Q1 2025 Five Below Inc Earnings Call
And then one on your Touchtone phone.
Note. This event is being recorded.
Speaker Change: I'd now like to turn the conference over to Christiana Pelz, Vice President of Investor Relations. Please go ahead.
Winnie Park: Thank you drew good afternoon, everyone and thanks for joining us today for five <unk> first quarter of 2025 financial results Conference call on today's call are Winnie Park, CEO Christie Chapman, Chief Financial Officer, and Treasurer, and Ken Bull Chief operating officer.
Speaker Change: After management has made their formal remarks, we will open the call for 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.
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.
Forward looking statements today are as of the date of this call and we do not undertake any obligation to update our forward looking statements.
This presentation, we will refer to our SG&A expenses breath, SG&A means selling general and administrative expenses, including payroll and other compensation marketing and advertising expense depreciation and amortization expense and other selling and administrative expenses. Additionally, we hope it does.
Speaker Change: Guessing certain non-GAAP financial measures a reconciliation of these items to U S. GAAP are included in today's press release.
Speaker Change: 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.
Manny: I'll now turn the call over to many.
Many: Thank you so much Christina Hello, and thank you for joining us.
Many: As we announced last month, we had a strong first quarter with financial results that exceeded our expectations.
Many: I'm incredibly proud of the five below team for driving these results with a maniacal focus on delivering a great customer experience grounded in fun and extreme value.
Many: We remain committed to putting our customer first with a focus on product value and store experience in order to achieve our vision to be the destination for the Kid and the Kid and all of us.
We are the cool store for kids and the yes sure for parents.
What differentiated this past quarter with our heightened focus on the customer.
And working as a tightened it multi disciplinary team of merchandising planning and allocation to marketing store operations and supply chain.
We made great strides on one sourcing amazing product focused on Easter and spring break trend right beauty novelty food and candy as well as relevant cultural zeitgeist moments like Minecraft.
To amplify these products with end to end storytelling that started with social media through to compelling in store floor sets.
Three ensuring better in stock positions with tight alignment between our teams at <unk> town or ship centers and the store fleet.
And for continuing to benefit from investment in labor hours and operating efficiencies.
All we're planning for the future within a dynamic tariff environment.
The result was a strong first quarter led by product that resonated with our customers.
Many: We had broad based outperformance across the majority of our worlds proving that our customer centric strategies focused on product value and experience are working.
The five below team demonstrated that they can execute at a very high level and service of our customer and will carry this forward into the balance of the year.
Our customers have validated our place in the market as a resource for fun and great value.
Speaker Change: Let me share a few highlights from our first quarter performance.
Sales and comps exceeded our updated guidance with sales of $971 million and comparable sales increase of seven 1%.
We were excited to drive these comps through increased transactions of six 2%.
Our sales outperformance led to strong fixed cost leverage and we delivered adjusted EPS of <unk> 86 cents.
Speaker Change: We continued our store growth during the quarter opening 35, new stores across 20 states too.
Two of these stores located in Victorville, California in Joplin, Missouri, we're among the top 25, all time Grand openings.
We supported our new stores with the return of Grand opening marketing activities.
This first quarter performance reinforces our belief that five below with the right product and value combined with an incredible store experience is the destination for our customers the kid and the Kid and all of us.
Our mission remains offered the newest best products at extreme value to help our customers throughout their life stages to play live good and celebrate.
Speaker Change: Now onto product, providing fresh trend right and quality products at amazing value. It's what we're known for and what makes us special in.
Speaker Change: In the first quarter, we featured great licensed product for customers to build their own special Easter baskets.
Speaker Change: And we broadened our Easter candy offering.
Speaker Change: Our shelves were stocked with spring break must haves, including Boogie boards Beach House, and the newest assortment of on trend totes.
Speaker Change: We drove sales by consistently flowing newness, most notably in beauty style and novelty food.
Speaker Change: And toys and games, we remain a key destination for collectibles.
Speaker Change: Finally, maintaining our in stock positions in key areas like Tech has grown cells and shown that we are the place for cables Chargers phone cases, and Bluetooth audio.
Speaker Change: On store experience, we did a much better job wowing, our customers compared to last year.
Speaker Change: The investments we made in our store experience, which began in the second half of last year, including increasing labor and simplifying and improving processes are paying off.
Speaker Change: Our crew is now in a much better position to assist customers. While also ensuring our shelves are stocked with trend right products, our customers want and need.
We remain committed to our crew and to make the store easier and more fun to shop for our customers.
Yeah.
Yeah.
Speaker Change: [laughter] onto marketing I continue to believe that there's a big opportunity to better connect with our customers both in store and digitally and ultimately increase our brand awareness.
Speaker Change: On last quarter's call I mentioned, six curtain up moments to drive customers to our stores, which include the new here spring break and Easter Summer then back to school Halloween and finally holiday.
Speaker Change: We need to let our customers know that we're a go to destination as they celebrate those special moments in life and we have just started to do that with our marketing.
Speaker Change: In the first quarter, we highlighted value and invested in creator content for social media with encouraging results.
Speaker Change: We have exciting plans in place for the remaining curtain up moments throughout the year and look forward to sharing our progress.
Now as we look forward the tariff environment presents additional complexity and our teams have been working hard and moving swiftly on mitigation plans.
Speaker Change: Our plans include vendor negotiations.
Speaker Change: First suffocation of sourcing continued investment in new value pack product.
Speaker Change: As well as assortment and pricing adjustments with a focus on reducing the number of price points.
Speaker Change: In a relatively short period with the heavy lift by the teams we were able to accelerate the work that was planned for our assortment by quickly sourcing new product in different countries, expanding our vendor base and simplifying our approach to pricing.
Speaker Change: Our efforts have already resulted in a reduction in goods sourced from China by about 10 percentage points for the back half of the year.
Speaker Change: In conjunction with these changes we are working very closely with our partners to optimize our inventory availability and receipt flow for the balance of the year.
Speaker Change: We remain committed to providing extreme value quality products for our customers.
Speaker Change: The teams are working incredibly hard to control the controllable and mitigate the rest of the current global trade environment presents.
Speaker Change: We are also laser focused on continuing to drive sell through execution excellence.
Speaker Change: As always we will act quickly and remain nimble and flexible in our approach as we react macro news and find solutions for a changing environment.
Speaker Change: In summary, we're excited to see early signs of success across our core strategies of product value and experience.
Speaker Change: We look forward to building on this progress with an unwavering focus on our core customer and are confident we will continue to provide our customers with amazing value and a fun shopping experience.
Christie: Now before I turn it over to Christie to provide more details on our performance.
Speaker Change: I wanted to take a moment to discuss the announcement that Christie will be leaving five below for personal reasons.
Speaker Change: I would like to personally thank Christie for all that she has done during her time here.
Speaker Change: We're truly grateful for her many contributions and her partnership.
Speaker Change: We began a national search for a new CFO and in the meantime, I'm very thankful that Campbell would take on the additional role of interim CFO.
Christy: Now onto Christy Thanks, Tony and good afternoon, everyone I want to thank you the board and the team at five below for their support I am proud of what we've accomplished during my time here and I am confident in the management team and the growth opportunities that a lot that lie ahead for this company.
Speaker Change: I will begin my remarks with a review of our first quarter results and then Ken will discuss our outlook for the second quarter and full year of fiscal 2025, Mike.
Speaker Change: My comments will refer to results on an adjusted GAAP basis, excluding the impact of nonrecurring are noncash items as outlined in our earnings press release.
Speaker Change: Please refer to our earnings press release for GAAP results and all reconciliations.
Speaker Change: Total sales in the first quarter of 2025 increased 19, 5% to $975 million from $811 $9 million in the first quarter of last year.
Speaker Change: Comparable sales increased seven 1% driven by an increase in comp transactions of six 2% and comp ticket of 0.9%.
Speaker Change: On a two year stacked basis comparable sales increased four 8% driven primarily by comparable transactions, which increased three 4%.
Speaker Change: These results reflect better than expected performance and the key selling weeks, leading up to Easter and this momentum continued through the end of the quarter.
Speaker Change: We opened 55, new stores compared to 61, new stores in the first quarter last year. We ended the quarter with 1826 stores, an increase of 221 stores or 13, 8% over last year.
Speaker Change: We were pleased with the productivity of our new stores at 87% slightly above our targeted percentage range of the mid eighties.
Speaker Change: Adjusted gross profit for the first quarter of 2025 was $328 $4 million, an increase of 24, 6% over the first quarter of 2024.
Speaker Change: Adjusted gross margin increased by approximately 140 basis points to 33, 8% driven primarily by improved inventory health, requiring less reserves for aged inventory and fixed cost leverage on the strong comp sales.
Speaker Change: As a percentage of sales adjusted SG&A for the quarter of 27.7% was slightly lower as a percentage of sales compared to last year's first quarter.
Speaker Change: This was driven by fixed cost leverage on the strong comp sales results offset by investments in store labor.
Speaker Change: As a result, adjusted operating income was $59 $6 million versus $38 $1 million in the first quarter last year and adjusted operating margin increased approximately 140 basis points to six 1%.
Speaker Change: Net interest income was $5 $6 million for the first quarter better than planned due to a higher average cash balance throughout the quarter.
Speaker Change: Adjusted net income for the first quarter was $47 $5 million versus $33.0 million last year.
Speaker Change: This resulted in adjusted earnings per diluted share for the first quarter of 83 cents compared to last year's adjusted earnings per diluted share of <unk> 60.
Speaker Change: We ended the quarter with approximately $624 million in cash cash equivalents and investments and no debt, including nothing outstanding on our $225 million line of credit.
Speaker Change: Inventory at the end of the first quarter was approximately $702 million as compared to approximately $630 million at the end of the first quarter last year.
Speaker Change: Average inventory on a per store basis decreased approximately 2% versus the first quarter last year, primarily due to the write down from fiscal 2024.
Speaker Change: We are pleased with the inventory levels and health of our inventory position.
Speaker Change: As we adjust to the shifts in the global trade environment and position ourselves for the back half of the year by accelerating receipts, we expect our inventory levels at the end of the second quarter will be significantly higher than last year.
Ken: Now I'll turn it over to Ken to discuss our outlook.
Ken: Thanks Christy.
Ken: Echoing Wendy's words, I am grateful for your contributions to five below your dedication to the company for the past two years and your passion for developing our people will have long lasting benefits.
Ken: Since issuing full year of fiscal 2025 guidance last quarter, there have been changes in the tariff rate environment.
Ken: Our updated guidance provided today reflects the impact of tariff rates that are currently in place.
Ken: This guidance also reflects the outperformance we delivered in the first quarter and a better than originally planned sales outlook for the second quarter.
Ken: And as when he noted our customer centric strategy and focus on product value and store experience are driving the desired outcomes.
Ken: For the second quarter of 2025, we expect total sales in the range of 975 million to $995 million.
Ken: We're a growth of 18, 7% at the midpoint versus last year's second quarter.
Ken: Comparable sales are expected to increase between seven and 9%.
Ken: Compared to a negative five 7% comp in the second quarter of last year.
Ken: And we expect to open approximately 30 net new stores in the second quarter.
Ken: Adjusted operating margin at the midpoint is expected to be 3.9% versus four 5% in the second quarter of last year.
Ken: This decline is being driven primarily by SG&A deleverage related to higher incentive compensation costs and our investments in store labor.
Ken: The majority of tariff related costs in the second quarter will impact gross margin in.
Ken: And these costs are largely expected to be offset by fixed cost leverage resulting in only slight gross margin pressure year on year.
Ken: Net interest income is expected to be approximately $4 million for the second quarter and.
Ken: And taxes are expected to be approximately 26%.
Ken: Adjusted net income for the second quarter is expected to be between $28 million and $34 million versus $29 $7 million in the second quarter last year with adjusted diluted earnings per share expected to be between 50 to 62 cents compared to 54 cents in the second quarter of 2020.
Ken: Four.
Ken: For the full year of fiscal 2025, we are increasing our sales guidance to reflect the better than expected performance in the first half of the year.
Ken: Our sales expectations for the second half of the year are largely unchanged from last quarter.
Ken: Full year sales are expected to be in the range of 4.33 billion to $4.42 billion with a comparable sales increase of 3% to 5%.
Ken: The midpoint of our full year operating margin guidance is unchanged from our prior outlook at approximately seven 3% or a decline of almost 200 basis points versus last year.
Ken: While the full year sales and comp guidance has increased given expected first half performance.
Ken: The associated flow through of operating profit dollars are largely offset by the impact of absorbing incremental tariff related costs net of all our mitigation work.
Ken: Adjusted diluted earnings per share is expected to be in the range of.
Ken: $4 25 to $4 72.
Ken: For fiscal 2025 gross capital expenditures, excluding the impact of tenant allowances.
Ken: Continue to be between $210 million and $230 million, which reflects approximately 150 net new store openings and investments in systems and infrastructure.
Ken: And with that I will turn the call over to the operator to start the Q&A session.
Ken: Operator.
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 to withdraw your question. Please press Star then choose please limit yourself to one question. If you have further questions you may reenter the question queue.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: First question comes from Michael Lasser with UBS. Please go ahead.
Michael Lasser: Good morning. Thank you so much for taking my question.
Speaker Change: There's been a pretty remarkable.
Speaker Change: Pivot in the comp cadence of the business over the last this quarter and last quarter.
Speaker Change: How much of it would you attribute to actions that five below has taken versus other fat other factors.
Speaker Change: And what would need to happen in the back half of the year in order for the momentum to slow as it is embedded in your guidance currently thank you very much.
Speaker Change: Thank you so much Michael for your for your question. So I think starting with the first question in terms of the momentum in sales and how much is that.
Speaker Change: Action versus other factors I think that.
Speaker Change: Worked.
Speaker Change: Hard and are the actions that we've taken are definitely paying off we've seen sequential improvement in the business from the back half of last year Q3 through Q4 to Q1.
Speaker Change: And specifically what is really resonating is our the selections we've made for product and the assortment I think that the team has done a terrific job of identifying relevant trends and distorting them. We also had the benefit of great storytelling that started again.
Speaker Change: In social and works its way through to the site all the way through to an.
Speaker Change: In store execution with our four sites.
Speaker Change: That were really terrific. We also refocused on value and ensured that we had really great outstanding value and relevant value in that and relative value in the marketplace that the customers have have definitely reacted too.
Speaker Change: I will say also that the teams have worked very hard to ensure that we've got the appropriate flow of inventory and product. We've added labor to the stores, but what we've also done is really worked very tight and tight formations between merchandising planning our ship centers as well as Alan.
Speaker Change: Patients in the stores to ensure that everyone was aware of when that inventory was coming they move quickly from the back to the front and we improved processes in the stores. So that our associates can actually engage with customers.
Speaker Change: At a higher and better level that they have in the past. So I think a lot of action I'm really added up to the current results.
Speaker Change: And I think the second part of your question is what would need to happen for the back half of the year, where we're just looking at the back half of the year with great Prudence.
Speaker Change: We are looking at two year stacked comps across the next upcoming quarters of plus 2% and certainly every action. We've taken thus far will apply to the back half of the year with that said, we acknowledge that there still is a macroeconomic uncertainty as.
Speaker Change: And so we wanted to take a very prudent approach to how we guided for the back half of the year.
Michael: Thank you Michael.
Matthew Boss: The next question comes from Matthew Boss with JP Morgan. Please go ahead.
Matthew Boss: Great Thanks, and congrats on a really nice quarter.
Matthew Boss: Thanks.
Speaker Change: So many or Ken maybe just on the magnitude of comp strength in the first quarter and the momentum across world that Youre seeing in the second quarter.
Speaker Change: Seeing new customer acquisition are you seeing a basket build from existing customers just trying to explain the magnitude of comps.
Michael: <unk> in the first half of the year and then for the back half I guess, maybe could you just walk through the incremental opportunities that you see across product value and marketing is potential improvement in in the back half as well.
Michael: So in the front half in terms of the comp strength from a customer point of view.
Michael: We we did see really nice lift in terms of transactions. They are up six 2% and we're actually seeing a nice growth both in terms of new customers in comp stores as well as existing customers returning to us.
Michael: And so all of that has has really buoyed the business.
Michael: And I will say that you know to get that traffic to cross the threshold is one thing and to get them to convert as a second and we've also seen really nice progress in terms of conversion.
Michael: And customers are greeted with fresh new product that they can see especially with some of the cleanup we did and the latter part of last year and the beginning of this year and again execution in terms of what the customer is greed of what that store level is has been a key to our success in terms of the back half.
Michael: Half of the year in terms of what we anticipate we will continue to drive some of this positive momentum we're seeing in the business. The majority of our merchandising worlds actually saw really great comp increases.
Michael: We are seeing some trends are now that kind of began at the beginning of the year that we will actually continue to distort to the back half of the year are those trends include a some of the new beauty product and the flow of new beauty product the really great flow of new raw.
Michael: Relevant food product and novelty Kandi has been terrific for our business.
Michael: And then we also are seeing really great progress in terms of and growth in terms of our style business. That's been buoyed by our focus on lounge and lounge pants, along with our great graphic Tees. So all of those things have been nice additions to the business and and then finally I will say.
Michael: That in in the younger segments of the business like toys and games. It's just been terrific to see collectibles take off that the last piece of this is our in stock positions are so much better this year than last year, and we will continue to drive that we have them because of the the great success of Q1 port.
Michael: Ford receipts and continue to ensure that we've got great and stock specifically attack and that's been a really nice win in terms of some of the comps. We've achieved so again applying the same set of actions and distorting trends that we're seeing right now through the back half of the year is what we intend to do.
Michael: And just and Matt just to add to that too when he mentioned the store experience piece of it which is important and we're going to continue to invest in the stores as we mentioned before we started that last year that has continued through this quarter, whether it's in hours for the stores or the simplification and reduction of workloads. So they can focus on.
Michael: There's more of those customer facing activities.
Michael: So when he's point, keeping the keeping the stores fresh and those in stocks high.
Michael: Yeah.
Speaker Change: The next question comes from Chuck Grom with Gordon Haskett. Please go ahead.
Chuck Grom: Hey, Thanks, good afternoon, Chris.
Kristina Best: Kristina Best of luck, Ken just on the guide can you unpack the.
Chris: The annual compression and operating margins it looks like it's roughly the same down about 180 to 200 basis points relative to your prior guide, but it sounds like your tariff expectation might be up another maybe maybe 60 basis points to about 160 basis points of pressure can you talk to that and then and then if you're embedding any.
Chris: Shrink improvement in the back half of the year. Thanks.
Chuck Grom: Thanks Chuck.
Michael: And.
Michael: Youre pretty close there Chuck in terms of the.
Michael: On a full year basis in terms of the.
Michael: The impact of tariffs net of any mitigation activities, we see it as about 150 basis points for the full year and.
Michael: And Youre right were were pretty much maintaining that 200 basis point operating margin deleverage for the full year.
Michael: About 60% of that resides in gross margin and the remainder or about 40% is in.
Michael: As an SG&A relative to shrink we've continued to maintain our reserves at the same level that we exited last year. So we haven't changed that yet.
Michael: You've got inventories coming up in August so in the third quarter, we're going to be able to see if we've made improvement. If you recall, we did see improvement in the <unk>.
Michael: The January inventories last year.
Michael: But decided to maintain our accrual level at the same rate until we see more of that consistent performance.
Michael: And we should see that later in the year, but we've maintained that same shrink rate through the year from consistent with our last guide.
Speaker Change: Thanks Chuck.
Speaker Change: The next question comes from Scot Ciccarelli with Truest. Please go ahead.
Scot Ciccarelli: Good afternoon, everyone I guess, it's kind of a follow up to Chuck's question. When we kind of think about the tariff impact.
Michael: You just outlined Ken can you help us think about it on a go forward basis like how much is you know kind of if you could hit now were equal to mitigate as when he referenced earlier your April you're already expecting the back half to source a lot fewer products from China. So like what's the right way to think about this as we kind of like stripe tried to model out the.
Michael: The following year.
Michael: Yeah. Thanks, Scott.
Michael: I'll try to.
Speaker Change: A walk you through it here to give you a little bit of help.
Speaker Change: Based on what I mentioned in my prepared remarks around the second quarter guidance.
Speaker Change: Again on an overall basis, we are looking for about 60 basis points of deleverage on the operating margin.
Speaker Change: A significant portion of that is coming from higher incentive compensation and also about 150 basis points embedded in Q2 of tariff related costs net of mitigation.
Speaker Change: Again, the majority of the deleverage that's occurring in Q2 was going to be an SG&A again with a higher incentive costs.
Speaker Change: And investments in store labor.
Speaker Change: Again, a lot of that is going to be offset by some fixed cost leverage and then up in gross margin for Q2 just slight.
Speaker Change: Deleverage there where the majority of any impact in Q2 for tariff costs are embedded in gross margin and that too is going to be almost fully offset by.
Speaker Change: Leverage on fixed costs now when we move through the rest of the year just looking at what we've provided so far through Q2, and then you look at what we did for the full year.
Speaker Change: We're looking at pretty significant deleverage in the back half of the year.
Speaker Change: 350 basis points of deleverage.
Speaker Change: In the back half of the year at about 70% of that is in gross margin, obviously, driven by the tariff costs and about 30% of that is in SG&A.
Speaker Change: So just to give you a sense kind of how it how it flows as we go from the second quarter through to the to the end of the year.
Speaker Change: Thanks Scott.
Speaker Change: Next question comes from Simeon Gutman with Morgan Stanley. Please go ahead.
Simeon Gutman: Hi, everyone. So it's a little bit related to the prior question.
Speaker Change: The question is regarding pricing and the approach I think Lenny you talked about simplifying pricing and on understanding some some prices going up some going down. So now you have terrorists part of the picture how much more complex is it do you feel confident on elasticity and then Ken to the point you just made.
Simeon Gutman: I guess it doesn't sound like there's mitigating activities built into the guidance for the back half so you're it sounds like you're not.
Speaker Change: <unk> price that much or you're absorbing cost if you can connect those thoughts if you can thanks.
Speaker Change: Thanks, So much to me and great question. So are the mitigation activities that we got him include them as I mentioned earlier vendor diversification and Ah you know are the other piece of this is actually our assortment mix and.
Speaker Change: And then as you mentioned price adjustments, what we have done is modeled out the entire year, we've actually gone SKU by SKU product by product to just look at what we showed them what price things at and we are looking at touching about 15% in terms of price.
Speaker Change: <unk>, both up and down and it's not just for tariff, it's really looking at relative value in the marketplace. What we wanted to hold to was this notion of delivering value and so we will still have 80% of the units that we offer in store at five.
Speaker Change: Dollars and below.
Speaker Change: So a lot of this was a rounding exercise in terms of getting run out at some of the scent and things we are gonna be holding onto the heritage price point of 5555, 55 am but outside of that we're really looking at just simplifying the shopping experience for customers and also simplifying work.
Speaker Change: Load for the crew and so and I I mean, I'll turn it over to Kantar.
Speaker Change: Answer, yes, Simeon just just around kind of the assumptions based on what when you mentioned in terms of the mitigation activities rare.
Speaker Change: Relative to pricing as we mentioned we're going to maintain the same level of sales guidance that we provided on our last call and the assumption. There is that any benefit that we would get from pricing adjustments would be offset by unit degradation. So that when you do the math that would lead to some margin erosion.
Speaker Change: And that's what and one of the prior questions that I responded to that 150 basis points of operating margin drag a big portion of that is due to the margin erosion from that assumption related to related to pricing and so the tariff mitigation efforts and initiatives are embedded in the guidance so just to be.
Speaker Change: Just to double down on that point, yeah. Thanks, Simeon Thanks Tommy.
Edward Kelly: The next question comes from Edward Kelly with Wells Fargo. Please go ahead.
Edward Kelly: Hi, good afternoon, everyone.
Edward Kelly: I wanted to ask I guess sort of similar question, but bigger picture, obviously, a lot of headwinds in the business from a margin perspective, particularly this year, but you know you've seen over the last couple.
Edward Kelly: A couple of years I guess I'm.
Edward Kelly: I'm curious as you take a step back and think about tariff mitigation changes in vendor sourcing geographies that type of stuff.
Edward Kelly: And some pricing.
Edward Kelly: Where you think margin recapture could be moving forward.
Edward Kelly: And what you think is.
Edward Kelly: Is the appropriate level of EBIT margin for the business to the extent that you have some decent visibility on that.
Edward Kelly: So.
Edward Kelly: One of the things I'll, just say upfront as we've been really focused on driving sales and growth of the topline.
Edward Kelly: And which you know it actually does a lot of great things I said sales off problems and so that's one of the key pieces in this in terms of the future. The second piece of it is you know I I will say that that that's some of the challenges we faced with the tariffs have access.
Edward Kelly: <unk> work that we're doing on the merchandising front them, both in terms of vendor Max and diversifying our vendors and that's domestic vendors as well as factories that we work with a broad and and really looking at price through the lens of relative value and I really.
Edward Kelly: We're going to deliver great value pound for pound versus competition for the product that we offer we're often in super Lucky place and that our Assortments change constantly and were able to bring new things and and and really test at different levels of price and value and so those things are I think very.
Edward Kelly: Neat to five below.
Edward Kelly: And again, great acceleration in the work that we weren't going to do based on tariffs and the and the recent news.
Edward Kelly: And then Ed I'll, just I'll add to that I mean.
Edward Kelly: When he mentioned there around the acceleration of our efforts around product and and and and value.
Edward Kelly: That that was definitely accelerated I mean, that's going to present opportunities for us down the road.
Edward Kelly: And as Wendy mentioned also our focuses on this year right. This is a pretty challenging environment for us. So we're staying close to that.
Edward Kelly: However, if we.
Edward Kelly: We were to look longer term in a more normalized environment I think we would see.
Edward Kelly: Operating margin expansion.
Edward Kelly: As we reap more of the benefits around the work that we're doing now and then we maintain those disciplines in the business that we've always had that we feel that would drive operating margin expansion for us yeah, and leveraging off that freight sales strong sales yeah yeah.
Edward Kelly: Thanks, Ed.
Edward Kelly: Next question comes from Seth Sigman with Barclays. Please go ahead, hey, thanks.
Seth Sigman: Good afternoon, everyone. I'm curious if you could speak a little bit more about some of the operational changes you've made you talked about adding labor hours where are we there.
Seth Sigman: You also mentioned some other operating efficiencies things that do seem to be improving the customer experience in our stores and.
Seth Sigman: And I guess related if you step back and think about the level of investment you're making this year can you just remind us on that and I guess given the early success is there a thought that you could actually increase the level of investment at some point. Thank you.
Speaker Change: Great. Thanks, Seth Yes, it's one of the things if you recall that we really kind of shifted in the middle of last year and focus more on the in store experience and one of the things that we did we added on some additional labor hours when we looked at the work that needed to be done.
Speaker Change: We put some more hours out there for the stores that they can complete those jobs are getting the product to the floor.
Speaker Change: Any customer engagement and interaction.
Speaker Change: That's continued on into this year, but there's also the other side of the equation that to the extent that we're able to make work easier for them more efficient and actually eliminate any work that creates more time for them even within the same number of labor hours. So we continue to do that I think we did some things last year around making it easier for them to <unk>.
Speaker Change: Those out on the registers.
Speaker Change: If you recall, we updated shrink procedures, where we moved from checking out customers to just to being up there and monitoring what the customers were doing from a shrink perspective, but it actually gives them more focus on the customer too and it ended up being a benefit for customer service.
Speaker Change: Those we feel can continue we're going to continue to get more efficient as we as.
Speaker Change: As we move forward and again continue to push on the experience for the customer.
Seth Sigman: Thanks Seth.
Kate Mcshane: The next question comes from Kate Mcshane with Goldman Sachs. Please go ahead.
Kate Mcshane: Hi, good afternoon, thanks for taking our question.
Speaker Change: The strength of your business sounds more category led than maybe trend led I E strengthen like beauty and apparel than one specific trend like squished Melas would you agree with that.
Kate Mcshane: And a follow up question is just can you talk about what sustaining the comping today given April mostly have the benefit of Easter. Thank you.
Speaker Change: Thanks, Kate and thanks for your question.
Speaker Change: It's actually both at trend as well as category that we're seeing really win in terms of the strong comps that we've seen and Oh, you know point to one trend, which is this notion again with a younger segment of customers and collectibles.
Speaker Change: And we've seen a really great left in terms of our games and toys in our business there because the collectibles, which is definitively a trend business also novelty candy. So much of this the growth that we've seen is in specific items like.
Speaker Change: Like pillars and squash season. So we're very excited about some of the trends and again, taking a trend from ground level and just making sure we chase it and maximize it and being very very specific about what we represent when you cross the threshold.
Speaker Change: So I would say that it is actually both a that's helped us.
Speaker Change: And and I think it's always going to be a balancing act between the two we're also seeing some really nice trends right now in the business will speak to next quarter that are specific to license business and some of the cultural zeitgeist moments like Minecraft and stitch that we.
Speaker Change: Really went after in a big way and represented in store and again told the cuts from them out in advance drove traffic to the store. So that they had this great presence on the floor.
Kate Mcshane: Thank you Kate.
Kate Mcshane: Yeah.
Speaker Change: The next question comes from John Hind Buckle with Guggenheim. Please go ahead.
Speaker Change: Hey, guys can you.
Speaker Change: <unk> talked about I think when you talked about changes in trends.
Speaker Change: Our inventory this holiday.
Speaker Change: And right because you don't want too much.
Speaker Change: How long can you wait right in terms of trying to assess demand.
Speaker Change: When you reduce compressed.
Speaker Change: The door to door time Asian factories, which I think is like eight weeks.
Speaker Change: What role do you think close out.
Speaker Change: Should play out this year.
Speaker Change: John Thanks, so much for your question.
Speaker Change: So first of all close outs have been a very important to us and they will continue to be important if not more important as we move toward them and so we have actually amplified the team with some specific conditions that are who are who are exactly focused on closeouts and going after business and going after existing trends and making them.
Speaker Change: Even bigger but also just taking advantage of available product.
Speaker Change: In terms of inventory flow I would say this year is a little unusual given the tariff situation and kind of the stop start from the pauses that we've seen are we specifically parse them when the 145% tariff had on China, and we have re upped that the pause at 30.
Speaker Change: And our <unk> product in we're actually ahead of time in terms of ordering products and and just ensuring we've got the right flow on a go forward basis. It goes back to the best diversification of the sources and the vendors both domestically as well as what we get from our partners.
Speaker Change: And our vendor partners abroad, and so that's been a big push for US we are looking and we'll be adding for instance, we've got a great global sourcing office out of India that we're finally really able to leverage the team was on the ground in India within days of the tariffs.
Speaker Change: Going up and and so for us it's about how many different sources, we have both domestically and abroad to basically provide.
Speaker Change: Provide ample product, but also give us agility in terms of getting that product in shorter periods of time.
Speaker Change: And John the other piece there too when you mentioned kind of accelerating.
Speaker Change: Accelerating the shipments and making sure we're doing everything we can to kind of move that product as quickly as possible.
Speaker Change: The capacity that we have from a container perspective and with our distribution centers. We we've we made sure that we have ample capacity to handle this because there is to wendy's point there are shifts that have taken.
Speaker Change: You can place here, where it was a pause for a while now we're kind of moving a lot faster and we're making sure. We've got the capacity there to handle all of this.
Speaker Change: Activity.
John Thanks: Thanks, John.
Speaker Change: The next question comes from Brian Nagel with Oppenheimer. Please go ahead.
Brian Nagel: Hi, good afternoon.
Speaker Change: Thank you for taking my question Christopher Thanks for Oh, it's been nice working here appreciate it.
John Thanks: So the question I have and I apologize I'm going to bounce back to you I think with the Q&A started but just the acceleration we saw what we've seen here on the business in Q4 to Q1 and nowadays Q2.
Speaker Change: And I just started but it just seemed to be repetitive, but could you just maybe explain better.
Speaker Change: What would you actually if you look at the numbers, it's almost like a flip to switch type model, where the business has got stronger quickly and stayed that way.
John Thanks: All happened yet if you look at across retail and at a time when retail spending generally is more sluggish. So kudos to you but is there any more.
John Thanks: What happened in the business.
John Thanks: Yeah.
John Thanks: I think that on a two year stack comp basis, we did have easier compares in the front half of the year and Ah Theres definitely underlying strength in the business and we're excited for it.
John Thanks: But on a two year stack basis and on a last year basis, we actually had easier compares and so that gets a little harder in the back half of this year, notably.
John Thanks: I I will say that I think the thing that has made the biggest difference for US is just us maniacally focusing on our strategy, which is product value and experience.
John Thanks: So ensuring we've got the right relevant trends ensuring that we've got a clear point of view in terms of what we stand for with the product.
John Thanks: Ensuring that we've got value packed product.
John Thanks: And again, it's all about relative value, we did roll back prices on key items for our spring and summer sides and I'm with you know really great reactions from the customers and then the last piece is you know just a much better store experience, where we were able to clean.
John Thanks: You know that inventory the newness really is able to show through and we've got the right label a level of hours should move the product from the back to the front and greater coordination between our teams in terms of flowing product from D. C. All the way through to the stores.
John Thanks: So it's it's you know it's a bit of retail.
John Thanks: Blocking and tackling, but where where you know we're in better fighting position and and we're doing much better and exercise a lot of muscle across the last few quarters.
John Thanks: And that will not stop.
Brian Nagel: Thanks, Brian.
John Thanks: Yeah.
Speaker Change: The next question comes from David Bellinger with Mizuho. Please go ahead.
David Bellinger: Hey, everyone. Thanks for the question.
David Bellinger: Another one on tariffs and reducing your reliance on China.
David Bellinger: 10% reduction for sourcing in the back half.
David Bellinger: What's the angle there could you get to something materially below 50% over time, and which countries are you pivoting that volume to know what what country is the most capacity for the back half. Thank you.
David Bellinger: So we are down 10% and it really it's 10 percentage points.
David Bellinger: And and so the important piece there is again, we were able to leverage them.
David Bellinger: Our global sourcing office and hit the ground running that had been established a year ago.
David Bellinger: And we are actively leveraging that resource. We're also looking at broadening our and and have added a lot of vendors.
David Bellinger: Across domestic as well as I'm looking outside of China. In particular, so you know all of those things have helped US. We also have a lot of flexibility built up in terms of how we drive business and chase trends and in the back half of the year the trends that are really war.
David Bellinger: Talking right now are less reliant on purely coming from a single source in a single country of origin. So all of those things are working in our favor, but it was very intentional by the teams and when I say that we sprung into action, we literally sprung into action.
David Bellinger: We have been working actively on mitigation. It is a daily cross functional meeting and a a literally a hit list of things that we're gonna do and target and that's all come.
David Bellinger: You know, we're manifesting all of that now and through the back half of this year.
Speaker Change: Thanks, David.
Speaker Change: The next question comes from Paul <unk> with Citi. Please go ahead.
Paul: Hey, Thanks, guys.
Speaker Change: Two quick ones I, just wanted to understand what happened when.
David Bellinger: China tariffs were $1 45, you said that you put a pause what ended up happening with that product did you eventually take it once the rates for the reducer did you end up having to cancel a bunch and then suddenly.
David Bellinger: I'm just curious if you could give us any color about income cohort and any performance difference that you might have seen versus the lower versus upper income folks. Thanks, yeah, absolutely. Thanks, Paul when the tariffs had a 145%, which I think was around April 9th.
David Bellinger: We basically just paused shipment of the product so we could let things settle and understand better what the environment would be and since then we've released that product. They were absolutely that we werent canceling product, we let it go and it's flowing now so and we because we had good business in the first.
David Bellinger: Quarter of the year, we actually were actively pulling forward receipts, especially for our replenishment products. So I feel like we took the right actions to ensure that no. We didn't get hit with outsized tariffs and in this quarter and in Q2, but that product is now flowing.
David Bellinger: And then in terms of income income cohort, we actually saw growth evenly across all of our cohorts.
David Bellinger: And so it's it's been nice to see not only.
David Bellinger: Great growth across.
David Bellinger: The majority of our product world, but also across our customer base I'm agnostic of Soc economic level.
Speaker Change: Thanks, Paul.
Speaker Change: The next question comes from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.
Speaker Change: Thanks, Congratulations on the exceptional results and and best wishes Christie.
David Bellinger: Wanted to come back to our sourcing here and ask a little bit of a follow up it would appear like based on typical seasonality.
David Bellinger: In your Q1 performance that kind of the underlying EPS for the business is about $6 a share so fairly significant tariff drag here, even as you make that.
David Bellinger: 10 percentage point reduction in sourcing from China. As you look ahead to 2026, how much further do you think that you can get that sourcing down if tariffs at an elevated level should persist and then kind of as a related question wanted to understand whether or not.
Speaker Change: What you have seen any notable change.
Speaker Change: It's kind of the de minimus exemption has gone away, whether or not that's changed you know some of the competition.
David Bellinger: So.
David Bellinger: I'm going to actually start with <unk>.
David Bellinger: It's unclear whether or not the minutes de minimus has had any impact.
David Bellinger: Arab business Am I will say that you know.
David Bellinger: Five below is is an interesting business its pretty unique in terms of its focus on kids and so I think just less impact overall I'm from de Minimis.
David Bellinger: And then in terms of going for 2020 sex with sourcing.
David Bellinger: Really what we do is try and chase the best trends and get the roll up most relevant assortment of products.
David Bellinger: And so a lot of what we've done some part of it is intentional in terms of really looking at what's out there outside of China, but the other piece of it is ensuring that we get more vendors into the mix and we've been working on that actually since the back half of last share and ensuring.
David Bellinger: We've got really really great product and we're finding really great domestic sources for instance, and we're exploiting that we're definitely going after close outs. So it's a combination of all things.
Ken: And then I'll, let Ken speak to the last question.
Ken: Yes, Jeremy I think you mentioned kind of the tariff impact for this year.
David Bellinger: And kind of rolling that forward, yes, youre, probably just under one dollar based on the 150 basis points.
David Bellinger: That net tariff impact and again.
David Bellinger: We're going to focus on 2025 for now but.
David Bellinger: Given a lot of the benefits that's coming out of this work based on this tariff challenge and as Wendy mentioned kind of accelerating a lot of these activities.
David Bellinger: Our strategies for us, but we've really pulled that forward.
David Bellinger: We do feel again in a more normalized environment that we should be able to deliver operating margin expansion as we move forward.
David Bellinger: Thanks, Jeremy.
Speaker Change: The next question comes from Brad Thomas with Keybanc Capital markets. Please go ahead.
Brad Thomas: Good afternoon, and congrats on the results here.
Speaker Change: My question is around store openings and store actions.
Speaker Change: Now that you've slowed growth and paused remodels as you focused on stabilizing the business presuming the consistency in comps continues.
Speaker Change: Is this still the right level of store growth to think about going forward.
Speaker Change: Thanks for your question, Brad I think that we will accelerate store growth as we move forward.
Speaker Change:
Speaker Change: This year, we're gonna be entering markets.
Speaker Change: Where frankly, we have a lot of white space, we have no stores in the Pacific Northwest and so we've got a lot ahead of us in terms of <unk> and white space in the market and and with improvements in terms of of our execution our ability to deliver consistently.
Speaker Change: Both sales and profit we will be looking at further expansion are more sort of expansion of our Schwartz moving forward yes.
David Bellinger: And Brad we're we mentioned a while ago, what we see as the opportunity in the United States like the 3000 stores, we still feel really good about that.
David Bellinger: And as you can see from these results. We're also seeing improvement in the productivity of these new stores. So that's a good thing to see it a little bit more consistency in terms of performance. So that gives us even more confidence as we move forward.
David Bellinger: Thanks, Brad.
Speaker Change: The next question comes from Anthony <unk> with loop capital. Please go ahead.
Anthony: Good afternoon, and thanks for squeezing me in I guess my question was just around the <unk>.
Anthony: Cadence of comps during the.
David Bellinger: The first quarter, if there was any sort of noticeable difference between the different months and if you saw any essentially like acceleration in <unk>.
David Bellinger: April post Liberation day with folks maybe trying to get in front of potential price increases. Thank you.
David Bellinger: So Anthony we saw a really nice improvement in comps month in month out I think we had a couple of interesting.
David Bellinger: Nuances to the quarter number one February we had bad weather throughout the country, which definitely impacted traffic and comps.
David Bellinger: And then we have a shift in Easter timing.
David Bellinger: Or kind of March and April together in it in terms of a year on year comparison, but again coming out of the holiday. We have continued to see nice growth.
David Bellinger: And and you know actually our comp performance has been very good and the exit rate coming out so it's been continuing.
David Bellinger: Continuing to accelerate our weekend week out and and that's.
David Bellinger: Really great Testament to everything that the teams have done.
Speaker Change: Thanks Anthony.
Speaker Change: The next question comes from Michael <unk> with Evercore. Please go ahead.
Speaker Change: Yes, hi, Thanks for taking the question I was just going to ask on the EBIT margin pressure I think 150 of tariff. So then should we take the other 50 and kind of allocated evenly between incentive comp you know marketing spend and then store labor hours or is there any extra kind of clarity you can provide on that.
Speaker Change: Yes, Michael on the Euro on a full year basis, as we mentioned the 150 basis points.
Speaker Change: And op margin deleverage again about 60% of that is going to be up in gross.
Speaker Change: Gross margin again, that's where the overwhelming majority of any tariff costs are going to be in about 40% of that deleverage.
Speaker Change: For the year is going to be sitting in SG&A and again, you've got the higher incentive comp for the year the investment in labor hours, and it's offset slightly by some fixed cost leverage on a full year basis. So.
Speaker Change: That gives you a little bit of the geography of that full year.
Speaker Change: Thanks for taking the questions. Thanks, Michael.
Speaker Change: And the last question will come from Joe Feldman with Telsey Advisory Group. Please go ahead.
Joe Feldman: Yeah. Thanks for taking the question guys and congrats on a very good quarter again, I know you've been asked a lot about this.
Speaker Change: And I understand all the changes you've made in the stores and I can see them more in the stores and it sounds like.
Speaker Change: Like the Assortments better tighter everything you've described but how did customers know like I mean did the marketing step up measurably I don't recall hearing you say anything too much about the marketing but.
Speaker Change: It's like it seems like customers would have had to have known that things got better to then start to come back more frequently and the traffic was great. So.
Speaker Change: Was there more stimulus or was it social or maybe you could just share some color there. Thanks.
Speaker Change: Thanks, Joe I, we didn't increase our level of spend but what we did do was actually look at the channels and and we did them really invest in social media and greater content and with that investment and redirecting the spending.
Speaker Change: That direction, we thought we were doing the right thing by the customer in terms of starting their journey, where most customers start today, which is on social and digital and connecting that journey through to what they saw on stores.
Speaker Change: We were very specific about where we invested we invested in our trends that we were saying that we thought were relevant be at beauty Vietnam faulty Candy, we did a lot in social around you know building your own Easter basket and you know I'll just take that example of the Easter basket what you.
Speaker Change: So on social connected to what you saw on the site in terms of literally build it one choose a vessel to what goes in it and you saw that all the way through to the store. So it is that end to end and looking at the storytelling and starting with social and stepping up our creator content.
Speaker Change: Thank you.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Winnie Park for closing remarks.
Winnie Park: Thank you so much for joining us.
Speaker Change: Thank you so much for joining us. We're so excited by the progress we've made across product value and experience and I want to thank all of our teams for their hard work and dedication to delivering our results.
Speaker Change: Below continues to be a destination for our customers for fun trend right products at amazing value and we're committed to continuing to provide the magic that is by below.
Speaker Change: In summary, we feel really good about where the businesses today and we're excited for the future. We wish everyone a great summer and hope to see all in our stores. Thank you so much.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Okay.
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