables or needs based products resonating with customers.
The candy World once again outperformed featuring novelty candy like slime liquors.
<unk> from great brands like Hershey and Roche are as.
As well as our salty business, featuring the one chip challenge and talk East and.
In games and toys are squishy mall products remain popular.
We connected with our customers with Squish Sunday events and reached <unk> recently launched our exclusive five below only collection of squish malls.
Newer trends like anime Bunko, an Hello, Kitty grew and we sourced more licensed product, including items, such as Disney's Li Lo and stitch and Marvel action figures.
All had extreme value.
In addition, Halloween was more normalized as trick or treating another Halloween rituals recovered from the pandemic impacted 2020 in 2021 years.
We were pleased with our performance and our seasonal offerings were well received.
By beyond as I mentioned earlier continues.
Continues to be a great driver for us with.
With more stores offering a full assortment in the back of the store.
We've added about 200 items to the converted five beyond stores.
Finally.
I'd like to add that we took advantage of closeout opportunities and onetime special buys in the marketplace.
And now have additional extreme values across.
Products of many categories.
Our goal, especially this holiday inflation induced season to drive even more value for our customers.
And we will continue to selectively pursue opportunistic buys that will drive traffic and attract new customers to five below.
As it relates to our strategic initiative of experience, we are focused on connecting with our customers and delivering an even better shopping experience for them.
We already spoke about the successful rollout of the latest prototype featuring the five beyond store within a store in the back of the store, which includes the re imagine tech and room World.
We continue to see customers, who purchased five beyond products spend about twice as much as those who did not.
Which bodes well for continued increases in store productivity.
With approximately 20% of our chain.
The new five beyond format.
That we unveiled earlier this year.
We are on track and marching toward our goal for over 80% of the chain to be in this format by 2025.
With respect to marketing for.
For the third quarter, we invested heavily in digital specifically in paid search and social media.
We increased our marketing spend year over year.
Focusing more on the second half of the quarter, leading into the key holiday selling season.
We tested various strategies.
And believe our efforts were effective in driving sales.
Our marketing and visual design teams did a great job communicating our value message to customers where.
Whether digitally or in store.
In addition, with increasing knowledge about our customers gained through <unk>, we are leveraging data to target, both new and existing customers more effectively.
For ecommerce, we enhanced our offering by rolling out buy online pickup in store chain wide in September .
The initial results are promising and we look forward to our customers discovering the convenience type Apis orders during this busy holiday season.
With respect to supply chain.
We're proactively managing our operations and navigating dynamic conditions.
We continue to look for ways to control our destiny as an example.
We strategically accelerated inventory receipts to ensure a great in stock position for the holiday season.
We remain nimble in this ever changing environment.
And I am extremely pleased with the positive results the team has delivered.
Regarding our distribution infrastructure.
We completed our five no network with the summer opening of the Indianapolis ship Center.
We now have the capability to reach approximately 90% of our stores within two days and the network is expected to provide efficiencies and keep our stores well stocked.
Petr town, New Jersey, our first large ship center.
It has been fully built out.
With the ability now to service approximately 500 stores.
The other four ship centers will be expanded over the coming years to support our continued growth.
Now.
On to the all important holiday season.
We are pleased with the start of Q4, including Black Friday weekend.
Our stores are stocked and ready with an amazing assortment of value products that promises to delight our customers.
From branded games, and toys to pet beds and from holiday decor and licensed Ts to Bluetooth speakers.
We have something for everyone to complete their shopping list.
In addition to our buy below stocking stuffers and gifts.
We're also excited for five beyond.
Provide new and extreme value products in different categories.
Which further reinforces our position as.
As a must stop holiday gifting destination.
For example, this.
Holiday season, we are featuring a folding light up scooter with L. E D wheels for only $20.
We're also really excited to have sourced Kylie and Kendall crossover bags for only $5 exclusive to five below.
And to highlight these amazing values earlier this month, we kicked off our save the holidays marketing campaign utilizing social media paid search T V and key partners like Kelly Clarkson to attract new and existing audiences.
In our stores.
Thousands of associates to keep our shell still.
Help customers with their holiday shopping needs were.
We also plan to further elevate our customers' journey.
With approximately 70% of our stores offering assisted checkout.
Which improves throughput and the customer experience.
During the busy holiday shopping season.
We can't wait to see everyone in our stores and online at five below Dot com.
So in summary.
We made great progress on several initiatives in the third quarter and are in a great position for the fourth quarter we.
We believe with the steps taken including accelerating inventory receipts, expanding our value assortment, increasing marketing, adding boltbus and growing the number of self checkouts and stores, we are well positioned for our customers as they adjust to an.
Asian.
Holiday season, and look even more for value.
Last quarter, we said that by below becomes a needs based retailer during the holiday season, and we are beginning to see that play out as improved transactions, we offer the extreme value our customers need to help alleviate macro put price pressures while providing.
Fun shopping experience to let go and have fun.
Our customers know they can count on five below for amazing affordable gifts and stocking stuffers to celebrate the season and.
And we won't disappoint.
With that I'll turn it over to Ken to review the financials in more detail.
Ken.
Thanks, Joel and good afternoon, everyone.
I will begin my remarks with a review of our third quarter results and then provide guidance for the fourth quarter and the full year.
As Joel said, we were pleased to exceed the third quarter guidance, we provided.
Our sales for the third quarter of 2022 increased six 2% to $645 million from $607 $6 million reported in the third quarter of 2021.
On a three year compound annual growth rate basis.
Sales gross growth for the third quarter was approximately 20%.
Comparable sales decreased by two 7% with a comp ticket decrease of one 8% and.
Comp transaction decrease of <unk>, 9%.
Our average ticket remains strong increasing over 20% in the third quarter as compared to the corresponding pre pandemic period in 2019, which is in line with the results. We have seen since we reopened stores in mid 2020.
We were pleased that our comps on a one year basis, and a three year geometric stack basis.
Increased post August with improvements in both transaction and ticket.
We opened 40, new stores across 20 states in the third quarter compared to 52, new stores opened in the third quarter last year.
We ended the quarter with 292 stores.
An increase of 119 stores or approximately 10%.
Versus 1100 73 stores at the end of the third quarter of last year.
Gross profit for the third quarter of 2022 increased two 7%.
$207 $8 million versus $202 4 million in the third quarter of 2021.
Gross margin decreased by approximately 110 basis points to 32.2% drew.
Driven primarily by occupancy deleverage on the negative comp.
As a percentage of sales.
G&A for the third quarter of 2022 increased approximately 270 basis points to 29%.
SG&A expenses as a percent of sales were higher than last year, driven primarily by fixed cost deleverage.
Higher store expenses and increased marketing expense offset in part by cost management strategies initiated this year and lower incentive compensation.
As a result operating income decreased 57% to $29 million versus $42 $4 million in the third quarter last year with operating margin deleveraging year over year by approximately 375 basis points.
These results were better than our expectations due primarily to the sales be.
Our effective tax rate for the third quarter of 2022 was 24, 6% comp.
Compared to 24% in the third quarter of 2021.
Net income for the third quarter of 2022 was $16 $1 million versus net income of $24 $2 million last year.
Earnings per diluted share for the third quarter was 29 cents compared to last year's earnings per diluted share of <unk> 43.
We ended the third quarter with $117 million in cash cash equivalents and investments and no debt, including nothing outstanding on our $225 million line of credit.
Inventory at the end of the third quarter was $702 million as compared to $521 million at the end of the third quarter of last year.
In line with our expectations average inventory on a per store basis increased approximately 22% versus the third quarter of last year.
Approximately half of this increase came from unit growth as we accelerated inventory receipts to ensure better in stock positions for the holiday period.
We continue to expect the growth in average year over year inventory per store to moderate significantly by the end of the fourth quarter.
Now onto guidance for the fourth quarter and fiscal year.
We are pleased with the start to the fourth quarter, including Black Friday weekend results.
We expect fourth quarter sales to be in a range of $1.085 billion to $1.110 billion based on opening approximately 48, new stores in the quarter with comparable sales in the range of negative 1% to positive 1%.
Versus last year's fourth quarter comparable sales increase of three 4%.
As Joel said, we feel great about our holiday assortment and.
And expect to benefit from a better in stock position in Q4, more targeted and effective marketing and an expanded five beyond assortment in more stores.
At the midpoint of our guidance, we expect year over year operating margin improvement in the fourth quarter of approximately 150 basis points driven by leverage in both gross margin and SG&A expenses.
Lower incentive compensation and additional cost management strategies are expected to more than offset deleverage on fixed cost and higher than originally planned marketing spend.
Our effective tax rate for the fourth quarter is planned at approximately 25%.
Which excludes the impact of share based accounting for any share repurchases.
Yes.
Net income is expected to be in the range of 164 million to $173 million.
With diluted EPS is expected to be in the range of $2 93 to $3 nine.
For the full year, we expect sales in the range of $3.038 billion to $3 billion $63 million.
Or an increase of six 7% to seven 6% versus fiscal year 2021.
We expect comparable sales in the range of negative 3% to negative 2% and EPS in the range of $4 55 to $4 71.
Which is an eight 1% to four 8% reduction versus last year.
These full year projections assume opening 150, new stores and completing approximately 250 conversions to the new five beyond store format.
For fiscal 2022, we are planning to spend approximately $235 million in gross capital expenditures, excluding the impact of tenant allowances.
This reflects the opening of our new ship center in Indianapolis, opening new stores, and executing conversions and investing in systems and infrastructure.
In conclusion.
We had a better than expected third quarter and are off to a good start for the fourth quarter.
It remains a dynamic economic environment. However, five below is a resilient retailer.
Our teams continue to move quickly to adjust to changing customer preferences.
And I want to thank them for their ongoing commitment and dedication.
The combination of our long runway for growth industry, leading new store economic model and strong balance sheet.
Bind with disciplined cost management sets us apart and positions us to weather economic uncertainty all while continuing to deliver on our strategic priorities to capitalize on the significant growth opportunity that lies ahead.
With that I'll turn it back over to the operator to begin Q&A operator.
Thank you and at this time, 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 queue and ask.
This time, we will pause momentarily for the first question.
Question today will come from coffee boss with JP Morgan. Please go ahead.
Great. So.
Thanks, and congrats on a great quarter.
Joel so.
Couple of things what do you attribute the inflection in business that you've seen since August could you elaborate on November and is it fair to say that youre embedding a level of potential conservatism in the <unk> Guide and then just anything you see today that prevents you from returning to the components of the Triple double plan as we look to next year.
Oh.
Yeah. Thanks, Matt.
You know obviously, you know based on our guide and where the quarter and the quarter improved.
Throughout September and October .
And I think it's largely a combination of.
The the factors I outlined in my prepared remarks, which you know specifically where were a combination of.
What we've done around the triple double.
<unk> has really helped the improvement in transactions and you know we've always said as we get closer to holiday, we become a needs based retailer and we've clearly seen some of that begin to happen and then finally, we are increased marketing and so those are all things on our side of it.
And then you know it's not lost on US that you know the consumer CPI has gone down throughout the quarter and that probably certainly helped customers as well.
That's kind of how we see Q3, playing out as far as you know elaborating on fourth quarter.
Conservatism is a tough word to.
Now.
Confirm or deny it in the sense that as you always know, Matt Q4 has a different quarter than the rest of the quarters and we clearly have two thirds of the quarter is still in front of us.
So I think.
We said in our marks where we're really off to a very solid start to the quarter. It's in line with our forecast and we see no reason to for that to stop but you know we also have to recognize that it's a pretty dynamic environment and the customer hasn't dealt within the inflation like this before but look.
The stuff we put in place.
It seems to be resonating and we expect that to work throughout throughout December .
Thanks, Matt.
And our next question will come from Simeon Gutman with Morgan Stanley . Please go ahead.
Hey, everyone happy holidays.
Joel can you talk about the product pipeline heading into 'twenty three I know you won't give 'twenty three guidance and that's not the point, but anything that's different and then is there any products that are not already set for the holiday that come into your assortment than the next.
I'm, assuming not but.
Or anything around that and then to 'twenty three.
Yeah.
As far as the assortment.
Q4, I would expect you'll see a few new stuff still floating in for five beyond I think that's a.
The very dynamic line that we expect stuff to go in and out so you'll continue to see some newness and Wow.
Sure, but in terms of the product line I mean, some of the stuff I called out on my prepared remarks, like the Kylie and Kendall crossover bags I mean, that's just a great example of the merchants being out there being trend right getting exclusives to us and that that item is off to a great start and that will carry into next year.
And then I think the big you know if you want to forecast into 'twenty three I think the big change. We've seen you know licenses haven't been relevant for the last three years.
Largely because movies Havent happened and you know licenses tend to come out of movie. So you know the emergence of licenses here in the fourth quarter is a good sign that.
That'll probably continue into 'twenty, three as well, but that's kind of a quick overview on our product and as we think about going into 'twenty three.
Thanks Simeon.
And our next question will come from John <unk> with Guggenheim. Please go ahead.
Hey, Joe.
Your thoughts right, where we are in five beyond now right in terms of price points. So I think you've got more 25 dollar items than you've been you've ever had but price points worlds and I know you've always Michael's always challenge the merchants right, we need dollar items as much as we need $5.
That discipline on on five beyond right is it we need you know 10 dollar items as much as we need 20, well, what's your thought on that today.
Yeah. Good question John .
What I would say.
Say to you on that and honestly for everyone on the call, we're still five below and more than ever. This year, we really focused on that $1. Two dollar price points and really tried to scream value in the stores.
And at the same time strategically we are very excited about five beyond and what that allows us to do to not only be your stocking stuffer headquarters.
During holiday, but also be the main gift and.
We've landed on a on a great platform you know obviously called by beyond.
But what youre going to see us continue to emphasize and build upon is the bifurcation of the two and it is not our intent and non five beyond stores to grow that assortment you will not see that assortment grow in the non five beyond stores, we may still carry a eight foot section.
In the front.
But whether you're talking about five below or five beyond the consistent message that the merchants will deliver as value I think that's more important than the actual price and youre right. John we have.
25 dollar items than we did last year.
For now I think Thats the high end of where it will go up.
And I, we've got too many opportunities to have to go any higher than that right now.
But youll see that continue to expand in the five beyond stores and Michael and the team will do what they do we will start.
As we said at the Investor Day, we're moving away from items on the shelf to a store within a store and you'll start to see world's emerge you'll start to see categories emerge.
And I'm talking about by beyond for the second here, John but hopefully that gives you some sense of the difference between five below and five beyond and yet at the same time, they're both about delivering value.
Thank you thanks John .
And our next question will come from Scot Ciccarelli with June .
Uh huh.
Good afternoon guys.
A question on store growth I think at the gang gone be a bit lower than previously anticipated. So I guess the questions or are there still a headwind for the opening cadence we should be thoughtful about especially as we look towards a 23 unit growth opportunity.
Yeah. It's a good question John I mean clearly.
Coming into 'twenty two here.
The headwinds persisted over you know coming out of the pandemic you know even the ratio of stores first half to second half is skewed much later to the second half here in 'twenty, two and of course that rolls over a little bit into <unk> into 'twenty three.
But.
You know we're look we're still on track for the long term triple double goals.
We said 1000 stores over four years.
If you had if you take the slow start in 'twenty two here he does that.
And you end up missing that by 5% or something it's it's still directionally.
<unk> stores and and that's only because of the start here to 'twenty. Two we are gaining momentum going into 'twenty, three and expect that to continue to grow but I think the majority of the headwinds are behind us and you know I hate to say, it's got I think for the first time in three years, we're going to see some retail displacement coming out of the holidays.
That will be a good thing for us as we.
Pick up more sites as we know it.
Expand our growth, but that hopefully gives you some outlook on it.
Thanks Scott.
And our next question will come from Brian Nagel with Oppenheimer. Please go ahead.
Hi, good evening.
Congrats on a nice quarter.
Sure My question Thanks, Brian .
You mentioned in your prepared comments the opportunistic purchases. So the question I have is maybe just elaborate further on that.
Is this something you've always done this in the past. This is a bigger effort now just given some of the dislocations in the product that you're buying opportunistically is it more of the same at five below or do you have products that could be unique this year.
Yeah, I think that why it was important to get that included Brian in my prepared remarks is that honestly for the last couple of years, there hasn't been a lot of closeout opportunities one time opportunistic buys.
And I think it's important to note, though you know it's still a relatively low single digits of our overall purchases, but you know you walk in our stores Youll see.
A big selection of Funko.
Our 12 inch Marvel action figures.
No.
Things like that are a combination of really great brands and licenses and then incredible value that we brought to the stores. So I think it's look it's something that's been in our DNA for quite some time, but I needed to remind everybody.
That's.
Kind of back in our in our playbook and it hasn't been there for last couple of years.
And our next question will come from Paul is way with Citi. Please go ahead.
Hey, Thanks, guys.
Curious if you can share what you're seeing in terms of.
The five beyond prototype comp performance versus.
The rest of the chain chain in any detail that you might be able to give in terms of the traffic versus ticket.
Our stores versus the non five beyond stores.
Hey, Paul it's a great question.
Cannot lose a little bit so you know what Matt asked about you know improvements through the Q3 quarter.
And at the same time I'm not trying to Dodge your answer and while we are seeing improvements in both.
It's really early for us to kind of give you a definitive statements on that because the overwhelming majority of those happened in Q3.
Which is again it was an input into it you know why you know sales improved throughout the quarter and I think we we really.
Kind of need to watch how Q4 goes but what I will tell you and remind everybody.
At our Investor Day, you know we expected the first for full year post remodel to run in plus mid single digits and.
We haven't seen any signs that it's they're not going to performing at kind of that level, but at the same time, we want to kind of see more data real data. We've got a large subset of stores now 250, and we'll really watch those through the quarter, but I would.
Stick with the mid single digits, which is what we laid out at.
Investor Day.
Thanks, Paul.
And our next question will come from Edward Kelly with Wells Fargo. Please go ahead.
Yeah, Hi, guys good afternoon.
So theres been a lot of talk about heavy promotions this holiday period, especially in categories like toys.
Can you just maybe talk about what your Q4 mix is in that category and how you think you're set up to compete and then just a follow up on one thing you talked about earlier on the closeout business, just maybe a little color on what Youre seeing there in terms of the opportunity could you maybe.
Size it.
And any impact that that could have in Q4 as well. Thank you.
Yeah.
Yeah Ed D.
You know the toy category for us and holidays and kind of the high teens.
<unk> and I think it's look I know the industry is talking a lot about heavy promotions over buys.
That really hasn't impacted us we we.
We also don't tend to play in the traditional toy lineup that everybody is talking about.
Squished malls is in the toy Cat you know in our toy World.
And you know.
That's very different than you know the plastic toys that I think a lot of people are referencing and today I I D.
Don't expect us to deviate too much from.
The high teens in terms of the Q4 performance and toy so Ken anything to add on that no. I think you hit it it's always an important part of the holiday season, and you know us.
Joe mentioned those are our expectations, that's what we've seen historically from a penetration standpoint.
And that's what we're expecting to see for this holiday also.
Thanks, Ed.
And our next question will come from Jason talked with Bank of America. Please go ahead.
Okay.
Hey, good afternoon, Thanks for taking my question.
You mentioned a few times.
Maybe you said on past calls that the business becomes more need space as we get into the holiday season. So I'm just curious as you're starting to plan the business for next year.
We could see a similar cadence.
Just sort of environment continues I'm curious to get your thoughts there.
Let me clarify you see a similar cadence of the needs base going into holiday, Yes, I'm just wondering as we get out of the holiday season, and we entered the spring and summer assuming that the consumer just broadly still under pressure.
You're kind of planning the business too.
This run rate won't continue to see some softening before that it picked up again as we get into the holidays.
Yeah look I I think I wouldn't expect us to see softening I think it's it's a very different time period than where the start of the year was that the consumer is clearly said value is important and they figured out that you know we're a piece of the value equation I think what we saw in Q2.
<unk>, where we saw a big slowdown as did most retailers and that was during the transitory time of massive inflation certainly the war started and we saw the consumer freeze.
They've adjusted their pocketbooks, they've adjusted new lifestyle, and we're part of that equation going forward.
Will the first couple of quarters be more focused on our needs based categories like consumables and candy, absolutely, but as long as we continue to deliver value I don't see it going backwards plus look youre going to get the continued benefit of more conversions as we go into 2023, which is going to more than.
Offset any potential slowdown you're you're foreshadowing there.
Hopefully that gets at what you are asking Jason.
Thank you and our next question will come from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.
Thanks, Congrats on the strong results I wanted to ask.
Wanted to see if first just clarifying on the cadence of trends.
If I'm not mistaken I think the cadence.
The compares get easier as we get into the back half of December and into January . So first just confirm that and then a second question would be just you've invested a lot in technology within the stores self checkout.
We've had a lot of retailers that have talked about an increase in shrink rates in 2022 wanted to get a sense for what you're seeing you know and procure is as you know the last couple of quarters here and as we get into the holiday season.
Yeah. Thanks, Jeremy.
Yeah, I think you're thinking about the cadence piece of it right.
If you recall Q4 last year January .
<unk> was up against the.
The stimulus payment from 'twenty one 'twenty.
January of 'twenty, one, which was at the end of our fiscal 'twenty and so that that was our hardest compare last year I do think January is now you know a more normalized baseline.
Baseline from prior years and it is also our smallest month of the year, but.
You know clearly you know I think yeah and this is at all in our guide to we you know we expect you know November was the toughest there was a big pull forward last year of a buying with the whole concern over supply chain.
But that that we factored in kind of all of that in as we thought about our cadence for the for the quarter and then as far as shrink rate.
Look there's been a lot of talking in the.
And in the industry about that I think all of that started to emerge in 2020 one.
And so I don't expect 22 to be.
<unk> significantly different than 'twenty one.
Some of that is driven by our price points.
These are some of the higher end retailers, but it's also kind of already and are largely in our base from from last year.
And our next question will come from Chuck Grom with Gordon Haskett. Please go ahead.
Hi, This is Eric Cohen on for Chuck Thanks, a lot and congrats on the corner.
Toy growth definitely improved a lot. This quarter I was wondering if you sort of unpack the drivers of improving growth and then also sort of how youre thinking about inventory as we get to year end.
Yes, Thanks, Eric.
As I mentioned in the prepared remarks, we did see a significant improvement.
And that year over year average store inventory it actually dropped in half if you recall back in Q2 was I think the growth rate was in the high 40% I think 47% down to 22%.
The overwhelming majority of that was our strategy of accelerating inventory receipts to get prepared for this holiday season, we didn't want to get caught up in any type of supply chain disruption and if.
If you move forward to the end of the year based on our expectations. We think that moderation is going to continue significantly as we get back to the <unk>.
To the end of the year and we will be we should be in very good position at the end of the year and probably we're seeing some of the freshest inventory levels that we've seen in years. So we feel really good about where inventory is for us right now.
Alright. Thank you thanks, Eric.
And our next question will come from Anthony to combo with loop capital markets. Please go ahead.
Good afternoon, and thanks for taking my question you mentioned that your assisted self checkout penetration is or I guess, it's been 70% of your stores and I was just wondering you.
What's sort of the long term targets are there any limiting factors to get into 100%. Thank you.
Yeah. Thanks Anthony.
Look the long term targets, it'll probably never be exactly 100%.
Some of it's a factor of converting old stores. So I would say are really low volume stores or still are smaller format stores, we probably arent going to if you don't have the room to put it in.
And then are extremely high shrink stores, we tend not to put it in there so but for all intents purposes. You know that number will continue to float up it'll never be 100, but it's probably not going to be less than 85%. So somewhere in that range of 85 to 90.
Thanks Anthony.
And our next question will come from Brad Thomas with Keybanc capital markets. Please go ahead.
Hi, good afternoon.
Thanks, John .
Best wishes for the holiday here.
My question was.
I know it's early to talk about 2023, but I was wondering if in broad strokes you can give us a little more thinking around margins given some of the noise that we're seeing and given the inflection that you're guiding for here.
Gross margin.
Yeah, Brad its Greg.
The question, you're asking is probably not a lot of People's mind, I'll turn it over to Ken here in a second but just look this is normally where we wouldn't.
Want to give any guidance on 'twenty three.
And we tend to save all of that for March and maybe a little bit at ICR.
Listen I know, you're all trying to kind of figure out your models and you know.
And you have to also realize we have to get through Q4.
But you know maybe maybe I can help you a little bit on the top line.
The think about that and then Ken maybe you can think about a scenario that would help them to think about the bottom line, but you know I think you know our largest input to to topline growth as new stores and we wouldn't expect to be below 200 next year and so I think that's you know in the ranges were.
Thinking about it will certainly have.
Full line of sight to the to the new store program as we get to March and our year end call, but can help them think about a scenario of how to think about the bottom line, yes, sure and thanks, Brad for the question and as Joel mentioned, obviously, we're going to get through the holiday season, and we'll we'll.
We will provide guidance as we normally do on our March call and again this is not guidance, but in a scenario of format. So in a scenario say of a 3%.
Comp for next year based on what we know today, Brad we believe that operating margins should be up slightly and that's versus our fiscal 'twenty two guidance that we're providing now that does include some puts and takes that we've spoken about before there are some headwinds that we would.
Back next year.
Around areas like higher incentive compensation.
The cost management strategies that we initiated this year, primarily in the back half of the year that we've spoken about but have done helped us significantly from a profitability standpoint, we're gonna be anniversarying those in some of those we're carrying forward in some of those we can't say there'll be a slight headwind there.
And then inflation.
We're seeing increases in certain operating areas of the business, especially coming on here late in the year.
But as you know, we always look and we do a pretty good job of mitigating a lot of those increases based on our scale negotiations and other cost management.
Strategies that we can put into place. So that's again just a scenario of what we would see next year. If it was say a 3% comp.
Thanks, Brad.
And our next question will come from David Bellinger with N K M partners.
Got it.
Thanks for the question.
Appreciate the commentary around five beyond and the lift you're getting in that respect, but average ticket this quarter.
Order was still down it was up 20% looking back to 2019, but down on a year over year basis.
Did that acceleration you saw through that.
Q3 period in terms of comps did that did that have to do more with certainly a quick shift to value and are you seeing those lower price points.
Are they moving at a faster velocity than.
Call it $5 an ounce.
David assay.
Asking that through the quarter did you just asked.
You asked me that question again, I'm trying to follow.
So the improvement you saw throughout Q3 and acceleration did that have to do more with some of your lower priced items, just turning quicker than selling better or you're still getting that lift from items that are $5 or higher.
Well I think you know if I had to categorize it it's probably roughly a third a third a third.
Meaning a third of its coming from five beyond.
A third of it coming from you know.
Dziedzic price increases we made.
You know to combat inflation, and then a third of its coming from sales mix.
<unk> right, so I think that that kind of yes, Dave.
David if you're referring to kind of a typical average unit retail increases there.
That's where that's that's what that mix is.
About a third each one of those three components make up the make up to our average unit retail changes.
From an overall improvement in the business, it's really coming from across the board.
In terms of a product.
Respective.
Yes.
And our next question will come from Michael Lasser with UBS. Please go ahead.
Good evening. Thanks, a lot for taking my question, Ken So you need a 3% comp to generate some margin expansion next year, presumably that's not the new norm for the leverage point given that you'll have some unique expenses roll back into the base to what a what is the new.
Or what is the long term sustainable comp point comp.
The amount that you'll need to lever expenses and what happens is if your sales are flat in 2023, how much margin compression would you see just given there's a lot of uncertainty in the macro environment into next year.
Let me let me just take that began Ken I'll hand over to you.
Hey.
I wanted to I jumped in there and then I'll, let Ken answer specific Michael because.
I don't think the scenario I mean, Ken gave you a 3% scenario, but I don't think the scenario everyone. On this call should be thinking about is is a flat comp.
I think you know clear.
Clearly as we get to March and if the world changes again.
Unwind that comment, but you know I think with all the initiatives. We've got focused on what we told you all at the.
Investor Day.
We're pushing ahead with all those and.
We outlined 3% to 5%. The next three years, we're working our way into that for next year and I think the the 3% is still the right way to think about it. If you know if you take our historical low single digit you add in the benefits of conversions.
What starts to push is set at three or higher we're not ready to go any higher than that yet but.
I would caution everyone from getting off of a flat comp can I don't know if you want to yes. The Michael if you take it a little further because you're asking you're going a little further out in terms of.
The timing here just to remind everybody 2022 was a pretty unique year and because of a lot of things that happened. This year, they're having an impact on next year right I spoke about some of those headwinds which are really carryover from this year in our reduced incentive compensation.
Some of those cost management strategies and some other things.
So there's a lot going on there to unpack, but how I would answer you would go back to our Investor Day, where Joel just spoke about our expectations from a top line perspective.
One of the things.
That we emphasized was our ability to lever on a kind of a higher basis right in terms of higher leverage given the investments that we're behind us specifically in areas like the distribution network and some other and some other things technology.
That we would have an increased ability to leverage as we move forward at this point, obviously I can't provide any specifics.
We need a little bit more time for that but I would think that that's probably the key takeaway from <unk>.
Profit profile for us longer term and then operating leverage embedded in that yeah, I don't see anything longer term, Ken that as said, our our leverage tipping point needs to stay up at the 3%, 3%, where we used to be we just got to get through 'twenty three first yeah.
That gives you some color there Michael.
You.
And our next question will come from Michael Montana with Evercore ISI. Please go ahead.
Hey, Thanks for taking the question just wanted to follow up you know.
Joe You had mentioned about the new store side earlier can you give any sense for the remodel conversion front you know in five beyond next year can we think 300, plus and just remind us what the capex is for those.
Yeah.
It's 300 plus numbers are certainly a number.
At this point, we're still putting all that together Michael but.
I wouldn't certainly expect it to be less than 300 at all at any stretch it.
Be a little bit north of that number.
And what we will lay out lay out for all of you as we get certainly the March call is not only how many but some of the timing behind that and then Ken.
Oh for the investment to build out for store yes.
Yeah, Michael that varies depending on the type of conversion, that's taking place depending on the.
The age of the store, it's a more it's a more recent store can be pretty low actually.
Down below $100000, if it's if it's a full versus an older vintage type store.
Well cost pretty much the same as it would for building a new store.
But the overwhelming majority of those are going to be less than 100, K yeah right. It's not.
That's about where we're thinking about it yes. Thanks Michael.
And our next question will come from Kristina, Qatar with Deutsche Bank. Please go ahead.
Hey, guys. Good afternoon, and congrats on a really good quarter. I was just wondering you know thinking about share of wallet you did mention in your prepared remarks that you were working to leverage data for more effective messaging you also invested in marketing more heavily in the back half of the quarter. So can you maybe talk about the customer response that you saw because.
It does seem like it could be a pretty meaningful opportunity looking ahead, especially to drive brand awareness.
Yeah.
Thanks, Kristina and and that's really why we invested in <unk> and starting with November here is our first month, where we have.
Year over year statistics on on at the at the customer level.
We used to really only have it at the at the DMA level, but.
I would tell you you know so we will have that data going forward, which will answer your question, specifically I think as I look backwards I really have to use transactions as a proxy for trends for traffic.
And we saw transactions improve.
Throughout the second half of the third quarter and you know that that is a really good sign that says our marketing is working.
Customers are looking for value and then what we will be able to start to give you. All of you as we look at fourth quarter here and beyond is start to see what the mix of our customer is.
You know specifically who is coming in after we advertise so I just need a little bit more time. So we can get off of kind of the old way we've done it but.
Short of having a loyalty or a credit card.
<unk> work.
Which started in November last year that which then therefore means this is the first year I've got year over year.
Trends.
We will have that starting in 'twenty three for you.
Thanks Kristina.
Hey, Andrew.
They'll go ahead no go ahead I was going to say.
This concludes the question and answer session I'd like to turn the conference back over to Joel Anderson for closing remarks.
Yes, thanks, operator, sorry for jumping on top of you there.
Thanks, everyone for joining us today and you know just a reminder for everyone. As always you know I think we tried to commute communicated today. Our purpose here at five below is to deliver exceptional value and wildfire customers in values, even more important this holiday than ever we are extremely confident that we have sourced a terrific selection.
For for this the fourth quarter of value products. It will while our customer we are the go to destination for stocking stuffers and gifts.
And we also believe in value and giving back to our communities and right. Now we are currently with toys for Tots. This is something we've done for over 10 years now and I encourage all of you to visit our stores and help make a donation of difference for toys for tots.
So look in conclusion I want to thank all of our teams here at five below for their continued hard work in making this a great company and brand and we look forward to speaking with all of you. After the holidays have a great day and happy past Thanksgiving. Thank you.
Yeah.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
Okay.
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