Q3 2024 Five Below Inc Earnings Call
Speaker Change: Good day and welcome to the five below third quarter 2024 earnings conference call. All participants will be in a listen-only mode. Should you need assistance please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: 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.
Speaker Change: As amended.
Speaker Change: Forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.
Speaker Change: Risks and uncertainties are described in the press release and our SEC filings.
Speaker Change: Looking statements made today are as of the date of this call and.
Speaker Change: And we do not undertake any obligation to update our forward looking statements. In this presentation, we will refer to our SG&A expenses breast SG&A, selling general and administrative expenses, including payroll and other compensation marketing and advertising expense depreciation and amortization expense and other cells.
Speaker Change: In administrative expenses.
Speaker Change: Additionally, we will be discussing certain non-GAAP financial measures a reconciliation of these items to U S. GAAP are included in today's press release, 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.
Thomas: Over to Thomas.
Thomas: Thank you Christina and thank you all for joining us today to discuss our third quarter results and business update.
We are very pleased with the progress we've made since our second quarter call.
The entire five below organization has come together with a refreshed mindset and a focus that is already making an impact.
Thomas: Ken and I have asked a lot of our team.
Thomas: It's been a heavy lift since the second quarter.
Thomas: I've been so impressed to witness firsthand, what we are capable of achieving with this shift.
Thomas: I want to thank our teams across the entire company for their commitment.
Thomas: Hard work and execution as we position five below.
Thomas: So the opportunity to supply ahead of us.
Thomas: Before I discuss the organizational and refocus on the way.
Thomas: I want to say how excited we are to announce winning park.
Thomas: Our new C E O.
Thomas: Okay.
Thomas: The breadth of women's leadership experience across specialty in value retail.
Thomas: Especially have merchandising expertise.
Thomas: Global sourcing.
Thomas: Consumer acumen.
Thomas: And importantly, how she values people and champions organizational culture.
Thomas: All make a uniquely suited for the role.
Thomas: In addition ship.
Thomas: She brings a deep understanding of the power at the intersection of trend and value.
Thomas: As you saw in our press release.
I am delighted that tennis continuing in his role as CFO.
Thomas: And on behalf of the board and the entire five below team.
Thomas: I want to thank him.
Thomas: For stepping in as interim CEO.
Thomas: <unk> expertise and deep knowledge of our business was integral in setting a refocus in motion.
Thomas: And we will continue to be as we execute on our strategic priorities.
Thomas: In my role as executive Chairman.
Thomas: I'm excited to work alongside Winnie and Ken.
Thomas: We now have a powerful combination of skills and experience.
Thomas: That positions us well to realize our full potential.
Thomas: Okay.
Thomas: Okay.
Thomas: In the three short months since we last spoke.
We've made meaningful strides to refocus the organization.
Thomas: And are operating with a sense of urgency to address the areas of the business, we outlined on our last call.
Thomas: Product.
Thomas: Value and store experience.
Thomas: Well, we are off to an encouraging start.
Thomas: We have a ways to go to deliver the performance that we believe this company is capable of.
Thomas: Our vision for five remains the same.
Thomas: To be the best destination for teens, and pre teens and yes store off of parents.
Thomas: We are getting back to our core.
Thomas: Focusing on the customer and what they want.
Work is underway to edit our assortment.
Thomas: Leverage our scale and deliver newness and trend right high quality product at an amazing value.
Thomas: While at the same time, improving our store experience and.
Thomas: Optimizing our cost structure.
Thomas: We have a long runway of growth with significant white space available to us.
Thomas: And we are working to ensure we are properly positioned to capitalize on this opportunity.
Thomas: I've always been passionate about working back from the customer.
Thomas: And maintaining an unwavering commitment to delivering the five below par.
Thomas: Of extreme value.
Thomas: Trend right product and a fun store experience.
Thomas: I am excited about our future and I'm confident.
Thomas: And our teams ability to achieve the vision.
We've put before them.
Ken: And with that I will now hand, it over to Ken.
Ken: Got it.
Ken: Thanks, Tom and good afternoon, everyone.
Ken: I'll make some comments on the third quarter results.
Ken: And then share progress updates on our key focus areas of product and value and store experience.
Ken: Then Christie will discuss more details on our results and outlook for the rest of the year.
Speaker Change: But before I get into results I want to add how excited I am to welcome winning to the team.
Speaker Change: For customer centric experience team oriented leadership style and deep focus on people both customers and crew.
Speaker Change: Make her a great fit.
Speaker Change: I look forward to partnering with winning to unlock our full potential and drive the next phase of five below is growth.
Speaker Change: I also want to take a moment to acknowledge and recognize the incredible contribution of all our teams.
It has been a very busy five months and what they have accomplished has been and is significant.
Now onto our results.
Speaker Change: Sales in the third quarter increased 15% to $844 million.
Speaker Change: With a comp increase of six tenths of a percent.
Adjusted EPS was <unk> 42 cents.
Speaker Change: These results were ahead of our guidance.
Speaker Change: Overall, we saw improved sales across a broader group of world and categories compared to the second quarter.
Speaker Change: Our operational execution across all areas of the business also improved and drove a better customer experience.
Speaker Change: We were very encouraged to see this overall improvement in the business, including across key comp metrics.
Speaker Change: At the same time, we acknowledge we still have work to do to achieve our vision and deliver consistently positive comp results.
Speaker Change: For new stores, much like our performance and comp sales.
Speaker Change: Performance here also exceeded our expectations.
Speaker Change: We opened a record 82 stores during the third quarter delivering growth of 18% versus last year's third quarter store count.
Speaker Change: These new stores were located across 31 states, including.
Speaker Change: Including our 44th state of Wyoming.
Speaker Change: Four stores in four states made our top 25 summer or fall Grand opening list of all time.
Speaker Change: Regarding performance by World the Tech seasonal style and Candy worlds.
Together represented over half of our business in the third quarter delivered the sales outperformance.
Speaker Change: We were encouraged to see the positive results from the initiatives we took.
Speaker Change: To add newness and deliver value, especially in our beauty Halloween tech and games and toys categories.
Speaker Change: Our license business was also strong across several departments with both newer trends in existing trends such as soon.
Speaker Change: As we help celebrate Hello Kitty.
Speaker Change: Yes.
Speaker Change: Within our five beyond assortment.
Speaker Change: Items that represented extreme value and where trend right resonated with our customers.
Speaker Change: Now on to our key focus areas.
Speaker Change: Starting with product and value, we are renewing our commitment to being the yes store for kids and parents.
Speaker Change: Flexibility relevancy nimbleness and speed are key to five below is merchandising success and.
Speaker Change: And we are focused on leaning into these core capabilities.
Speaker Change: One of our key Differentiators has always been the ability to quickly identify trends and capitalize on them.
Speaker Change: With the teams back together in the office, we have seen positive momentum towards greater innovation speed, driven by improved collaboration and communication across multiple groups, including merchandising product development sourcing planning allocation and visual merchandising.
Speaker Change: We believe our merchant teams are now better organized and equipped to quickly capitalize on trends and innovate.
Speaker Change: They have a renewed focus on sourcing truly amazing trend right items that deliver quality value and wow for our customers.
Speaker Change: Work is underway to drive broader and more consistent category in world performance.
Speaker Change: With an improved key item approach.
Speaker Change: <unk>, SKU rationalization and productivity and sharper value.
Speaker Change: As we said last quarter. This will take some time and we currently expect to begin to see the impact of these changes in the second quarter next year.
Regarding five beyond we believe it continues to provide us an opportunity to deliver a highly edited assortment of great trend right products at incredible value.
Speaker Change: We will apply the same core teen and preteen customer filter and focus as we do with the five below products when creating this assortment and we will optimize presentation in our stores.
Speaker Change: On the store experience.
Speaker Change: Store experience is also a key differentiator for five below.
Speaker Change: We aim to be the cool store for kids and the destination for fun Treasure Hunt experience.
Speaker Change: We have invested in our stores by increasing labor and streamlining operations to enhance the experience for both our customers and crew.
Speaker Change: We added more labor into the stores. This year beginning in August and have begun creating work efficiencies and reducing tasks for our crew.
Speaker Change: As an example to improve crew efficiency in store service levels, especially in the high volume holiday quarter.
Speaker Change: Part of our investment has associates Manning, our self checkout areas and available to assist.
Speaker Change: The actions we have taken to date have re energize and store teams and enable them to focus and engage more with our customers to deliver a better customer experience.
Speaker Change: Oh.
Speaker Change: Now turning to the fourth quarter.
While it is very early the holiday season is off to a solid start with the Black Friday weekend coming in on plan.
Speaker Change: Our stores are filled with gifts and stocking stuffers from cozy apparel.
Speaker Change: Toys and games to seasonal decor.
Speaker Change: We are leaning into value even more this holiday season with one two and three dollar items.
Speaker Change: As pleased as we were with our third quarter outperformance.
Speaker Change: And solid start to holiday with our Black Friday weekend results, it's important to acknowledge the expected impact on our fourth quarter results of the five fewer shopping days between Thanksgiving and Christmas.
We last had this calendar in 2019 and abuse that experience to build our fourth quarter plan. This year.
Speaker Change: As we look ahead, we are pleased with the changes and improvements we have been able to implement in a short period and are excited about the opportunities for the future. We have a long runway of growth ahead and encouraging early results from the work that is underway to improve performance and results.
Speaker Change: Okay.
Speaker Change: Before I close I want to make a few comments on the topic of potential tariffs.
Speaker Change: First tariffs are not new to five below we successfully solved for tariffs in the late 2018 in 2019 timeframe.
Speaker Change: Through a combination of vendor collaboration product reengineering and assortment changes moving product sourcing to other countries and ultimately pricing increases primarily in our tech world.
Speaker Change: We expect to utilize these tools and tactics again.
What's different today is that not only do we have a playbook having successfully navigated. This before we also have five beyond established as well as our India Global sourcing office, which will help to optimize our vendor base overseas.
Speaker Change: That said work is already underway way with our many vendor partners and our overseas sourcing teams to mitigate the impact of potential tariffs.
Speaker Change: In closing we are fortunate to have talented and energized teams in place across the organization.
Speaker Change: We have begun to reset the mindset of our company and have implemented meaningful change that our teams have wholeheartedly embraced.
Speaker Change: I could not be prouder of and more confident in the entire five below team to drive the vision, Tom and I have laid out.
Speaker Change: And with that I'll hand, it over to Christie to discuss our results and outlook in more detail Christy Thanks, Ken and good afternoon, everyone I would like to add my welcome to winning I look forward to working with her to create value for our shareholders.
Christie: I will begin my remarks with a review of our third quarter results and then discuss our outlook my comments will refer to results on an adjusted basis. Please refer to our earnings press release for GAAP results and a reconciliation.
Christie: Total sales in the third quarter of 2024 increased 14, 6% to $843 $7 million from $736 $4 million in the third quarter last year.
Comparable sales increased nearly 6% driven by an increase in comp ticket of one 2%, partially offset by a decrease.
Christie: In comp transactions of 0.6%.
Speaker Change: As Ken mentioned the teams did a great job executing against the initiatives, we put in place to improve sales.
Speaker Change: Well, it's still early in our reset we were encouraged to see an improvement in the third quarter compared to the first and second quarters across key sales metrics, including transactions and average ticket.
Speaker Change: In the third quarter, we opened 82, new stores compared to 74, new stores opened in the third quarter last year.
We ended the quarter with 1749 stores, an increase of 268 stores or approximately 18% over last year.
Speaker Change: New stores also benefited from the actions taken to improve the business, resulting in new store productivity that exceeded our expectations and our guidance for the third quarter.
Speaker Change: Adjusted gross profit for the third quarter of 2024 with $281 million an increase of 25 seven.
Speaker Change: 7%.
Speaker Change: Adjusted gross margin increased by approximately 290 basis points to 33, 2% driven primarily by lapping the approximate 180 basis points shrink true up from last year's third quarter.
Speaker Change: The timing of certain product margin benefits, including freight and efficiencies and distribution.
Speaker Change: These benefits were partially offset by fixed cost deleverage.
Speaker Change: As a percentage of sales adjusted SG&A for the third quarter of 2024 increased approximately 180 basis points to 29, 9% versus last year's third quarter.
Speaker Change: This was driven primarily by increases in store payroll, including investments in labor hours and wages as well its fixed cost deleverage, partially offset by leverage from cost management initiatives.
Speaker Change: As a result, adjusted operating income was $27 $6 million and adjusted operating margin was three 3% versus two 2% last year.
Speaker Change: Versus guidance, our adjusted operating margin results were better than expected primarily due to the favorable favorable fixed cost de leverage that was lower due to the sales team.
Speaker Change: Adjusted net income for the third quarter was $23 $3 million versus net income of $14 $6 million last year.
Speaker Change: Adjusted earnings per diluted share for the third quarter was 42 cents compared to last year's earnings per diluted share up 26%.
Speaker Change: We ended the quarter with $216 $6 million in cash cash equivalents and investments and no debt.
Speaker Change: Inventory at the end of the third quarter was $818 million as compared to $763 million at the end of the third quarter last year.
Speaker Change: Average inventory on a per store basis decreased approximately 9% versus the third quarter last year, primarily due to our ongoing strategy to normalized inventory levels.
Speaker Change: The inventory balance at the end of the quarter includes an approximate $21 million incremental reserve for unproductive inventory as we implement our new merchandising strategy that Ken discussed.
Our third quarter, ending inventory has us well positioned to deliver against our fourth quarter sales guidance and we expect to end the year with average inventory per store at lower than last year.
Speaker Change: Turning now to our guidance our press release outlines our sales new stores and earnings guidance for Q4 and full year 2024. So I'll focus my commentary on additional details are drivers for that guidance.
Speaker Change: I will refer to fiscal year, 2023, and a 52 week basis and the fourth quarter of 2023 on a 13 week basis and to fiscal year 2024 on an adjusted basis that excludes the impact of nonrecurring or non cash items as outlined in our earnings press release.
Speaker Change: As a reminder, the extra week in fiscal 2023 added approximately $48 million in sales and approximately 15 and earnings per share to the fourth quarter and year.
Speaker Change: For the fourth quarter of 2024 on a 13 week year over year adjusted basis, we expect the following.
Speaker Change: Total sales are expected to increase between 5% to approximately 7% with a comp decline in the range of negative 5% to negative 3%.
Speaker Change: As a reminder, this is a unique holiday season due to the calendar with five fewer shopping days between Thanksgiving and Christmas similar to the 2019 holiday season.
Speaker Change: Adjusted gross margin at the midpoint is expected to decrease by approximately 90 basis points as the 100 basis point benefit of lapping the shrink true up from the fourth quarter last year is more than offset by fixed cost deleverage on the negative comp and the timing of certain product costs, including freight.
Speaker Change: Adjusted SG&A as a percentage of sales at the midpoint is expected to be approximately 120 basis points higher than the prior year. This is driven by fixed cost deleverage on the negative comp and investments in store hours and wages, partially offset by lower incentive compensation.
Speaker Change: This resulted in an adjusted operating margin decline at the midpoint of approximately 210 basis points compared with the prior year's fourth quarter.
Speaker Change: Moving on to the full year total sales are expected to increase between approximately 9% to approximately 10% with a comp decline of approximately 3%.
Speaker Change: Adjusted gross margin at the midpoint is expected to decrease approximately 20 basis points due to fixed cost deleverage on the negative comp that is partially offset by lower inbound freight from the first half of the year lapping last year's shrink reserve true up as well as DC efficiencies.
Speaker Change: Adjusted SG&A as a percentage of sales at the midpoint is approximately 150 basis points higher than last year.
Speaker Change: Fixed cost deleverage on the negative comp and investments in store hours and wages are only partially offset by lower incentive compensation.
Speaker Change: As a result, adjusted operating margin is expected to be approximately 9% or 170 basis points lower than the prior year.
Speaker Change: Net interest income is forecasted to be approximately $14 million for the year end.
Speaker Change: We expect April effective tax rate.
Speaker Change: For 2024 of approximately 25%.
Speaker Change: With.
Speaker Change: Respect to gross Capex, we now plan to spend approximately $340 million, excluding the impact of tenant allowances.
Speaker Change: This reflects the opening of 228, new stores converting about 180 store locations to the <unk> format. The completion of expansion in our distribution centers in Georgia, and Arizona and investments in systems and infrastructure.
Speaker Change: We expect to end the year with 1771 stores.
Speaker Change: For all other details related to our results and guidance. Please refer to our earnings press release.
Speaker Change: To wrap up the work to return five below to realize its full potential is well underway and we are pleased with the early signs of progress we have a large opportunity ahead to meaningfully improve our comp trajectory as we implement our merchandize and experienced strategies and continue our growth.
Speaker Change: The entire five below team is focused on executing against our plans and we are beginning to see positive results and improvements which provides us confidence in the opportunities that lie ahead I want to thank our teams for leaning in during these last several months as we reset for the future and with that I would like to turn the call back over to the operator for the quest.
Speaker Change: <unk> and answer session.
Speaker Change: Thank you.
Speaker Change: 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 are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two please.
Speaker Change: Please limit yourself to one question. If you have any further questions you may reenter the question queue.
Speaker Change: At this time, we will pause for just a moment to assemble our roster.
Speaker Change: And our first question today will come from John <unk> with Guggenheim Securities. Please go ahead.
Speaker Change: Hey, Ken the one question is a broad one but when you think about what you want to do with product right as you go forward.
Sean: Sean how you think about sort of allocation by world.
Speaker Change: So it kind of recapturing that extreme value alright.
Speaker Change: How do you think about the SKU assortment.
Speaker Change: Wanted to noticeably cut back.
Speaker Change: Certain areas.
Speaker Change: And then price point right.
You're talking about 135, and but just sort of touch on that.
Speaker Change: The key thing as you think.
Speaker Change: Recapture that extreme value orientation.
John Guggenheim: Yeah. Thanks, John.
As you know and as we've said the key focus areas in a couple of the key focus areas around product and value.
Speaker Change: You mentioned the worlds.
Speaker Change: And it's one of the things that we wanted to get back to as a more kind of consistent and broad performance across the world and I. Thank you.
Speaker Change: We saw that in the third quarter, which was good to see across more than just a few worlds and we increase that and that that's ultimately our goal is to look to deliver on more consistent performance there.
It's always been.
Speaker Change: And it always will be around trend right product high quality extreme value all focus towards and targeting kids and I think that's the piece that we're going to get back to from a focus perspective for.
The teams and the merchandising areas.
Speaker Change: The.
Speaker Change: The other piece around the Skus, we did say.
Speaker Change: We were going to and we will start to.
Speaker Change: Go through a SKU rationalization and we're also going to be looking at SKU productivity, which should drive less skus.
Speaker Change: That work is more on a go forward basis like we would expect to see some improvement there.
Speaker Change: As we get into the middle of next year now that being said for the inventory that we own.
And Christy had mentioned it we've got a reserve that we put in place against existing products. So that'll help us get there too but the go forward is a meaningful reduction in our skus.
Speaker Change: As we move forward and we'll probably see that into next year.
Speaker Change: Thank you also mentioned the price points. The one to three it was an area in holiday that we emphasized if you're in our stores, you'll see that especially when you walk in it's always been a key part of our business.
Speaker Change: And even when you look at the five dollar and less price points I mean, they still represent probably 85% of the units out there for us.
Speaker Change: So that's always going to be an ongoing focus for us as we move forward that's important for us, especially for the kids.
Speaker Change: And then Tom I know if you have anything you want to add to that Ken Dodd merchandize cause you covered it John one thing I would say as we look at on some of the learnings.
Speaker Change: <unk> looked at all the worlds. It's also fair to say that without getting into a lot of specifics, we see a real opportunity ahead.
Speaker Change: To reset some of the areas and in those areas. We can obviously expect to see a much greater SKU reduction to enable businesses and we need as a company to find way to look at businesses that perhaps need a certain degree almost a re invention and ability to reduce skus in a meaningful way to allow for newness.
Speaker Change: To comment just to add on Ken.
Speaker Change: Comment on price points.
There is no question about it you're starting to see it you can expect to see more a greater emphasis on five below and even within that range narrowing the price points.
Speaker Change: While at the same time, we think there is an opportunity in five beyond but to be very selective and to make sure that the filter same filtering of extreme value.
Speaker Change: Trend right.
Speaker Change: Product is what we are focusing on so more to come.
John Guggenheim: Thanks, John.
And your next question today will come from Chuck Grom with Gordon Haskett. Please go ahead.
Chuck Grom: Good afternoon, and thanks, a lot congrats on the progress.
Speaker Change: John you guys could just talk a little bit about the benefits of everyone being back in the office you know on the outside looking in it's hard to see but clearly that was missing and it clearly it looks like it's helping so can you talk about that and also.
Speaker Change: As we look out over the next couple of years, how we're thinking how youre thinking about store growth.
Speaker Change: New store productivity was better this quarter, but it's still a little bit below where you guys have stork with trend. So just how should we think about store growth next year and the years out. Thank you.
Speaker Change: Yes.
Speaker Change: Thanks Chuck.
Speaker Change: Yes, we it was important for us to get everybody back to the office and that's been I think it's been a few months now.
You can see and feel the difference because this.
Speaker Change: This business is all about collaboration and innovation.
Speaker Change: And really the only way to get there is it that's tough to do.
Speaker Change: In a hybrid environment, it's tough to do virtually it's tough to do online. So you can see throughout the organization, especially in those key areas around product. So merchandising planning allocation visual merchandising in fact, we reinstituted.
Speaker Change: The pod to the physical pods, where these teams are working together because that's what it's all about it's a team approach so.
You're right we have seen the benefits of that in a real short period of time and I think that's going to continue for us.
Speaker Change: Around store growth, we mentioned to you I think on the last call.
Speaker Change: We called out for next year, a range of 150 to 180 stores.
Speaker Change: As that stands now based on what we're looking at it's probably closer to the lower end of that range.
Speaker Change: We've had.
Speaker Change: And we mentioned before we've been extremely selective with our sites and I think that's going to continue.
Speaker Change: And some of our landlords have had delays in some of the properties and so that's kind of pushed that number. So we're looking right now.
Speaker Change: To be at the low end of that range.
Speaker Change: With regards to anything else related to 2025, I mean, we'll we'll obviously update everyone on our fourth quarter call as we normally do but that's kind of how we look at the growth going forward, we'll have more to talk about it even in further future years on our fourth quarter call. Thanks Chuck.
Speaker Change: And your next question today will come from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.
Jeremy Hamblin: Thanks, Congrats to Winnie and congrats to the whole team on the improved results.
I wanted to come back to just understanding.
Jeremy Hamblin: When you look at Q4, you're off to a solid start solid black Friday.
Jeremy Hamblin: Period, but what do you think maybe missing out on.
Speaker Change: You could have had a do over on where.
Speaker Change: You know where your product assortment was what do you think the missed opportunity is.
Speaker Change: In Q4, whether that's life.
Speaker Change: Licensing opportunities with you know kind of some exciting things like Milana Wicked.
Speaker Change: Cetera, but what do you feel like you would have leaned into a bit more there.
Speaker Change: That could've drove our business better and then just as a reminder, can you can you outline for us.
Speaker Change: Ken or Christy what the.
Speaker Change: The compressed season impact was in 2019, I did I think I recall it was like several hundred basis points to comp.
Speaker Change: Yeah, Okay. Thanks, Thanks, Jeremy.
I'll take a.
Speaker Change: The last part of that question first.
Speaker Change: We had the benefit this time in a shortened season to be able to have a year.
Speaker Change: That's more comparable and that as you called out that 2019.
Speaker Change: And we use that cadence.
Speaker Change: And modeling and experience to be able to to determined expectations for this fourth quarter I believe if you go back and you look at.
Speaker Change: The transition from say Q3 of 2019 into Q4.
Speaker Change: We did probably about a three comp in Q3 of 2019 about a minus two comp in the fourth quarter. So you had about a 500 basis point differential in comp.
Speaker Change: It's pretty similar to what we've done here in terms of where we landed in the third quarter and what we're guiding to in the fourth quarter. So as we said in our prepared remarks, we use that as kind of a guide for us.
Speaker Change: In terms of the fourth quarter and potential opportunities I think the first thing.
Speaker Change: I want to just reinforce what we're really happy with what the teams have done a real short period of time.
Speaker Change: They had a chance to make an impact on Q3.
Little bit easier to do that for the third quarter, just given the nature of the quarter. It's a smaller quarter, it's got small season and their Halloween and you just have the ability on an item by item approach to have the impact there. It's much more difficult to do that in Q4, just because the size of the quarter and the nature of our business.
Turns from.
Speaker Change: Self purchase in Q3 to more of a gifting approach in in Q4.
And as you know myself and Tom We're we're never pleased Theyre never happy who are always looking for better. So yeah. There is definitely opportunities out there, but I got to tell you. The team has done a really good job in preparing us for the holiday season from a product standpoint, and also from an execution standpoint across the organization.
Speaker Change: So.
Speaker Change: Whether it was the stores and what they've done to get the experience there for us.
Speaker Change: Or even the operating teams the planning teams the allocation teams have done a fantastic job.
Speaker Change: So there's a lot here that we continue to learn I think Tom mentioned that in his remarks too that we're going to use those things and that's just going to be more opportunity as we go forward. So thanks Jeremy.
Speaker Change: Your next question today will come from Karen short with Melius Research. Please go ahead.
Hi, Thanks very much.
Speaker Change: Couple of question well I'll leave it to one but maybe I'm tend to ask you.
Speaker Change: Hmm.
Thoughts on CMO.
Replacement, if there are any and then I'm curious what you think the optimal number of skus or for the stores.
Speaker Change: Yes, yes.
Speaker Change: Thanks, Karen.
Tom answer on the CMO or take a hiatus.
Speaker Change: On the Skus I think our team in merchandising.
Speaker Change: As today.
Speaker Change: We are very pleased with we have Andy councilman, who leads the team that we have seven we've mentioned this before we have seven dms six of whom have a tremendous amount of experience anywhere between six to 15 years, we have a great team on the merchandising organization.
Speaker Change: We're pleased with all the work that they're doing and we are confident in their ability to really drive this business forward at this point.
Speaker Change: I do believe and with <unk> coming on board and you look at hub.
Speaker Change: A level of experience around the side of marketing and merchandising and product newness.
Speaker Change: My involvement which has been a bit but I think the team is in place ready and we are very very happy with the team.
And then Karen just on the SKU optimization as we said that that is a focus for us now.
Speaker Change: We will see results of that going forward.
Speaker Change: We've quoted before that we could see up to say a 20% reduction in skus.
Speaker Change: And again that takes a little bit of time to get into play there.
Speaker Change: The key there is when we say SKU optimization is really rationalization in productivity I mean, thats, where the focus is going to be.
Speaker Change: And we have an opportunity in some of these in the future seasons to be able to do that work. So we will look across the world and I think you heard Tom mentioned also.
Speaker Change: There's probably certain world that there is a little bit more of that that's going to take place for us what that does for US is it opens up the.
Speaker Change: The opportunities for newness newness is really critical to the business.
Speaker Change: Especially when you talk about trend and excitement for the customer.
Speaker Change: So that will give us the ability to really focus more newness as we go forward. So just a little bit of clarity around the SKU optimization. Thanks Karen.
Speaker Change: And your next question today will come from Michael Lasser with UBS. Please go ahead.
Michael Lasser: Thank you so much for taking my question, how much would begin to me.
Speaker Change: Second quarter to the third quarter was driven by the actions at five below he's taken versus just the <unk>.
Speaker Change: External environment improved over that time.
Speaker Change: It has been.
Bolted the actions, especially adding more value how do you reconcile the need to increase are you using price as a lever versus using prices and labor to offset the tariff risks and youre going to face in 2025. Thank you, yes. Thanks Michael.
Speaker Change: Yes, there was there was definitely a benefit from an external perspective, I think you saw across the retail sector that traffic improved especially.
Speaker Change: When you look at the middle of the second quarter, probably around that July timeframe and as we enter Q3, and then exited Q3.
Speaker Change: It looks like the continuous improvement in traffic I think the.
Speaker Change: The benefit for US was that we capitalized on that traffic and that was the key and again it was from a product perspective, you saw the broader performance across the categories. There. It was we had the ability to introduce newness, we have the ability to introduce trend.
Speaker Change: We pushed value we had also embedded in there and we haven't really spoken about we had a successful Halloween season seasonal business, our traffic drivers for us too and I think the team did an outstanding job.
Pulling that all together and the customer responded really well to that but again it was throughout other categories. When we look at our style categories and there was the other piece that we did again I mentioned from an operational execution standpoint.
Speaker Change: Teams did a great job.
We invested in labor in the stores the stores delivered for us.
Speaker Change: And the teams from a product perspective, we.
We flowed the product much better than we did in the second quarter, we had an excellent seasonal transition going into Halloween and if you were in our stores you saw much better in stocks. So it was really a combination of all those things it's hard to kind of pinpoint.
Speaker Change: The amount so it's all of that combined I think your other question was around.
Speaker Change: Maybe value and how it relates to mitigating tariffs.
Speaker Change: Yeah.
Speaker Change: The one thing that when we say value by the way, it's not just price it's trend it's high quality and its price. So it's a combination of all of those.
Speaker Change: And that's really that with the customers feel and see when they come into the store. So it's not just about the price point because of it is where we are in the wrong business right, we start with great product.
Speaker Change: And then from a tariff perspective, we will see where tariffs go as I mentioned, it's still a big uncertainty and it's still a big potential.
Speaker Change: We have levers that we can pull.
Speaker Change: Prices the last one for us at the end of the day and the other piece, that's going to benefit us and it's part of the mindset shift.
Speaker Change: The Tom had mentioned and that we spent a good amount of time working on is <unk>.
Speaker Change: Better leveraging on our scale I think that drives more value for us that we can translate back to the customer. So we will also have the ability to do that.
Speaker Change: Better than we have before and again if prices need to go up I think on a relative basis compared to other retailers because it's going to be across the board with other retailers I think we're still going to be in a great position. There. So thanks for the question Michael.
Speaker Change: Yeah.
Speaker Change: And your next question today will come from Scot Ciccarelli with Truest. Please go ahead.
Scot Ciccarelli: Good afternoon guys.
Speaker Change: So you guys had pointed to excessive weakness with your lower income consumers as the primary sales headwind and he's.
Speaker Change: At your handful, but do you have a feel for what customer cohorts drove the sequential improvement in traffic was it concentrated with lower income consumers or was it kind of across the board.
Speaker Change: Yeah. Thanks, Scott.
Speaker Change: We saw a consistent performance across the various income demographics. So.
Speaker Change: Consistent with what we've seen historically when we go back in the business. We saw that recently so that was good good to see.
Speaker Change: Thanks Scott.
Speaker Change: Sure.
Speaker Change: And your next question today will come from Simeon Gutman with Morgan Stanley. Please go ahead.
Speaker Change: Mr. Gutman your line may be muted.
Okay.
Speaker Change: Okay.
Speaker Change: And moving on to our next question.
Speaker Change: Edward Kelly with Wells Fargo. Please go ahead.
Speaker Change: Hi, good afternoon, everyone.
Kevin Christie I wanted to ask you about just a couple of things as we think about next year from a margin standpoint, because there is some uncertainty on our end.
Speaker Change: About shrink you turned on self checkout again, so do you get any shrink benefit next year labor you've invested in labor in the back half is probably I think 20 basis points it seems to be working.
Speaker Change: So is that like how much of a headwind is that next year can you quantify incentive comp I'm just curious because we think about next year. It looks like there will be some margin headwinds that we need to consider and I don't know to what extent you can help us in thinking about that at the moment.
Speaker Change: Yes, Thanks Ed.
Speaker Change: I know, we try as we always do to be as transparent as we can especially on kind of go forward outlook and help you guys with the modeling.
Speaker Change: We'll tell you we are focused on 24 right now right and we've got a huge season still ahead of us and that's where our energies are focused on and as we normally do we'll provide a complete update.
Speaker Change: And guidance around the future on our <unk>.
Speaker Change: <unk> fourth quarter call.
Speaker Change: The other piece to that we have to throw in there we talked about the potential of tariff so.
Speaker Change: Any discussion we would have would not be considering the impact of those but you know as I think Christie mentioned this.
Speaker Change: On the prior call.
Speaker Change: From a modeling perspective, we are up against.
Speaker Change: Incentive compensation headwinds.
Speaker Change: Excluding the incentive compensation headwinds.
Speaker Change: To just to give you an idea we would expect to start leveraging at a 3% comp.
Speaker Change: That's the way we're looking at it now and again, we still have work to be done we want to get through this holiday season.
Speaker Change: But we'll.
We'll provide more.
Speaker Change: Information in the fourth quarter and again keep in mind. This is all on an adjusted basis when you're comparing the year. So just keep that in mind too based on those.
Speaker Change: Those adjustments that we flowed through this year and comparing those for next year. So that's all on an adjusted basis.
Speaker Change: Ed.
Speaker Change: And your next question today will come from Matthew Boss with JP Morgan. Please go ahead.
Great. Thanks.
Speaker Change: Ken maybe just on <unk> comps versus plan.
Speaker Change: Could elaborate on the contribution you saw from the newness and value initiatives. This quarter, maybe if you could speak to comps in November how best to think about it relative to the guide and just if you could rank further initiatives in the incremental initiatives that you sided that would be there by the second quarter of next year that would help one.
Speaker Change: Quick one for Christine just the 21 million inventory write off if you could just walk through what line items that impacted that would that would be helpful.
Speaker Change: Okay. Thanks, Matt.
Speaker Change: On the Q3 comps, we really saw in that improvement between where we guided and where we landed.
We really saw it pretty broadly from a performance standpoint.
Speaker Change: In general the.
Speaker Change: The teams had a chance to chase some product.
Speaker Change: It did help to have an impact for the season, which was great.
It was around newness and trend and value and again, whether I called out style, we called out Tech, which also benefited from better in stocks, which was good to see.
Speaker Change: So those and then Halloween Halloween across the board did really well for us and that was.
Speaker Change: Not just in the seasonal category, but within other categories that performed well. So it was really kind of coming from all of those.
Speaker Change: I mentioned beauty too is another area that.
We were able to impact.
Speaker Change: In terms of the November comps, we normally don't speak to intra quarter activity or anything this early.
Speaker Change: To keep in mind, the comps are somewhat not totally relative, especially because of the shift.
Speaker Change: In the in the.
Speaker Change: Black Friday weekend and lesser days.
Speaker Change: But again as I said, we had a solid black Friday weekend, and we feel really good about where we are versus where our where we placed our guidance. So we feel like we're in good shape and then.
Speaker Change: I mean as far as it relates to our inventory.
Speaker Change: Basically we made an adjustment within gross profit.
Speaker Change: As a reserve for unproductive inventories of lowering our overall inventory balance stood at $818 million that we quoted but it's within gross profit.
Speaker Change: And again everything I talked about was on an adjusted basis. There's a reconciliation in our press release for you to look at to see it.
Speaker Change: Uh huh.
Speaker Change: <unk> laid out for you.
Speaker Change: Thanks, and your next question today will come from Seth Sigman with Barclays. Please go ahead.
Seth Sigman: Everyone. Thanks for taking the question I wanted to just go back to labor investments and changes you made to the labor model this quarter could.
Seth Sigman: Can you just give us a feel for how that helped the performance and I guess, how youre thinking about the need for further labor investments from here. Thanks.
Speaker Change: Yes, Thanks Seth.
Speaker Change: The labor piece of it really came in one of the focus areas for us is around experience and.
Speaker Change: We had mentioned that on our second quarter call that we realized that we could not invested enough in labor and it was.
Speaker Change: Reflective in the stores.
Speaker Change: Whether it was a service levels, whether it's the in stock levels. So.
Speaker Change: I think Christie mentioned.
Speaker Change: We had an incremental investment in the third quarter, we felt it paid off for US I mentioned, how we successfully transitioned.
Speaker Change: In the seasons in the quarter, whether it was going into Halloween or the startup holiday, which came at the very end of the third quarter.
Speaker Change: So that that was good to see.
Speaker Change: And it's not just the labor investments I don't want you to think that it's just about throwing hours at the stores.
Speaker Change: It's also around.
Speaker Change: Workload efficiency.
Speaker Change: We've done a handful of things that have helped the stores, we've removed non value tasks and we're going to continue to look at that so that frees them up to focus on the more important things to do in the stores. So we're excited about what we saw there.
And I think Christie has mentioned.
Speaker Change: That we're going to continue that investment and if you want to expand on the amount of that that we had in the third quarter, Sir Yeah, Yeah, and we increased the average store hours by about 5%. So that the impact was about 50 basis points within the quarter.
And then as you look into next quarter, we expect it to be about half of that so you got someone asked earlier, it's about 20 basis points for the full year impact.
Speaker Change: We will continue to look at that particularly in the first half of next year as we continue to invest in what our stores need to deliver on that star experience.
Speaker Change: And just just to add to that to the one other thing Seth that we did in the quarter.
Speaker Change: I think it was in my prepared remarks was around the self checkout, where we.
Speaker Change: We updated that where we have somebody there that's manning that self checkout area.
Speaker Change: It creates more crew efficiency for us it creates a better service level for the customer.
Speaker Change: And we think that's going to help us to as we move forward. So that's been pretty positive for us versus where we were before with that area of the store.
Seth Sigman: Thanks Seth.
Speaker Change: And your next question today will come from Kate Mcshane with Goldman Sachs. Please go ahead.
Kate Mcshane: Hi, good afternoon, thanks for taking our question.
Kate Mcshane: Ken I know you said on the last call that you had thought some of the competition had been catching up a little bit during your period of softer execution, just based on what happened with the third quarter and our success.
Kate Mcshane: Successes in turnaround you had during that time, how would you characterize your competitive positioning today.
Speaker Change: Thanks Kate.
Speaker Change: Sure.
Speaker Change: I think what Youre seeing is this is when we talk about work is underway.
Speaker Change: And the beginning of some results in the learnings I think all of that is what we're seeing in Q and Q and Q3.
We were not there in our results in Q2 again, I know it sounds repetitive, but to get back to trend right product, it's high quality extreme value focus towards kids.
Speaker Change: And there is newness.
Speaker Change: When we do that we win.
And that's what we saw in certain categories in the third quarter now again, we still have a ways to go with doing this but that's really the thing that.
Speaker Change: When we talk about a mindset shift in.
And what we're doing within the.
Speaker Change: Organization.
That's.
Speaker Change: That's what we'll continue to see as we.
Speaker Change: We move forward in terms of the more opportunities for us there so more to come thanks.
Speaker Change: And your next question today will come from Brian Nagel with Oppenheimer. Please go ahead.
Brian Nagel: Hi, good afternoon nice quarter congratulations.
Speaker Change: Yeah, certainly Brian the question I have.
Speaker Change: Just look at the comp sales upside.
In the third quarter.
Speaker Change: Given the significant turnaround where we saw earlier in the year.
Speaker Change: Maybe you can just discuss the cadence through the through periods, where here in Europe hearing from a lot of other retailers or brands out there that you'll consumer who are showing up for big events. The low end in between is that could you see back to with the upside really driven these key events or was it more consistent through the quarter.
Brian Nagel: Yes, Thanks, Brian.
Speaker Change: Yes, we would we would kind of mirror, what you're hearing from the sector I think the quarter started off probably a little bit more similar with how we exited the second quarter and.
Speaker Change: We internally saw improvement as we move through the quarter, probably in the middle of the quarter on through the end of the quarter.
Speaker Change: The key there, though is that we are able to capitalize on at this time.
Speaker Change: And when we talk about the different areas of the business the beauty area of the Tech area.
Speaker Change: Louise and seasonal and yes, the customer came out and they were shopping our lean.
Speaker Change: We had a great assortment for them.
Speaker Change: Ross newness across value in across all our various world. So it all kind of came together, but there was that cadence that you saw at improving as we went through the quarter.
Speaker Change: Thanks, Brian.
Speaker Change: And your next question today will come from Michael Montana with Evercore ISI. Please go ahead.
Hey, Thanks for taking the question.
Speaker Change: I wanted to ask you about tariffs and I guess, it's probably a three parter, but.
Could you remind us basically what was the percentage increase that you saw back in 2018 19 on the goods that you're selling is it around 35%.
I guess part two would be either as a letter greater percentage what amount of the corresponding headwind do you feel like you were able to offset net net given your actions and then vendor leverage.
Speaker Change: And then I guess the final part is.
Speaker Change: Can you just remind us today and level set what percent of the sourcing is being imported from China directly as well as indirectly.
Speaker Change: Yeah.
Speaker Change: Thanks, Michael you're right that was a multipart question.
Speaker Change: But I'll speak.
Speaker Change: What I can do there.
Speaker Change: From from a tariff.
Perspective.
Speaker Change: When you look at the increases going back to 2018 and 19. If you recall there was a lot that happened by the way they started off.
Speaker Change: And it took a while for them to get into place and the categories that we're going to be tariffs and all that it started off probably in the 10% level.
Speaker Change: And then it moved 15 20, 25% I think it pretty much peaked to 25% relative to <unk>.
Speaker Change: Primarily in our tech and room areas that we were hit with that.
Speaker Change: I talked about the mitigating opportunities that we have and the biggest one out there for us and it was the majority of what we were able to work with was the vendor.
Partnership assistance collaboration whatever you want to say there.
Speaker Change: Got us up to a certain percentage and then when the percentage has got too high the vendors kind of pushed back and that's what drove us.
Speaker Change: Breaking the $5 price point, especially in the tech area.
Speaker Change: Okay.
And you did have the right percentage related to our total product, whether it's directly or indirectly.
Speaker Change: Imported.
Speaker Change: We're close to that 60% level.
Speaker Change: Coming out of coming out of China, I do want to emphasize though again first of all that all the time, it's still a potential we don't know where that's going to go it's a total uncertainty.
Speaker Change:
Speaker Change: There is three or four things around tariffs that are going to benefit us.
Speaker Change: The we do have a playbook we've been through this before.
Speaker Change: We've got five beyond there if we need it.
Speaker Change: Which is well established with the customer because recall, we were testing that back in 18, and 19, so where to see if that.
Made any sense, we have a sourcing office over in India, that's going to be able to help us. So we have boots on the ground.
To help us whether it's with existing vendors within their countries are shifting countries and vendors.
Speaker Change: And then the other piece, we can't Understate again, we go back to the mindset shift and we talked about this in the second quarter that we need to leverage our vendors much better.
Speaker Change: And we're already working on that so that's going to help us too as we.
Speaker Change: As we go through and actually.
Speaker Change: Regardless of where this goes with tariffs and the uncertainty you heard my prepared remarks, we already have.
Activities and actions in communications underway.
Speaker Change: With our vendor partners and working with our overseas office.
Speaker Change: Already looking to set up strategies to mitigate these.
Speaker Change: So thanks Michael.
Speaker Change: Okay.
Speaker Change: And your next question today will come from Simeon Gutman with Morgan Stanley. Please go ahead.
Simeon Gutman: Thanks, sorry about before.
Speaker Change: Nice progress I wanted to ask about the sequential improvement again can you. If you look at the Egypt, Egypt stores, the cohorts and then new markets versus mature was it uniform.
Speaker Change: Then I guess the average means there's probably some stores that are probably low single, even maybe mid single digit at this point is there any rhyme or reason for that if they are immature mature those are stores, maybe you didn't have more of a five beyond.
Speaker Change: Yeah.
Simeon Gutman: Yeah, Thanks, Simeon yeah.
A lot of detail there.
Simeon Gutman: And again, we don't want to get too much into the intra quarter I can tell you on and I listen first of all throughout the chain you always have.
Simeon Gutman: The pluses and minuses right for various reasons by the way, whether it's something with the store whether it's.
Simeon Gutman: An event an anniversary weather whatever it may be.
Simeon Gutman: And let's not forget accountable <unk> right, because we know that's happening in a controlled environment.
Simeon Gutman: And we can plan for that and that's always in our guidance, assuming some some level of that but I got to tell you.
Simeon Gutman: It's been relatively consistent across stores you heard that just wasn't positive performance in our comp stores.
Simeon Gutman: But also in our newer stores, where we exceeded our new store productivity and what we had expected. So we were we were pleased with.
Simeon Gutman: With what the performance the performance that we saw during the quarter and again as I mentioned.
Simeon Gutman: Four.
Simeon Gutman: Another color, we did see improvement and it was across the chain as we kind of worked through.
Simeon Gutman: Third quarter.
Simeon Gutman: Thanks Simeon.
Speaker Change: This will conclude our question and answer session I would like to turn the conference back over to Ken Bull for any closing remarks.
Ken Bull: Okay. Thank you guys all for joining us today.
We wish you all a happy holiday season, and we look forward to seeing you in our stores. Thanks everybody.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: [music].
Speaker Change: Yes.
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