Q2 2023 Five Below Inc Earnings Call
Good day and welcome to the five below second quarter 2022 earnings conference call.
Participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After todays presentation, Dave will be an opportunity to ask questions.
Please note this event is being recorded.
I would now like to turn the conference over to Christiane up as VP of Investor Relations and Treasury. Please go ahead.
Thank you good afternoon, everyone and thanks for joining us today for five below second quarter 2023 financial results Conference call on today's call are Joel Anderson, President and Chief Executive Officer, Ken Bull, Chief Operating Officer, and Kristy, Chipman, Chief Financial Officer and Treasurer.
After management has made their formal remarks, we will open the call to questions. Please limit yourself to one question to enable us to accommodate everyone in the queue.
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 up 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 five below Dot Com I will now turn the call over to Joel.
Thank you Christina before I get started I want to officially introduce kristie chipman to you as our new CFO and Treasurer, we're really excited to have her onboard and while she's only been here six weeks. She has hit the ground running and is already well immersed in the business as you recall, we promoted Ken Bull to Cielo.
Oh in March and he has been a great resource to help with the transition Christie welcome to five below.
Moving now to our second quarter results. We are pleased to deliver Q2 in line with our guidance with sales growth over 13% to $759 million and a 2% to 7% comp sales increase which continued to be driven by transactions.
Exactions increased a strong four 5%. This once again illustrates the success of our buy beyond conversion strategy and the appeal of our water.
That's outstanding value.
Value that is even more appealing when customers are stretching their dollars further.
Diluted earnings per share came in towards the high end of our outlook range, increasing approximately 14.
To 84 cents or.
Our merchant teams again curated product assortment that reinforces buy blows relevancy.
And we saw continued popularity of a broad variety of trends across our.
The bowls and our version of consumables, including Candy snacks and beverages.
Our team has also captured the popular swifty trend with stylish clothing jewelry, such as friendship bracelets and beauty products.
Mainly we were thrilled to see licenses begin to grow again as new movie releases like the Super Mario Brothers in April and Barbie in late July drove customers into theaters in our stores.
In anticipation of a successful release of the Barbie movie our buyers were able to source several barbie related items, including a mini styling had beauty sets and even Barbie dolls.
All selling for only $5. This is a great example of how we can quickly capitalize on the trend.
We're seeing amazing products at incredible value for our customers.
Overall.
Given the still challenging economic backdrop.
We were pleased with our results and progress in executing across the five key strategic pillars that underpin by billows long term triple double vision let.
Let me give you a quick update on each.
First pillar store expansion with.
With nationwide potential of over 3500 locations new stores are the key growth driver for us and our new store economics remain industry, leading with a payback period under a year in the second quarter, We opened 40, new stores across 24 states.
One of these openings and Louisiana made our top 25, all time Grand opening list.
We continue to see great opportunities in the marketplace remain on track to achieve our goal of opening over 200 stores. This year and our real estate teams have a strong pipeline of new stores for 2024.
As an example, we will open over 130 stores in the next four months and our first half 2024 openings, we'll get much closer to our historical 50 50 opening cadence.
Moving to our second pillar store potential.
We set an aggressive store conversion goal for fiscal 2023 and are pleased to have already completed close to 400 conversions.
This brings our total converted stores to over 600, since we announced the new prototype at Investor Day in March of 2022.
We continue to see these converted stores drive higher sales and transactions ultimately growing our average unit volume through the addition of both by beyond.
As well as new products and services.
Our third pillar is product and brand strategy.
Finding great product at extraordinary value for our customers is our passion and buy blows merchants persistently pursue trends, while newness and value.
<unk> and across the globe.
We are excited about the new global sourcing office in India, and the opportunities it will bring in the future.
We're already beginning to realize the benefits of having our own.
To drive speed and improved quality, along with strengthening our strategic partnerships with key suppliers in the region. In fact, we will be delivering the first products sourced through this new office in time for the upcoming holiday season.
Our brand strategy, we continue to integrate data and analytics into our digital marketing efforts to better understand the cohorts tumors as I mentioned last quarter, we kicked off a marketing campaign for the store conversions in may with the goal of bringing to life the new five beyond store format.
We believe it was successful in reaching new customers as evidenced.
Actions and customer count.
Through our efforts in growing presence on social media. The five below brand has established itself as a go to brand for value and fun and we want to ensure the word is out to everyone.
Our fourth pillar is inventory optimization. This is the pillar Ken is now focused on a CLO while also ensuring the other four pillars are scaling effectively.
Enabling the delivery of our triple double vision.
Ken will update you in a few minutes.
The fifth pillar crew innovation.
Focus is on the store crew and the pipeline of talent that is critical to achieving the triple double.
By focusing on and investing in our associates through training wages and opportunities for advancement and engagement of our crew continues to improve year over year.
We will begin holiday recruiting later this quarter looking to hire over 20000 seasonal associates at our stores and ship centers for the all important holiday season.
They are key to delivering the Wow shopping experience of five below for our customers.
In summary.
We are pleased with our financial results and operational accomplishments year to date. We are also seeing success with the start of the second half, which kicked off with a solid back to school season.
A notable call out as backpacks.
Five below a staple that we infused with newness each year. For example, this year, we introduced clear backpacks expanded our licensed assortment and added coordinated patches in key change for customers to personalize their backpacks. We also significantly increased our donation program with over 360.
<unk> thousand backpacks provided for kids in need.
As we look to the rest of the year.
We remain mindful of the macro pressures facing our customers. Additionally, as many retailers have discussed we also expect higher than originally anticipated shrink levels for the year and have adjusted our guidance Accordingly.
Christie will discuss in more detail.
Against this backdrop I'm very pleased with how the teams continue to play offense, our merchants are ready for holiday and have procured a terrific lineup of fresh trend right products at outstanding values, We believe our customers will love.
I want to thank our other teams at wild town supporting the stores and ship centers.
And our overall holiday plans.
That I will turn it over to Ken to say, a few words before Christy reviews, the financials and our outlook in more detail Ken.
Thanks, Joel and I also want to extend a warm welcome to Christie.
Great to have her onboard and in just six weeks. She has taken over all of my previous finance duties.
While building connections within and beyond the finance organization.
As part of my new role as COO I am responsible for the inventory optimization pillar as well as ensuring the other four pillars are on track, thereby allowing us to collectively achieve our triple double vision.
Over the last several years, we have done a great job managing a volatile supply chain, while also implementing tools and systems for efficiency.
Our current inventory levels reflect an improved supply chain and we are pleased with the health of our inventory as we enter the back half of the year.
And expect to be well positioned for the all important holiday season.
We have a great opportunity ahead of us to continue to better 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 in stocks and turns and improving end to end visibility.
We have already begun the work on both the new merchandise financial planning system and the replenishment forecasting tool.
Regarding my oversight of the other pillars, we've established a reporting cadence and developed better cross functional communication to streamline and focus our initiatives and activities.
And I feel very positive about the progress we've made.
Finally, I am also leading a team to focus on operational mitigation efforts to counter the elevated shrink trends Joel just mentioned.
Now I'll turn it over to Christie to go through our second quarter results and guidance Christy.
Thanks, Ken and good afternoon, everyone I'm excited to be here at five below and talk with you today.
I'd like to thank the team at five below for the warm welcome to the adopted family.
I have spent the last six weeks diving into the business visiting stores and meeting the crew and I'm happy to say that what I saw from the outside has been validated five below is a unique brand with tremendous growth opportunities led by an amazing crew with a culture that is second to none I am looking forward to partnering with the business.
To achieve the triple double vision and getting to know each of you as well.
Now onto the financials I'll begin my remarks with a review of our second quarter results and then provide guidance for the full year in the third quarter.
Our sales for the second quarter of 2023 increased 13, 5% to $759 million over the last year.
Apparel sales increased by two 7% with comp transactions, increasing four 5%, partially offset by a comp ticket decrease of one 8%.
We are pleased to see a meaningful increase in comp transactions and our converted stores validating our investment in our strategy.
In addition, our non converted stores also delivered positive comp transactions.
The decrease in comp ticket was driven by lower units per transaction, partially offset by a slight increase in average unit retail price similar to what we have seen for several quarters now.
We opened 40, new stores across 24 states in the second quarter compared to 27, new stores opened in the second quarter last year and continue to be pleased with the productivity of our new locations.
We ended the quarter with 1400, seven stores, an increase of 155 stores or approximately 12%.
Gross profit for the second quarter of 2023 was up 15, 8% over last year to $264 $6 million.
Gross margin increased by approximately 70 basis points to 34, 9%, primarily driven by lower inbound freight costs.
As a percentage of sales SG&A for the second quarter of 2023 increased approximately 140 basis points to 27, 1% versus last years second quarter, driven primarily by more normalized incentive compensation versus last year.
The increase in marketing expense and higher costs and store related expenses.
As a result operating income finished at $58 6 million, while operating margin decreased approximately 70 basis points to seven 7%.
Net interest income was $4 3 million as compared to 0.1 million as we benefited from higher interest rates and a larger average cash balance versus last year.
Our effective tax rate for the second quarter of 2023 was 25, 6% compared to 26, 3% in the second quarter last year.
Net income for the second quarter of 2023 with $46 8 million.
Earnings per diluted share for the second quarter increased 13, 5% to 84 cents compared to last year's earnings per diluted share of <unk> 74 cents.
We ended the second quarter with $436 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 $544 million as compared to $569 million at the end of the second quarter last year.
Average inventory on a per store basis decreased approximately 15% versus the second quarter last year, when we purposefully accelerated inventory receipts to ensure a strong in stock position for the 2022 holiday season.
Now onto guidance as a reminder, fiscal 2023 includes a 50 <unk> week, which is still expected to add approximately $40 million in sales and approximately eight in EPS.
My remarks on full year guidance will refer to the 53 week year unless otherwise noted.
Our guidance does not include any potential future impact from a share based accounting or share repurchases.
I'll start with guidance for the full year, and then turn to the third quarter.
For 2023, we are reiterating our expected sales in the range of $3 5 billion to $3 five 7 billion, an increase of 13, 8% to 16%.
The comparable sales increase is still expected to be in the range of 1% to 3%.
At the midpoint of this guidance total sales are expected to deliver a 17, 6% compound annual growth rate or CAGR for the four year period since 2019.
This is in line with the first half CAGR of 17, 4%.
With respect to operating margin at the midpoint, we are lowering guidance by approximately 20 basis points to 11, 1%.
For the year, we still expect gross margin leverage due to lower freight costs, though the magnitude of leverage is lower than prior guidance due to higher anticipated shrink reserves.
This gross margin leverage is expected to be more than offset by SG&A deleverage due to certain one time cost management strategies, we put in place last year and lapping of lower incentive compensation.
As it relates to shrink we're currently conducting interim physical inventory counts on a subset of our stores and anticipate results will reflect the negative trend seen across the industry.
Therefore, we believe it is prudent to increase our shrink reserve for the balance of the year and we expect a significant impact in the third quarter due to the anticipated year to date true up and higher rate compared to last year.
The impact of the fourth quarter is expected to be much lower.
We are working on several shrink and operational initiatives throughout the organization to help mitigate the increased expense.
We are lowering our EPS guidance with the midpoint of diluted earnings per share now expected to be $5.41.
Versus the prior midpoint of $5 51.
Representing an approximate 2% reduction.
We remain on track to open over 200 new stores.
And to end the year with over 540 stores or unit growth of approximately 15%.
With our strong cash balance and healthy free cash flow generation combined with higher year over year interest rates, we are still assuming a significant increase in net interest income this year.
We expect our full year effective tax rate for 2023 of 25, 5%, which currently assumes a higher effective tax rate for the second half of the year of 26, 5%.
Net income is expected to be in the range of 295 million to $311 million, representing a growth rate of approximately 12, 8% to 18, 8% over 2022.
Diluted earnings per share are expected to be in the range of $5 27 to $5 55.
Implying year over year growth of 12, 4% to 18, 3%.
On a 52 week comparative basis growth for diluted earnings per share is implied to be 10, 7% to 16, 6%.
With respect to Capex, we still plan to spend in total approximately $335 million in gross capex, excluding the impact of tenant allowances.
This reflects the opening of over 200 new stores.
Inverting over 400 store locations.
Commencing expansions to our distribution centers in Georgia, and Arizona and investments in systems and infrastructure.
For the third quarter of 2023 net sales are expected to be in the range of $715 million to $730 million.
An increase of 10, 9% to 13, 2%.
We plan to open approximately 70 stores with the majority of these new stores opening in the latter half of the third quarter.
This compares to 40 stores opened in the third quarter last year.
We are assuming a third quarter comp sales increase in the range of flat to 2%.
We expect an operating margin of one four to two 1% in the third quarter of 2023.
The approximate 150 basis points of deleverage at the midpoint is primarily due to the anticipated shrink headwind.
Net interest income is expected to be approximately $3 6 million for the third quarter and taxes are expected to be approximately 28%.
Diluted earnings per share for the third quarter of fiscal 2023 are expected to be 17 to 25.
Versus 29 in diluted earnings per share in the third quarter of 2022.
In summary, we delivered second quarter results within the range of our outlook as we look to the balance of the year. Our teams are making great operational progress against key strategic objectives and preparing for the holiday season.
For all other details related to our results and guidance. Please refer to our earnings press release and with that I'd like to turn the call back over to the operator for 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 one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two please.
Please limit yourself to one question. If you have further questions you may re enter the question queue. At this time, we will pause momentarily to assemble our roster.
Our first question comes from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.
Thanks, and congrats Christiane joining the five below team.
I thought I might start with asking a question on shrink and just understanding in terms of the 20 basis point change in the operating margin for the year what portion of that attributable to your.
Your change in in shrink reserves for the year.
Then secondly, and related to that.
If you are observing higher shrink do you sense that there might be any change in terms of.
The self checkout kiosks that have been added to all the new stores and so forth and the strategy of just rolling that out or do you feel like the mitigation strategies.
That youre working on can can.
Canada can adapt to the environment and we can move forward in the in the pathway that you've.
Gone the last couple of years.
Yeah, Hey, Thanks, Jeremy Let me, let me take that.
Obviously with us.
No not changing the topline.
The 20 basis point decline is really the only change.
From the last quarter and that pretty much is all based on the changes, we're making with the assumption of shrink I think though.
You asked a lot of questions about ACO, a lot of questions about mitigation and.
Ken maybe you got a few comments because I think in Ken's role both as past CFO and then now in his role as COO.
He is responsible for all things inventory in and maybe where we're at right now and we're feeling about it sure. Thanks, Joel and thanks Jeremy.
What I'd like to do is just give a little bit of history around this because Jeremy you ask specifically around shrink rate.
And if you all recall.
At the beginning of this year on our fiscal 2022 year end call. We did note that we had experienced higher shrink levels.
Last year, and we had about a 30 basis point.
Annual increase.
That impacted over 2000 22021.
Based on that we increased our reserves in 2023 to reflect this higher rate that we exited in <unk>.
2022, and also in response.
You mentioned some of the mitigating.
Areas that we could work on and I'll talk a little bit about that but we did increase and we revised our asset.
Protection policies and tactics.
Christie had mentioned also that this month.
We were right in the middle of conducting our standard interim physical inventories on a subset of our stores, it's a little bit over a third of our stores. So a meaningful populations of stores and we are seeing initial kind of elevated levels versus what we noted at the end of last year and I think you're all familiar with.
The recent media and videos that are out there where retailers across the sector are experiencing increased levels of shrink and related crime incidents and we are not immune to this as we as we're finding out.
Again, as Kristie mentioned from a financial perspective.
Based on these preliminary indications from the work that we're doing.
We do expect a net financial impact of the 2023 operating margin of about 20 basis points. So that includes the impact of <unk>.
A mitigating efforts both in shrink reduction.
And also other enterprise wide cost savings initiatives.
The true shrink rates.
We're experiencing obviously would be higher than that based on.
Being the 20 basis points is net of all of those mitigation.
Efforts.
And just Jeremy again, just to talk about this the because you mentioned the mitigating efforts and strategies I think you mentioned also the self checkout.
As you know, we're not new to these <unk>.
Macro challenges that are out there we've been faced with these before whether it's tariffs the pandemic supply chain disruption.
Inflation last year, and we like to play offense throughout the company to mitigate the financial impact of these macro.
Issues.
This is a what we view as an external societal issue and it is going to require involvement from government and local leaders to fully resolve it.
We've also noticed that the traditional measures for mitigation around asset protection.
Or not as fully effective as they had been previously so we are focusing.
Shrink mitigation efforts on more of a comprehensive approach that.
That actually includes both asset prevention.
<unk> asset prevention and crew safety.
And we have dedicated a team to look at all different areas to help with mitigation efforts and that includes enhanced technology merchandise presentation.
Selective price increases register formats policies and procedures were going to look throughout the supply chain for improvements there.
Regarding ACO that you mentioned.
I think we've talked about before that we had expected to see increased levels.
Of shrink around ACO and we've seen that historically I think what we're seeing is that they are increasing across the board here. So and then on top of it two we're also going to be initiating some other cost enterprise wide cost savings. So just kind of an overview.
And all of that where it's coming from and what we're doing about it.
Thanks, So hopefully that's all the color and best wishes.
Yeah, Hey, Thanks, Jeremy.
Our next question comes from Seth Sigman with Barclays. Please go ahead.
Hey, everyone. Thanks for taking the question. So my main question is around what's been happening with ticket could you talk a little bit about what's going on with the price points.
I think you said were up slightly but I would think thats largely mix any more insight into how youre managing price points as certain input costs come down and then when you look at the lower U P. T. I think that's been a trend for some time.
I recall last quarter, you talked about some improvement, but just any more context there. Thanks so much.
Yes Seth.
That has been very consistent quarter over quarter, and and I think the area where probably.
Most pleased with is the progress, we're making on transactions, which is really.
Our proxy for traffic.
The <unk> are only down slightly in our U AUR is only up slightly so you know the.
Comp sales were getting is is more than coming from transactions and it's not coming from just taking price up and so while we've taken up price slightly.
It's really not the main driver of where Youre seeing our comp increase has come from it's all really coming from transactions.
Okay. Thank you.
Our next question comes from Brian Nagel with Oppenheimer. Please go ahead.
Hi, Good afternoon Christie welcome.
Thank you my question.
Just on the SG&A.
You addressed the Covid comments, but.
We've had this elevated SG&A growth rate for the first half Youre Telegraphing. It remained elevated sucking about recognizing you haven't provided guidance for the.
Next fiscal year, but how should we just generally think about those SG&A expenses as we go from this year into next year.
Yeah, I mean, Brian its a great question.
You know us.
Pretty unfair for Christy to answer she is just getting in here for the first six weeks, but.
You know in our tradition is as we get.
Closer to the end of the year, we'll give you that guidance but.
I think it's safe to say.
Especially with the explosive growth, we see coming in new stores that you will see leverage next year, the operating margin level.
We got to figure out where does it fit between gross margin and SG&A.
But as you just heard can give a lot of examples on on shrink mitigation a lot of that is going to come out of SG&A.
To cover that so net net I would look at it at the operating margin level and it's our job to mitigate this no different than any other of these other macro environments faced in and translate that into.
And the margin expansion.
And just to remind everybody you know and I said it in my prepared remarks, I mean, we have over 130 stores coming at US here in the next four months and I also shared with you I expect our new store opening cadence next year to get back closer to 50 50. So there's a lot of growth happening in the next 10 months or so here.
Ken anything you'd add on that just to.
Brian you heard Joe mentioned in the prepared remarks still feel extremely confident around the triple double vision.
With really kind of the drivers there being the unit growth the comp opportunity and the profit profile, which assumes leverage so.
In line with what with what Joel said, but too early to be given.
Specific callouts for next year right. Thanks, Brian .
Yeah.
Yes.
Our next question comes from Chuck Grom with Gordon Haskett. Please go ahead.
Hey, Thanks, good afternoon everybody.
Just wanted you guys could speak to the cadence of the comp throughout the quarter and then if we take the midpoint of your <unk> comp guidance. It does imply a pretty big uptick on the for your stock's relative to the second quarter, but it's consistent with the first quarter. So I guess my question is can you remind us if theres any unusual compares over the past couple of years.
<unk> <unk> the factors that support the implied acceleration in the comp.
Yeah.
Hey, Chuck I think the way we look at it is.
Look at your four year average.
Our store growth.
Looking at your four year, CAGR and I think if you compare.
Our first half four year CAGR.
It's in the mid high.
Hi team.
Hey, Christy is that high teens and then.
What's implied for the back half of the year is almost identical it's within 10 or 20 basis points I think Chuck.
A better way the way to look at it in terms of.
The comp and then.
For within the Q2 cadence was relatively in line all three months, yes erosion.
Yes, consistent and also Chuck just to add to that.
Our guide for Q3 is pretty much in line with what we had expected early on if you recall I think we spoke about this on the fourth quarter call. When we gave guidance.
For the year in terms of what the cadence would be.
If you look at kind of a multi year Geo stack performance.
The year is really laying out by quarter, we had expected early in the year.
Okay, great. Thanks.
Thanks Chuck.
Yes.
The next question comes from Matthew Boss with J P. Morgan. Please go ahead.
Matt.
Yes.
Hello, Matthew is your line muted.
Hey, sorry about that.
Great.
I'm going to make up the question for you but.
Uh huh.
Alright, alright, Matt So Joel a couple things maybe could you elaborate on category trends that you saw across maybe more discretionary relative to consumables any call outs by income cohorts.
I know you touched on the third quarter, but anything specific to August two.
Call out and then.
Maybe just elaborate on the terrific lineup of products that you cited and into holiday and just your flexibility to chase demand in the second half.
Yeah look Matt a lot of questions on <unk>.
On product a little bit.
<unk> trends.
First quarter or second quarter not much change.
It continues to skew towards our version of consumables.
Which comes in the form of candy in HPA and the like.
So that was pretty consistent from Q1 to Q2.
The interesting change that we did call out and there was just the emergence of licenses.
Mario Brothers.
And Barbie well, while not a huge impact on the quarter.
It's just nice to see licenses reemerge, we haven't really seen licenses of anything meaningful.
There really hasnt been movies for a few years here. So that's really good to see cohorts nothing to call out.
We continue to really.
See strength across all the cohorts, but but no.
Trade down per se that would call out and then hey, we're really pleased with back to school and and I'm not ready to talk about how they are just for competitive reasons, but we got a great lineup for product and if anything I would say our whole store becomes a store of needs in.
In the fourth quarter, rather than the store once so excited about fourth quarter and what's coming this way Matt.
Great Best of luck. Thank you you bet.
Our next question comes from John <unk> with Guggenheim Securities. Please go ahead.
Alright, two quick questions right. So for Joel I know, you're not ready to talk about holiday, but what.
When I think about.
Right the reset of Tech and then putting five beyond going a bit early.
And trade down so how would you assess your positioning for the fourth quarter right. So it would seem to be better than it's been in a couple of years.
And then for Ken where do you think the biggest opportunity is on inventory because I don't think you've had a big problem on out of stock right. So.
Is it that or.
So it's just more.
Inventory turnover.
Yeah, Let me just start.
Turn it over to Ken.
The biggest change John and great call out on the tech reset, but the biggest difference for US is the magnitude of five beyond stores, we're going to have this year versus last year I mean.
Approaching close to half of our comp stores and we learned a lot from last year on the five beyond part performed and that's given our merchants a full year to prepare for that and so I think that's a big running head start this year that we didn't have last year.
I already with Matt shared licenses and then Theres a few other things coming but.
We're in a much better situation than than prior years, and then certainly as Ken about inventory and that's also in a much better shaped than last year much better position John and.
Thanks for the compliment on the in stocks, but internally, we feel we can still do better there.
Within in stocks, you mentioned turns I mean, it's all about buying better at the end of the day.
Making sure we've got the right inventory in the right location at the right time.
And we feel there is still opportunity there for us the ability Joel spoke about the trends that are out there we want to make sure we have the ability to.
<unk> continue to place our buy those trends and put them in front of the customers appropriately. So there's still opportunity out there and it's going to come from process, it's going to come from technology. We're also incorporating <unk>.
Data and analytics, so we still have a ways to go to see improvements there.
Yeah. Thank you thanks, John Thanks, Sean.
Yeah.
Our next question comes from Simon Gutman with Morgan Stanley . Please go ahead.
Hey, good afternoon, Joel I should restate my name in case I get assignment.
Hey, Simeon how are you [laughter] alright, you got at that time.
So I wanted to follow up on this value movement, we're seeing in retail and a little bit on the fourth quarter.
You said youre not seeing trade down I am just curious if you. If you your traffic seems to suggest that you are getting your fair share of the value movement, but we're seeing discount mass even dollar stores do a little better than others.
So curious if there's anything there to call out if there's anything within five beyond that's changed and I think it was a year or it could have been two ago. When you called out the fourth quarter being prime position for your customer for your value and.
So John's point I think it does line up reasonably well this time around I'm curious if you can comment on that as well yeah, I mean look.
On the trade down I was more referring to the general sense of how some of the others look at trade down, but clearly our traffic's up.
And.
And it's up.
<unk> seen a lot of new customers in the door and so I think that just shows where we're more relevant to more customers and this is our off season, I mean I think.
At this time years.
Timeline when five below is the least needed so to see that really ticking up our marketing is working the customer needs it and.
And then you know.
Certainly you called out all the holiday stuff Simeon but.
We were really set up nicely for a great holiday and I think as value is is really in Vogue again.
And there really isn't any other kids retailer out there.
Our store is becomes a store needs for families at holiday time in.
So I'm really excited about what we're seeing for Q4 here and.
We're going into a lot of momentum some of the questions John asked about the.
Tech resets being done earlier.
But beyond that are done et cetera, et cetera, but.
I know you all want specific items and those I'm just going to have to say it for the next call just for competitive reasons.
Thanks, Hey, Thanks Simeon.
Okay.
The next question comes from Edward Kelly with Wells Fargo. Please go ahead.
Hi, good afternoon, everyone.
I wanted to ask a follow up question on shrink the last time that you talked about shrank after that James.
Many of our accounts.
You mentioned, the 30 basis point year over year headwind.
It looks like an additional 20 basis points now, but you have cost mitigation. So I was just wondering if you could quantify.
How much we're really talking in terms of like how much is really up year over year.
And then as we think about the forward risk around shrink and I don't think you did rolling counter count again in January .
I think we've seen the bottom here.
Unemployment is still low and then the last part of all of this is where is it coming from that I think initially there is a lot of organized crime stuff that people are talking about but as this worked its way into more traditional customers until employees.
Thank you.
Yeah, I mean, there's a lot of time pack and I think youll try.
For all of you on the call you just got to remember.
We painted for you probably.
In our guide the worst case scenario you are still in the process of doing all the reconciliation quantifying all of our mitigation efforts.
We'd already mitigated some of the things from the 30 basis.
The increase from last year I do think we've seen.
Pretty much the high watermark the differences now as a year ago, we weren't doing anything about it.
In June we put in a new return policy would change our damages policy. So all the mitigation efforts we are putting in just started.
And also remember the.
Shrink that we were exiting 'twenty two one.
<unk> included a lot of stores that were in there.
That were inventoried back through 'twenty. One this inventory really includes everything from the back half of 'twenty, two and the front half of 'twenty. Three so we have a really good sense now of.
The high watermark, and it's our job to mitigate it.
Yes.
<unk>.
The fact remains that all retailers are CNS and <unk>.
And as Ken said somewhat of a societal issue to fully.
Mitigate but but our job is to.
You know really get after this and figure out a way to.
Mitigate the.
The increased shrink, we're having and so.
Where is it coming from it's coming in all angles and you've got several cities now, which just simply arent prosecuting below the 500 dollar level.
Sadly our hometown here in Philly is.
A city that's seen some of our highest shrink rates and we watch target and we've watch Wawa exit Center city and so while I don't think we're yet at that extreme.
Of closing five below stores. There. These are the type of mitigation strategies that will be included as we.
Consider what to do if we don't see things improve so.
It's a.
It's a big amount that could.
Could be I think in total is 50 to 70 basis points and our job is to mitigate that.
As you can tell by our guide think it's going to be around 20 basis points.
Great. Thank you.
Thank you Ed.
Our next question comes from Paul <unk> with Citi. Please go ahead.
Alright, thanks, guys.
Can you talk about the lift.
Give us an update on the lift you're getting from Remodels.
Traveling as good as you had anticipated and how does that look like that between transaction.
The increase in transactions.
S T.
Has that changed over time, and then just curious in your store productivity.
Our most mature markets.
The more mature markets, what you're seeing thanks.
Yes, Paul I mean look nothing's changed on the on the <unk>.
Conversion stores, we're still seeing.
Mid single digit lifts.
With transactions being even higher than that in and converted stores. So really I mean, we are uber.
Cited and standing behind this conversion strategy. We've got the 400 that we've done this year and expect to get right back after that again next year with some more stores, but that that mid single digit.
<unk>. This is consistent with what we saw at the end of last year and are continuing to see this year.
Year to date.
Does that catch all that there Paul.
That was the first and second of all with the new store productivity.
Looking at your mature more mature markets such as your newer markets what you're seeing.
Well.
In Sps, where I mean there.
I think we came in closer to the 90 day over 90 adjusted earnings.
The 90% and its relatively consistent through the <unk>.
Types of stores and regions.
Alright, Thanks, Paul.
Thanks, guys. Good luck.
Our next question comes from Scot Ciccarelli with choice. Please go ahead.
Hi, guys. This is Joe on for Scott. Thanks, So much for taking my question actually I just wanted to follow up a little bit on the mid single digit lift youre seeing in the Remodels.
Is there anything you'd call out in different areas by income demographics.
No honestly it's.
It's pretty consistent by income demographics.
And we're seeing that same type of lift consistently no matter, where we've opened the stores.
If anything we see it a little bit higher if it's an older stores that we converted but in terms of income demographics and that type of thing it's pretty consistent.
Awesome, Thanks, and then.
And just one follow up question I know you guys have been talking about people shopping closer to holidays.
Wanted to see what you were thinking about for Halloween trends this year.
Would you expect it incrementally latter half boost versus last year or something around the same.
Well, yes, no I think it's we've seen it closer to the holiday consistently for over a year now and I think Halloween it'll be pretty similar this year as well.
Got it thanks, so much.
Yes.
Yes.
Okay.
Our next question comes from Michael Lasser with UBS. Please go ahead.
Good evening, Thanks, a lot for taking my question.
In the three years in three years prior to the pandemic Pablo had a 12% operating margin on average now after the 20 basis point reduction to your guidance on the heels of the increased shrink.
Are we going to have around an 11% operating margin, despite having $2 billion of incremental sales.
Joe what needs to happen in order to get back to the 12% you mentioned that you're going to be targeting operating margin expansion next year, but is it simply a function of generating top growth leverages the fixed expenses to drive the margin expansion.
Or are there other strategies you can put in place that would restore the profitability back to where it was prior to the pandemic. Thanks, Yeah, Hey look Michael.
Certainly the.
The increased shrink was.
We didn't think was going to continue this year over last year and.
We're working hard now to mitigate that but let's let's not lose sight of.
That aside and you said, 11%, so you're taking you're assuming we're going to be closer to our <unk>.
Low end of our guide not the not the high end of our guide so.
And I think as we continue to find things to mitigate it that that's going to improve that but there's two big things that are coming.
We're going to start to get the leverage off of these five beyond stores that.
We've put a lot of money into spent a lot of time converting those are those are going to lever for us and then we're also we've really accelerated our new stores.
And that's been a setback for us were about three years behind where we wanted them to be back in 19 due to the pandemic.
So our new stores.
Really going to.
Come online here, we've got 130 coming on in the next four months huge stack coming on the beginning of next year, we havent back close to a 50 50 and that all contributes towards fixed and and then Ken and his focus on all of the investments we've made.
Really going to help the leverage we're not opening any distribution centers. The next two years here.
We will lever off those Dcs, we're going to lever off the systems, we invested in so there's a lot of leverage.
Coming from all of those I think it's our job.
To come back to you at the towards the end of the year here to to quantify that exactly.
And put those into your models, but I see nothing but upside.
And as we get past this shrink put mitigation efforts in for that and then take advantage of new store growth and the <unk> beyond strategy working.
Thanks, Michael.
Our next question comes from Joe Feldman with Telsey Advisory Group. Please go ahead.
Hey, guys. Thanks for taking the question wanted to go back to inventory for a minute. How are you guys planning inventory for the second half.
And how does that the shrink impact your plan, meaning.
Presumably you are finding there is stuff that's not there and so now it's like you have to maybe order more and I'm wondering how we should expect inventory to look either on a per store or on a total basis at the end of each quarter.
Yes.
Yes, Joe.
Thanks, Joe.
If we if we look out in terms of inventory levels.
We speak normally to the.
Average inventory on a per store basis, I think if you roll. This forward end of Q3 end of Q4 similar to what we saw at the end of this quarter, we were down double digits about 15%.
Specced it to be down probably more single digits again, I think that's a reflection first of us.
Improving our inventory management disciplines, there and then your second part of your question around the shrink yes those are.
We would obviously be allocating more product out to the stores in.
In response to these higher shrink levels I mean, obviously, we made estimates of what shrink would be and we're coming in higher than that.
And then we make the adjustment adjustments to make sure the stores are in an appropriate inventory position going forward.
Okay. Thanks, guys. Good luck, thanks, Joe Thanks, Joe.
The next question comes from Michael Mann, Danny with Evercore. Please go ahead.
Hey, guys. Thanks for taking the question first I just wanted to see if there was any call outs in terms of geography on the comp and or if he started August in the comp range and then I just had a margin follow up.
Yeah, Mike if you could just get on next for margin pulp, we're trying to get through rest of these calls but.
No.
Geography change.
We see it.
For a week here or a week there when there is.
Storms rules rolled through California, a week ago, and obviously, California.
Florida right now but.
If you look at the whole quarter together pretty consistency consistent across all geographies and really pleased with the start to Q3 here and yes, absolutely within the range.
Thanks.
I appreciate that.
Talk to you later Mike.
Okay.
Our next question comes from Brad Thomas with Keybanc Capital markets. Please go ahead.
Hmm.
Hey, Thanks for taking my question and welcome Kristi.
I'll ask.
Another category and merchandising question the staff will shrink for now.
You mentioned Barbie is performing well I guess the question. We've gotten is was it material here.
Any sense of that May fade here.
As a remainder dies down.
With back to school kind of partly underway here.
Not pulling away across the whole country.
Any early trends that youre seeing may help to drive some acceleration. Thanks.
Yeah look I think I called out Barbie less of it impacted our quarter and more as a shout out to Barbie.
And Mario brothers, just that we're starting to see licenses emerge.
And.
But its I don't think Barbie is going to it's not going be near as big as frozen or couple of the other movie releases, but really pleased that it's there. It's a great example of our.
Our merchants staying on trend and really chasing something back to school backpacks. It was all about backpacks, we had a great backpack season and.
That's really the same for their it is wrapping up here in the northeast here I think licenses, even in backpacks were pretty relevant but nothing else to call out there and actually youll be CNS set Halloween in the stores next week.
Thanks, Brad.
Great. Thanks, Joe.
The next question comes from Jason Haas with Bank of America. Please go ahead.
Yeah, Hey, good afternoon, and thanks for taking my question I know, it's a small portion of your business, but I was curious if you could talk about what you've seen with online.
Sales recently and I'm also curious if you've seen any increased competition.
From online only competitors both to your online business and also to the store and if not.
Can you just remind us what insulates the five below model from online competition. Thanks.
Yeah look.
Online has been good for US just to remind everybody is low single digit of our total business, which is a very different profile from everybody else and certainly what insulates. It is it's a small piece of the business for starters. So even if it had a material impact its a very small impact on our total business.
But having said all that online is great for us it helps us get an early read we already have a good sense of what's going to sell in Halloween here, because it's been online for about four weeks now and we do that every with every seasonal change we get it up online first and it get more helps us prepare and set.
The stores.
But.
No impact from that we can tell from pure online retailers.
Thanks, I appreciate it Jason.
Thank you.
The next question comes from Danielle Silverstein with Credit Suisse. Please go ahead.
Hey, there thanks for squeezing me in just.
Just a quick question on conversions.
So given that transaction growth is driven the comp this year and five beyond conversions have helped that along is the shift in focus to store openings in the back half factored into comp guidance, particularly thinking about for Q, which potentially embeds sequential comp.
<unk>, but.
No incremental benefit of <unk>.
More conversions. Thank you.
Yeah Dan.
It doesn't it doesn't factor in any incremental conversions at all.
<unk>.
And I don't think it was intentional all the back half was towards new stores. This is more of a factor of.
The hangover from Covid, and the shutdown of supply chains and getting them back open so our class of.
23 will be back closer to 50 50 in the class of 23.
Four.
That 24 will be back to 50 50 so.
This is just the last remains of it by next year, we'll back to a normal cadence of openings, but.
It doesn't play much into comp change.
Okay. Thanks, and if I could just really quickly can you speak to the availability of potential crew members and how many stores are opening into H.
Yes.
We have not had any problems with crew availability and getting stores open.
A reminder, for everybody we're really good at hiring 15, and 16 year olds at something a lot of retailers don't do.
Not 15, 16, 16, and 17 year olds.
And so we're store for kids, we hire kids and everybody loves her first job and we're a great place for first job. So really no problem. There we kick off hiring here in about another three or four weeks and don't expect any issues.
Thank you alright. Thank you you bet.
The next question comes from Anthony <unk> with loop capital markets. Please go ahead.
Alright. Thank you so much for taking my question I didn't think I'd be able to get it in with all the two and three part questions that everyone else is asking.
I guess my question just real quickly on Barbie.
Is Europe .
Would you I mean, I've seen the Barbie and Youre in your stores are you sort of happy with with the with your assortment or would you in other words is it enough.
Would you want to get more when you're chasing it just how do you feel about your Barbie assortment. Thank you.
Yeah, Hey, Thanks, Anthony I think it's enough.
Our chasing it.
Some stuff that sold faster than we thought and we've got more coming in but but we don't see it as something that's going to grow like frozen did from 7% to 11% to 13 feet or something like that but in certain stores. We definitely are chasing and it's been been somewhat short, but overall, we're pretty pleased with it. Thanks Anthony appreciate the one part question.
<unk>.
Yes.
Okay.
The next question comes from Cristina <unk> with Deutsche Bank. Please go ahead.
Hi, good afternoon, thanks for squeezing us and so I just had a just a question on store growth and given the acceleration that you were talking to so maybe two parts can you just talk about your overall ability to get these opened on time. If we should think about there is any risk maybe that some can get pushed later in two quarters or early into <unk>.
And then two if you could just talk about what the process looks like now that availability of labor is getting better or you're finding incremental real estate locations from closer to us just how best to think about that getting closer to that 50 50 cadence next year, yes.
Look.
Answering the second part of the first of the biggest things that change. Unfortunately, it says there was a bunch of bankruptcies and.
There hasn't been many store bankruptcies and in the.
'twenty, one 'twenty two time period and it really accelerated here in back end of 'twenty two into 'twenty three so that's really what helped on.
Filling the pipeline back up so we're back on time and then.
In terms of opening on time, you really were not seeing the supply chain problems that we had and landlords are back to building.
We've got a bigger team we're building.
And it's pretty much flowing you know look we have a store here and there that will get pushed back for a month or six weeks, but then we'll have another store pull up so it's more like we're seeing an even amount of pull ups as we are push backs.
Thank you you got to keep going here.
Our next it's my last call Yes, yes. The last question comes from Philip Lee with William Blair. Please go ahead.
Okay.
Great. Thank you guys.
I was just hoping you could provide a little bit more color on the transaction growth you saw during the quarter. How much was driven by five beyond versus non converted location and then any color on growth attributable to new versus existing customers on the expanding value appeal. Thank you.
Yeah, I don't know if I don't know Chris do you have those numbers for the converted and conversions.
I mean, they're both transactions were positive in both yes.
We're.
Phillip positive in both converted stores and non converted stores and I think.
You talked about the growth I mean, we're seeing actual growth in new customers and growth in improvements in our retained customers too.
Yeah.
Look it's obviously higher in the in the converted stores in and obviously, that's a good thing.
That was our strategy that's what we wanted to see and we've got over 600 of them now and to see it continue like that just bodes well for the the rest of them as we convert them next year and the year after.
Okay, great. Thanks.
Thank you.
Hey.
Thanks, everybody for jumping on.
A lot of questions certainly about shrink, but but more importantly.
What we are opening a record set a number of new stores, we are increasing our productivity in our stores. We are growing our brand awareness the marketing is really starting to work.
Transforming the inventory the focus Ken is going to put on that is going to create efficiencies and where.
Gonna make five below a great place to work for the associates.
We hope to see you and we hope you enjoy the rest of the summer and don't forget to get out and visit a five below store thanks for joining us.
See you after Thanksgiving on our third quarter call have a great night everybody.
Yes.
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