Q1 2023 Five Below Inc Earnings Call
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Good day and welcome to the 5 Below first quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
To ask a question, you may press star then 1 on your touchtone phone. To withdraw your question, please press star then 2.
Please note this event is being recorded. I would now like to turn the conference over to Christiana Pelz, CTO of Investor Relations. Please go ahead.
Thanks, Sarah, and good afternoon, everyone. Thanks for joining us today for Five Below's first quarter 2023 financial results conference call. On today's call are Joel Anderson, President and Chief Executive Officer, and Ken Bull, Chief Operating Officer, Chief Financial Officer, and Treasurer.
After management has made their formal remarks, we will open the call to questions. I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended.
Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and our 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 5below.com. I will now turn the call over to Joel. Joel
We were pleased to achieve first quarter results in line with our guidance with sales growth of approximately 14% to $726 million and a transaction driven 2.7 comp sales increase. It continues to be a challenging time for consumers with persistent inflation, and a long-term impact on the economy.
lower tax refunds and fewer government sponsored benefits compared to the stimulus fueled periods of the pandemic. However, being an extreme value trend right retailer, you continue to attract and retain more customers and grow our comparable transactions in both converted and non-converted stores.
Our transaction increase of 3.9% was the highest since 2017, excluding the stimulus fuel period during the pandemic, and is a strong indicator that Five Below is a destination customers rely on even in tougher economic times.
We are a resilient retailer with a flexible model and we continue to play offense, opening new stores and quickly reacting to customer needs to bring them the WOW products that they want at amazing values.
while also executing against our strategic pillars to achieve our triple-double growth.
On product and trends, we saw continued popularity of a broad variety of trends across our world in Squish, Hello Kitty, anime, collectibles, and our version of consumables, including candy, snacks, and beverages in our candy world.
and also beauty items and accessories in our style world.
The new Super Mario movie released in April was a hit and we sold through tees, posters, and other items and quickly procured more. It is nice to see licenses emerging again.
For Easter we had great baskets and candy at extreme value.
Easter we had great baskets and candy at extreme value that resonated with our customers.
The broad-based results of our worlds demonstrate the relevancy of our products.
All through the quarter, we made progress across our five key strategic pillars that underpin our long-term triple-double vision.
As a reminder, we are looking at each of these five pillars through the lens of customer relevancy and are unleashing the power of data and analytics to drive results.
The first pillar is store expansion.
We are expanding our reach to put five below anywhere as we said at our investor day.
We now expect to reach a milestone of over 200 new stores this year.
while building our pipeline for next year and beyond. In the first quarter, we opened 27 new stores across 19 states.
Two of these stores were in the top 25 spring grand openings of all time.
With our strong balance sheet, seasoned and nimble teams, and focused execution, we acquired several leases from other retailers in bankruptcy.
positioning us to exceed our original 200 store openings goal for this year.
These negotiations took time and effort from our real estate, construction and design, legal and finance teams on top of their already busy jobs and we are very thankful for their commitment in achieving a great result.
Moving to our second pillar, store potential, we are focused on growing our average unit volume in the addition of 5 Beyond in the back of the store, as well as new products and services such as ear piercing and fun snarky helium balloons.
We converted approximately 250 stores into the new prototype in the first quarter alone.
and are on track to convert over 400 stores to the new 5Meon prototype this year.
to achieve our goal of five beyond everywhere.
These conversions continue to drive traffic and hire baskets.
And we see a large opportunity to grow 5 Beyond from the current single-digit penetration of sales today.
Our third pillar is product and brand strategy.
We've discussed how Five Below is a merchandise driven organization and how our merchants are relentless about scouring the globe to pursue trends while newness in value. In the first quarter, we were very pleased to officially incorporate
open our first global sourcing office in India.
We are very excited to have a presence on the ground to work directly with our factories overseas.
together develop and bring to market even more amazing products at disruptive and distorted value for our customers.
This was a huge effort by so many people who supported our product development team in establishing this office.
Thank you to those who went above and beyond to achieve this milestone. On brand strategy, our digital marketing investments continue to grow and reach more customers to build our brand awareness, drive customer traffic, and position Five Below as a go-to destination for fun.
We conducted a successful campaign in Q1 surrounding Easter while continuing to push Evergreen offerings of the brand.
In doing this, we have successfully used data and analytics to understand audiences and to segment and optimize our digital marketing investments.
Complementing our paid digital marking efforts...
Our social presence and customer fans are growing in terms of followers engagement.
across social media platforms.
In addition to influencers creating content and posting about us, celebrities like Walker Hayes and Bethany Frankel shared the videos about their visits to Five Below on TikTok.
Their posts had high viewership and engagement. The fourth pillar is inventory optimization. The focus of this pillar is to further enable the scale required to achieve our triple-double strategy, while continuing to leverage inventory as an asset to drive sales and maximize profits.
Using technology and data analytics, we are focused on improving inventory forecasting, ordering, replenishment, and flow, with a goal of increasing turns and improving end-to-end visibility.
We've already implemented a new vendor management platform that increases transparency.
and enhances real-time communications, and we are beginning the work on both a new planning system and a replenishment forecasting tool. The fifth pillar.
communications, and we are beginning the work on both a new planning system and a replenishment forecasting tool. Our fifth pillar is crew innovation.
which focuses on the critical pipeline and talent that we need to achieve our triple double.
We will hire and train hundreds of thousands of crew members in the next several years in order to serve our customers, lead our teams, ship our product, and support our strong growth.
As you can see, we have been busy this first quarter.
In summary, we are pleased with our financial results and operational accomplishments in the first quarter amid a challenging macro backdrop.
With May actualized, we have a good perspective on Q2, in which we expect to see a continuation of transaction increases. As we look to the remainder of the year, we believe many of the headwinds of the pandemic era that impacted us will begin to emerge as tailwinds.
We are accelerating our offensive playbook. We are opening 200 plus new stores and completing over 400 conversions. We are executing a focus marketing campaign to bring to life the new 5 beyond store format. We are developing a focus marketing campaign to bring to life the new 5 beyond store format.
And we are capitalizing on an improving supply chain, including favorability and freight costs.
and continuing to build our strong pipeline of new stores for 2020-24.
With that, I will turn it over to Ken to review our financials and our outlook in more detail. Ken? Ken Mendez is the SBA financial analyst of our FOMC.
And that I will turn over to Ken to review our financials and our outlook in more detail. Ken? Thanks, Joel, and good afternoon everyone.
I will begin my remarks with a review of our first quarter results and then provide guidance for the second quarter in the full year.
Our sales for the first quarter of 2023 increased 13.5% to $726.2 million from $639.6 million reported in the first quarter of 2022.
On a four-year basis since 2019, total sales for the first quarter this year increased by an approximate 19% compounded annual growth rate. Comparable sales increased by 2.7%, with a comp transaction increase of 3.9%, the total sales increased by 2.7%.
partially offset by a comp ticket decline of 1.2%.
We open 27 new stores across 19 states in the first quarter, compared to 35 new stores open in the first quarter last year, and continue to be very pleased with the productivity of our new locations.
We ended the quarter with 1,367 stores, an increase of 142 stores or approximately 12%.
versus 1225 stores at the end of the first quarter of 2022.
Gross profit for the first quarter of 2023 increased 13.6 percent to $234.8 million versus $206.8 million in the first quarter of 2022.
As expected, gross margin of 32.3% was flat versus the first quarter of 2022.
Gross margin of 32.3% was flat versus the first quarter of 2022. As a percentage of sales.
S-GNA for the first quarter of 2023 increased approximately 80 basis points to 26.5% versus last year's first quarter. Driven primarily by a planned increase in marketing expense,
as well as higher costs in certain store related expenses.
As a result, operating profit finished at $42.4 million versus $42.3 million in the first quarter of 2022, while operating margin decreased approximately 80 basis points to 5.8% as expected. As expected, operating compensation has expired.??????????????????????????????????????????????????????' landlord?????????????????????????????????????????????????????????????????????????????????????????????? ??????????????????????????????????????????????????????????????????
Net interest income was $3.65 million as compared to a net other expense of $237,000 in the first quarter of 2022, as our investment income benefited from rising interest rates.
Our effective tax rate for the first quarter of 2023 was 18.6%, compared to 22.3% in the first quarter of 2022. This decrease was due primarily to a higher benefit from share-based accounting this year versus last year.
Net income for the first quarter of 2023 was $37.5 million versus net income of $32.7 million last year.
Earnings per diluted share for the first quarter with 67 cents, compared to last year's earnings per diluted share of 59 cents.
Deluted EPS included a share-based accounting benefit of approximately six cents this year, compared to an approximate 3 cent benefit in the first quarter of 2022.
We ended the first quarter with $424 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 first quarter was $534 million, as compared to $504 million at the end of the first quarter last year.
Average inventory on a per-store basis decreased approximately 5% versus the first quarter last year, as we strategically ordered inventory earlier last year to ensure healthy in-stock positions.
We are pleased with the current level and quality of our inventory going into the summer season and expect to be well positioned for the second quarter.
Now I'd like to turn to our guidance.
For the second quarter of 2023, net sales are expected to be in the range of $755 million to $765 million, an increase of 12.9 to 14.4%.
At the midpoint of this guidance, total sales are expected to show an approximate 16% compounded annual growth rate for the four-year period since 2019.
We plan to open approximately 40 new stores in the second quarter this year as compared to 27 stores opened in the second quarter last year and are assuming a second quarter comp sales increase in the range of 2 to 3%.
As a reminder, the slower cadence of opening one-third of our annual new stores in the first half of this year was due primarily to permitting and landlord-related delays.
We expect operating margin of 7.5 to 7.9% in the second quarter of 2023, or the leverage of approximately 70 basis points at the midpoint, as a shift in marketing spend and more normalized incentive compensation costs this year.
are only partially offset by lower freight expenses.
That interesting come is expected to be approximately $4 million for the second quarter.
and taxes are expected to be approximately 26%, which does not include any potential impact from share-based accounting.
Deluted earnings per share for the second quarter of fiscal 2023 are expected to be 80 cents to 85 cents versus 74 cents in deluted earnings per share in the second quarter of 2022.
Now onto the full year.
We are tightening the range of our EPS guidance with the midpoint consistent with our previous guidance.
And we still expect that at this midpoint, we would generate slight operating margin expansion.
Our total sales for the second half of the year are still expected to grow in the high teens on a four-year keg or basis.
Similar to the first half, with a comparable sales increase in the second half of the year currently assumed in a low single digit range.
Fiscal 2023 includes the 53rd week, which is expected to add approximately $40 million in sales and approximately $0.8 in EPS.
My remarks on full-year guidance will refer to the 53-week year unless otherwise noted.
For 2023 sales are expected to be in the range of 3.5 billion to 3.57 billion dollars.
an increase of 13.8 to 16.1%.
The comparable sales increase is expected to be in the range of 1 to 3%.
We now plan to open over 200 new stores and to end the year with over 1,540 stores or unit growth of approximately 15%.
For the full year, the slight leverage in operating margin at the midpoint of our guidance is driven by lower freight costs offset in part by lapping lower incentive compensation and certain one-time cost management strategies we put in place last year. With our strong cash balance and healthy free cash flow generation,
and half of the year of approximately 26% and does not include any potential future impact from share-based accounting. Net income is expected to be in the range of $297 million to $319 million, representing a growth rate of approximately 13.5 to 22.1% over 2000.
basis. Growth for diluted earnings per share is implied to be 11.5 to 20%.
This guidance does not include any potential future impact from share repurchases. With respect to CAPEX, we now plan to spend in total approximately $335 million in gross CAPEX excluding the impact of tenant allowance.
This reflects the opening of over 200 new stores, including those recently acquired from bankrupt retailers, converting over 400 store locations.
commencing expansions to our distribution centers in Georgia and Arizona and investments in systems and infrastructure.
In summary, we delivered first quarter results within the range of our outlook and against a difficult macro backdrop.
As Joel mentioned, we also made important operational progress against key strategic objectives.
This, once again, is a testament to the executional capabilities and focus of our teams, and I am extremely grateful for their efforts.
For all other details related to our results and guidance, please refer to our earnings press release. And with that, I would like to turn the call back over to the operator for the question and answer session. Going back another method was 1999kb there was a particular question.
related to our results and guidance, please refer to our earnings press release and with that I would like to turn the call back over to the operator question and answer session. Operator?
Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch time phone.
If you're using a speaker phone, please pick up your hands at before pressing the keys. To withdraw your question, please press the star and choose.
Please limit yourself to one question. If you have further questions, you may re-enter the question to you. At this time, we will pause momentarily to assemble a roster. And a few slides or still you may blend the roster.
Our first question comes from Simeon Gutman with Morgan Stanley . Please go ahead. If you
Good afternoon. My one question with no extra parts is literally every company across the retail landscape that we follow, whether they're selling to lower income or higher income, dited strain on the consumer, basket pressure.
some weakness. So I'm curious, Joel, if you can give us some insight into your quarter, the cadence of it, seeing if we're over a hump in terms of your customer. And inside how your customer is handling it in terms of basket and visits, just as a way to gauge if we can expect to expect the steadiness going forward.
Yeah, thanks, Simian. And it's a great question. I don't know that I could say that our customers over it, but I would say that the indication of such a strong transaction-led quarter for us probably indicates that, you know, like we've seen multiple times.
When times are tough for our customer, they have to rebalance their balance sheet, figure out, you know, they're spending patterns again and five below becomes, you know, part of their new routines and so clearly that showed up in transactions. Look, as far as the quarter goes,
You know, we were really pleased with Easter and like many called post Easter was a softening. So I think we're seeing trends get back to more normal pre-pandemic where the customer buys closer to the events. We certainly saw that with Easter, we've seen it with Mother's Day. That trend happened last year with things like Halloween and there's no reason that that wouldn't continue to happen.
We see the end of the month cycle, you know, with, as the end of the month, the sales gets softer, then they really pick up the beginning of the month. So all that, we've got many, many years of following that, and we're really kind of getting back to trends that we saw closer to last year.
You know, look, we're trend right, we're extreme value. We believe that the last place customers cut out are their kids. And so all that should bode well in tough times as well as in really strong times. So, you know, quarter was, you know, on the soft end of it, but we've definitely seen an improvement here. And I think that...
The peak of the head ones are behind us. Thanks, Simian. Our next question comes from, got to the early lift, true as please go ahead.
Hey guys, Scott Chikarelli. So I guess my question is we've had declines in average ticket for several quarters now. Just given the growth in five beyond, I guess the question is at what point would you expect average ticket to shift into positive territory given the current environment? Thanks.
Thanks Scott. You know, you've seen declines but they've been pretty small and I think it's important to remind everybody, you know, post pandemic, we saw extreme increases in and ticket and so while there's been some declines they still are much higher than they were.
Pre-pandemic and you know double digit increases so It has ticked down. I think that's assigned the customers being very discerning And what they put in their basket But at the same time I think where the positivity for five beyond really is proving to play out is on trips
So that shows up in transactions. We're just one more reason to come visit five below. There's another reason. I don't know, can anything else dad? No, I think you hit it on the five beyond. Scott, early on we've talked about this and we're still seeing it. It's really driving and increasing transactions.
I think it's somewhat of a newness of the store when the customer comes in and they see that. That may change because we're still early in this, but at least out of the gate, we're seeing that increase on the transaction side versus ticket.
Thanks, Scott.
My next question comes from Matthew Boss with Strayping organ. Please go ahead.
Great thanks and congrats on a nice quarter. Thanks, Matt. So Joel, could you expand on the broad-based performance that you're seeing across worlds and just the drivers behind the material improvement in transaction count, and then can with store productivity the best in two years. You just elaborate on the performance of some of the new builds.
and speak to the acceleration decisions that you made around new stores and conversions.
Yeah, look, Matt, the performance was really seven out of our eight worlds were extremely strong, all positive. Really the only world that's running negative comms is tech and I think that's pretty much across marketplace.
but really led by our version of consumables. I mean, candy, snack, beverages, HBA, those were the leaders of the quarter. But the fact that seven out of our eight worlds were positive shows you the customer really shopped our entire...
offering. That's a full store. Yeah, and then Matt, on the store productivity, you're right, you know, we've seen in some recent quarters back to that kind of 90, 90 plus store productivity performance, which we're happy to see. Joel actually called out this quarter a couple of stores again. It records for spring grand opening performance.
And if you look at our guidance, if you do the math around that, we do expect that to continue as we move forward, to get back to that 90% productivity as we move through the year. All right, thanks, Matt.
Next question comes from David Belinger with Ross M. K. M. Please go ahead. Hey Joel, thanks for taking the question. On the weasus you recently acquired, it looks like you picked up maybe 18 of those from a home furnishings retailer no longer in operation.
Those store sizes look to have a little more square footage than your typical box looks like most of them are in excess of 10,000 square feet. So is there any thought or testing around maybe a slightly larger store format including not just a wider selection of product but maybe some additional space for five beyond. Thanks.
Yeah, thanks David. You know, the majority were picked up from Tuesday morning. And you know, whether it's 10,000, 11,000, it's an immaterial difference to us. We've got plenty of stores out there that have a little extra square footage. But what I would tell you about the prototype is, we continue to,
innovate with our prototype. I mean the original 5 below prototype was only 4 to 5,000 square feet.
Then we created the 7,500 square foot, which what I got here, and we've slowly grown it now close to 10. And the way we've set up five beyond, David, is we can continue to grow five beyond. All we have to do is keep pushing that back wall back. And so it's only limited by our...
merchants coming up with rituals and milestones are growing up that they think we can build a classification out of. I think Pets a great example one that we built over last few years. But as of this point in time, we are really more focused on these next couple years, massive conversions.
to the current prototype that we shared with all of you down in Pembroke in Florida. But it's not to say down the road there is an opportunity to keep growing but the prototype. Thanks. Appreciate it, David.
Our next question comes from Jeremy Hamlin with Craig Helen Capital Group. Please go ahead. Thanks. This is Jack Cole. I'm for Jeremy. So similar to the first question, we've also heard widely across retail pressure from shrinkage. But you guys saw your GM's flat year as you expected.
So just any comments on any impacts you guys saw from shrink in the quarter, and if so, could you quantify it just in terms of bips? Yeah, look, shrink is definitely something that's impacted retail. We're no exclusion to it. We trued that up last year, and it had an impact on our fourth quarter.
we are crewing at the higher rates this year. And, you know, doing things in our parts to mitigate shrink. We change our return policy as an example. I don't know, can anything else on shrink? No, I think Jack, as Joel mentioned, we're focusing on preventative measures around shrink. I mean, at this point,
We're not experiencing anything materially different than what we saw at the end of last year and we did a lot of our physical inventories. And as Joel mentioned, you know, that higher rate that we came out of last year with has been included in the guidance that we provided for this. So it's all baked and there's just guidance that higher rate.
Yeah, thank you, Jack. Our next question comes from Michael Racer with UBS. Please go ahead. Good evening. This is a tool, my sorry, on from Michael Racer. Thanks a lot for taking our question. We have a question on five beyond.
Are you still getting a mid-singer digit lift from the five beyond remodels? And is there any risk that the lift moderates from here given the macro background?
Thank you. That lift has been consistent. And we're seeing that continue in the stores that we first converted. And the stores that have just recently converted. So you see that lift almost immediately. And it has continued throughout. But.
That's, you know, work stream value and the customer loves what they're seeing in five beyond. And that mid-single digit is continues to be the forecast we expect. Thank you. Thank you.
The next question comes from John Hlingbawke with Guggenheim's Gerdy. Please go ahead. Hey, Joel, two quick things. Number one, the acceleration of the five beyond conversions, you know, can you accelerate it further, meaning do more than 400 this year and accelerate it next year? And then secondly, your current thought
However, I would tell you the people that do our conversions are also the same team that does our news yours. And so it was purposeful this year that we...
Front-end loaded our conversions. As you can tell, our new stores are back-end loaded this year. And so that team is really planned to wrap up conversions here by the end of Q2 to really focus on the back half new stores. I mean, this is a record back half opening for us. It's gonna be about one third, two thirds, front half the back half.
And so that's probably the primary reason we're not accelerating them. But we've got a, you know, we feel the 400 are getting done. We feel really strong about them. And then we'll pick those right back up starting in the beginning of the year. And as far as tech world goes, yeah, we've seen some improvement from that. We've got an even bigger...
the all important fourth quarter. Thanks, John .
For next question comes from Edward Kelly with little Sfargo, please go ahead.
Hi guys, good afternoon. I wanted to actually about the comp cadence. The Q2 comparison seemed like it was going to be your easier comparison of the year on a multi-year basis. Based upon how you're guiding, I think it implies a little bit of the acceleration in the back half. So just thoughts around that. And then as we think about holiday, generally,
and it's gonna like what you're, you know, expecting for the season.
Yeah, hey, Ed, you know, on the comp, you know, I think the acceleration, I think you've got to really look at it more on the four year geostacks. And if you look at the four year total sales cager,
The first half comp is very similar to the second half comp. And I think what we forecasted for Q2 is a very in line, you know, take the midpoint of that is that on in line with where we came out of Q1. And then the back half of the year, I'm not really at this point to really talk about.
keep that a little closer, but we're pretty excited about some things we're seeing for the back half.
for the back-out. Thanks, Ed.
Our next question comes from Dr. Hanz, who think of America, please go ahead. Hey, good afternoon, and thanks for taking my question. Can you talk about how May is running today versus the 2 to 3% ComCide that you gave for 2Q? And then can you just remind us what the compares look like?
Thanks Jason. Normally we don't provide inter-quarter activity, but I can tell you that when we prepare our guidance for our current quarter, we consider where we are and when we look forward to see if there's anything. Any changes in the business or expectations or anomalies, anniversaries from last year.
acceleration last year based on some of the things that we're going on around the customer and inflation, but That's kind of what we're thinking now in terms of the guidance for Q2. But pretty much all three months in Q2 last year were relatively in line with each other. Yeah, from a con perspective. From a perspective.
Thank you, Jason. Okay, question comes from Brian , now we, Oppenheimer, please go ahead. I get out the unit. Nice quarter, thanks.
Thank you. My question. Just, and that's me, Nick, taking that. You know, you look at the guidance, you did take the, I guess the top end of the annual comp guidance down by a point. So.
What's behind that? Is it something you're seeing now? Is some new expectation of the back half of the year? Is something more mechanical? Yep. So, Brian , you know, when you look at the full year comp guidance, or previous guidance was a 1 to 4 percent comp.
And then we move to a one to three, sorry, we bought the high end of that comp down. That really just reflects the expected performance if you look out of the first half of the year. And as I mentioned in my prepared remarks, the second half comps imply a range of low single digits.
and somewhat similar to what we had talked about on our first call earlier in the year.
That low end for the second half would assume some type of deterioration in the, say in the macro consumer environment and then the high end would assume, would assume some slight acceleration on, on some of those tailwinds that Joel mentioned in his prepared remarks, around increased conversions that were doing more effective marketing and things like that.
All right. Thank you, Brian .
Next question comes from Kate McShane with Goldman Sachs. Please go ahead. Hi, good afternoon. Thanks for taking our question. A lot of our questions have been answered already. But we wondered to the extent that you can. Is there any way to quantify maybe a trade down or just
What if he had any more hiring consumer shopping five-blown in the first quarter? Yeah, hey, thanks, Kate. And I thought since all the questions were answered, you were going to ask how I was doing or something. But I'll answer the trade-down question instead. No, honestly, we haven't seen anything that is significant on that one.
We continue to see our lower end customer spending more with us, but we are seeing transaction increases across the board. But our core customer is still really dependent on us, and I think if anything, they're probably spending more.
You know more of their discretionary dollars with us, but nothing significant yet on the trade downside
Our next question comes from Karen Short, with Credit Suisse, please go ahead.
Our next question comes from Karen Short, with Credit Suisse, please go ahead.
Hi, good afternoon. This is Dan Silverstein on Carrons team. Just two really quick ones. First, on a strong transaction growth, are you able to assess how much of the contribution is from new customers versus existing customers shopping more frequently?
I know you guys have done a lot of work on leveraging customer data. So any comments on your consumer behavior would be helpful. Then really quickly, can you just qualitatively speak to what you're planning to in terms of margins for 3Q versus 4Q just to get some help with the timing of lapping freight? Thank you. Look on the transaction side and then Ken, you can talk about margins. It's actually Dan both.
in my preparatory marks on the full year. So just, you know, we expect slight operating margin leverage.
We're guiding the second quarter to about a 70 basis point D leverage. So the back half of the year will be operating margin leverage that we're going to see. Q4 is going to be from what we're looking at now. Slightly more operating leverage than Q3.
And when you get into the numbers there, the third quarter gross margin leverage is probably gonna be double that of the operating margin leverage for that quarter. And when you get into Q4, again, with the freight cost benefit and some of those other things going on, the deleverage around.
in SG&A, we're probably going to see gross margin leverage in excess of 150 basis points in Q4, and SG&A average probably just a little bit less than 150 basis points.
All right, all right. Thank you very much. Next question comes from Paul Lake Zoe City. Please go ahead.
Hi guys, this is Kelly on the Paul. Thanks for taking our question. I just found the first.
I want to first ask on the licensing business. Good to hear you're seeing that category improve. Just curious how big that business is for you to be a versus maybe peak or even pre-COVID-Buggles and what is kind of coming down the pipeline that got you excited.
And then just to follow, all right, I can circle back. Okay, just to follow up on the back half guidance, just to see if there's any differences 3, 2 to 4 to your, we just sort of plugging in that 2, 1% comp in the fourth quarter as well. Thanks.
Look, I think the... The comment on license, it's really been non-existent for three years.
You know, and some of that's because, you know, movies has been pretty much non-existent since COVID. It's still very small. It was really nice to, I think, Super Mario surprised us, but it still wasn't, it didn't have a material impact on the business.
But it does give us hope that some of the movies coming out this year are going to turn into licenses It's just an example of another trend that's back as they appear will take advantage of them and Ken on the back half Yeah, and on the Kelly on the back half You know if you're looking at the modeling the from a Comperspective the way we're seeing it now really in both Q3 and Q4
We're assuming a low single digit positive comp for both of those quarters. And then from an operating margin perspective, again, we would expect to see leverage in both Q3 and Q4 and the way we're looking at it now, Q4 is...
looks like it's achieving slightly more leverage than Q3. Very good. Thanks, Kelly. Thanks, Kelly. Our next question comes from Steve McManus with CMB Parviz. Please go ahead. Hey, great. Thanks for taking our question. So on gross margins, recognize...
that five version of consumables is unique, but is there any mixed shift impacts working through the P&L? That's worth noting. I don't think anything material worth noting. You know, we've seen this shift now for over a year. And it continues to check out.
to a significant that's moving, you know, a thousand basis points or something like that.
you know, thousand basis points or something like that. Thanks Steve.
Thanks Steve.
Next question comes from Chuck Grom with Gordon Haskett. I'd like to ask my question to ask. I guess how you doing, Joel? It would be my first one. The second would be, I guess just bigger picture. You guys have been talking about tokenization for a while. I guess at what point do we take that to a loyalty program? And you know, just...
Explore loyalty. Some of that probably just got put on hold because for three years it's just been COVID and then supply chain and then inflation and the teams have just been so busy dealing with mixed shifts and.
and product changes and all that. But the next logical step, Chuck, is really to, you know, now that we've got some of the base in place to start looking at putting in a loyalty program. You know, I think you got to look at it as 25, not 24. And we'll, you know, we'll certainly keep you all updated as we start to put that in place.
Next question comes from Christina Katai with Deutsche Bank.
Christina Katai with Deutsche Bank. Yes, go ahead.
Hi, good afternoon. Both of you, thank you for taking the question. Just a quick follow up to some of the strengths that you're seeing in traffic. Are you doing anything differently against merchandiser or price point wise? I know you say candy snacks and HBA performance, particularly the best, but how do you view the opportunity to further capitalize on a potentially weak or consumer environment?
specifically in the one to three dollar range. You walk in our stores now. There's a 16-foot wall. It's all a buck and I think that is really resonating with the customers and so While we talk a lot about the growth opportunity and by beyond on these calls
The core behind Five Below is not only the $5 WOW product, but right now the customer is really resonating with the $1, $2, $3 product. And certainly candy and snack, we have a larger majority in that price point. But take a look at the 16-foot wall we've got in our stores now that's all priced at $1.
that is value at its extreme and it's really resonating well with the customer. Thanks Christina. This concludes our question and answer session. I would like to turn the conference back over to Joel Anderson, training closing remarks.
Thank you everybody for joining us today. Let me just close by reading what I said earlier in my closing prepared remarks.
We truly are Accelerator Offensive Playbook. I reiterate we are gonna open 200 plus news stories this year. We will complete over 400 conversions. We will capitalize on an improved supply chain. We already have a strong pipeline of news stories for 2024.
And as you've heard today from both Ken and I, our growth prospects if I below are strong. I hope you all have a great summer and make sure you visit our stores and for all your summer fun. Thanks very much and have a great night. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.