Q2 2019 Earnings Call
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At this time I'd like to turn the conference call over to Christiane upheld the P. of Investor Relations. Please go ahead.
Thank you Jamie good afternoon, everyone and thanks for joining us today for five below second quarter 2019 financial results Conference call on today's call, our Joel Anderson, President and Chief Executive Officer, and Campbell, Chief Financial Officer and Treasurer.
After management has made their formal remarks, we will open the call to question.
And each reminds you that certain comments made during this call may constitute forward looking statements and are made pursuant to and within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 as amended.
Such forward looking statements are subject to both known and unknown risks and uncertainties.
That could cause actual results to differ materially from from such statements. Those risks and uncertainties are described in the press release, an R.F.P.C. firings.
The forward looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward looking statements.
We do not have a copy of today's press release, you may obtain one by this thing the Investor Relations page of our website at five below Dot Com I will now turn the call over to Joel.
Thank you Christiana and thanks, everyone for joining us for a second quarter earnings call.
Before I begin my normal review of the quarter wanting to pause for a minute and start with some thoughts on Tara.
Clearly it hasn't been business as usual with the various announcements.
Our teams have done an amazing job.
Managing through all of the complexities.
And I want to thank them for their nimbleness and hard work and helping to offset the impact of the terrorists.
I am just as appreciative per vendor partners.
For all their efforts to help mitigate the impact on our customers.
Our belief in the fundamentals of our core business and the commitment we have to our customers are associates.
And our shareholders hasn't changed.
And we remain focused on delivering extreme value and while to our customers.
Day in and day out.
Now I will review the highlights of the quarter.
Before handing it over to Ken.
To discuss our financials.
And our outlook.
And then we'll open the call for questions.
In the second quarter sales grew 20% to 417 million.
Driven by continued how performance of our new stores.
And a copy of 1.4%.
Earnings per share good 13% to 51 cents.
But 19% growth.
Adjusting both periods for the tax benefit of Sharebased accounting.
Sales were within the guidance range.
And while our cop performance was below expectations.
Strong new store performance enable us to deliver earnings per share near the high end of our guidance range.
I'll provide more color on our new store performance in Q2.
As well as other drivers of our second quarter performance.
During q. too.
We open 44, new stores, which is for more than planned.
We opened in diverse markets across 21 states, bringing our total first half openings to 83 stores.
Seven of these Q2, new stores made our top 25, all time spring.
Or summer Grand opening list the scores ranging from Augusta, Georgia Hemet, California.
Illustrating yet again.
The breath of five below his appeal.
We plan to open 150, new stores for the year.
Which is at the high end of our original store grow target for 2019.
With an industry, leading less than one year average pay back on our new store investment.
We continue to believe new stores are the best use of capital.
Summer got off to a cooler.
And let her start.
Especially when compared to the record hot.
May and June we had last year impacting traffic and R.C.'s no product.
However.
As weather patterns normalized into July .
Sales improved.
We drove good performance to the rest of our sermon was strengthened the candy create room tax and party worlds.
Bisaro newer trends, such as gaming and unicorn contribute to sales.
And we also began to see some early results from the exciting movie line up for this year.
Such as toy story for and Lion King.
Our merchandising teams continue to do an excellent job delivering a fresh.
Hi quality.
Added in trend right assortment.
While products that extreme value across all eight worlds.
Onto marketing.
We were focused on increasing brand awareness and our digital presents including TV.
We grew the number of stores receiving TV in Q2.
Crum about 40% last year.
Approximately 50% this year.
Our summer T.V. campaign featured camp five below.
With lots of outdoor fun for kids.
With more favorable summer weather.
Our campaign would likely have been even more impactful.
But overall, we are pleased with our TV results.
Additionally, the marketing team continue to make progress on adding content and reach on the social mobile front.
As an example, we also tested two new social media Influencers, who posted their favorite by below products on their feeds.
Finally are growing economies channel.
Which is part of our digital strategy continues to contribute to our brand awareness.
We are successfully incorporating.
A wide range of digital strategies into our marketing program.
As we shift our focus to more effective communication vehicles.
Which we believe will help us grow our brand awareness.
[noise] excuse me in addition to and merchandising and marketing.
We're executing on our other key strategic initiatives.
Namely people systems and infrastructure.
As well as elevating the customer and associate experience innovation.
First on the people front.
And supportive our focus on creating a superior supply chain network.
We hired an F.C.P. a supply chain rich tanenbaum.
He brings experience from national retailers, such as Petsmart and vitamin shop.
And we are excited to welcome him to the team.
This newly created position at five below.
Shows our commitment to building a world class supply chain.
Excuse me.
On the infrastructure side.
Her southeast D.C.
Does now fully operational and position to support over 250 stores in 2019.
Additionally, we signed a contract to build our next distribution center in the Houston Metro area.
Which similar to our southeast facility Obion own D.C.
Ownership provides us with greater control and flexibility.
As we grow our footprint throughout the United States.
This D.C., which is planned to open in the first half a next year.
Together with future plans for additional new distribution centers.
In the Midwest and the west.
Reinforce the enthusiasm we have.
Or a rapidly growing store base.
Now, let me turn to the future.
Innovation is a top priority for us as we look to elevate the experience for our customers as well as our associates.
Several of our innovation initiative.
Are focused on the store experience.
Namely the remodel program.
The Reimagine front end.
And the 10 below tests.
With regard to our remodel program.
To date, we have remodeled 30 550.
Approximately plan stores for 2019.
And the feedback from customers in our store teams continues to be very positive.
They love the freshmen freshness of the look and feel.
The bright sign age as well as the center aisle layout.
Making the stores appear more open.
I recent models continue to track.
Two amid single digit caught with and the first full year.
The Reimagine front end experience or R.F.D. as we call it.
Provides a speedier assisted checkout option.
And an and an expanded impose section.
Which also.
Enabling while also enabling our associates to pro actively engage with our customers on a more personal level.
We believe customers are enjoying the ease and convenience of the R.F.P.
In addition.
Had our new store Grand openings.
Where we typically have customers lined up to enter stores.
And now better equipped to handle the high volumes and more efficiently.
Serve our customers.
We believe this bodes well for the customer experience in the peak holiday season.
When the stores in our associates are busier than ever.
Which was one of the goals of the <unk>.
We expect 160 of of this year's new stores and remodel.
The feature the re imagined front end.
Oh.
The third area motivation, we are developing and testing is 10 below.
Are in store test, providing extreme value merchandise.
At price points above $5.
And up to 10.
We expanded the concept to about 25 stores.
And we will continue to test this concept through the fourth quarter.
With 10 below we're able to offer additional higher end products like X. box and we video games.
Nerf toys.
R.C. robots and spy items like neck and put massagers.
These represent items and categories, we could not previously Kerry have five below.
And all it extreme value for our customers.
Our merchants have done an outstanding job, creating a 10 below assortment.
With even more value in while the customers love.
We continue to be pleased with the customer response and feedback.
On the extreme value 10 below provides.
In fact.
Our 10 below tests.
Have also been very valuable.
In informing us on the pricing and communication strategy of our tariff mitigation.
Now a few words about two three.
Back to school as a key traffic driver.
And we are pleased with our back to school sales thus far.
Which includes school centrals like backpacks pens and journals as well as dorm decor.
Additionally.
We will start selling frozen to product in early October .
Which is expected to be a strong license trend in Q4.
When the movie releases on November 22nd.
Phil also have a great lineup of toys and games with amazing products.
At an incredible value.
In summary.
We feel great about our <unk>, our marketing plans.
And the store experience, we will provide customers.
In the second half of the year.
[noise] now I'd like to discuss tariffs.
In more detail.
And walked through the progress we have made.
As a value driven retailer we are concerned about increasing tariffs because they will be impactful to our customers.
And lead to higher prices overall.
But as a value retailer growing at 20% annually.
We are also well positioned to deploy mitigation actions.
To manage through this very fluent tariffs situation.
We previously discussed the various ways.
We were mitigating the tariffs on list one through three.
Including vendor negotiations.
Price increases.
Process efficiencies.
And.
Over time moving production to other countries.
We are pleased with the progress we have made.
And we are amplify in these efforts as we work to mitigate list for.
As well as last Friday's announced increases.
Specifically.
With respect to pricing.
We have been undergoing various tests throughout the year.
We started by testing price increases.
And a subset of one to four dollar items.
Earlier in 2019.
Based on the price elasticity results. We recently rolled these price changes out to the chain successfully.
And we'll continue to test pricing changes an additional items below $4.
We also tested raising five dollar items.
To 555.
And two major markets.
We're about 5% of our scores.
And are pleased with the results so far.
Further supporting our value proposition at prices above $5.
[noise] incorporated customer feedback from the five dollar 55 cent test.
As well as initial learnings from the in store 10 below concept.
And recently expand the test to another major market.
Where we are now adding new.
Five dollar plus items.
Introducing different price points.
As well as incorporating a 10 below tech section.
It is very important to us.
That we continue to deliver extreme value products to our customers.
And that will continue to guide us as we roll out further pricing initiative.
Given continued positive results from the pricing tests.
We expect to roll out the pricing changes.
Across the chain.
By the fourth quarter.
Hmm.
As Ken we'll discuss.
We have updated our outlook today to reflect all the announce tariffs to date.
Are wider than normal for your H.P.S. outlook reflects the additional layer of complexity.
As we managed through this ball period related to terrorists.
So in summary.
We were pleased to deliver on our second quarter sales any P.S. outlook.
Despite the weather had one.
More importantly.
As we look to the rest of the year.
Our teams have done an amazing job mitigating tariffs.
And our focus is now on gearing up for the all important holiday season.
And ensuring a merchandise assortment and store experience.
That will while our customers.
We are well positioned to capitalize on the opportunities created by the strong license calendar.
And our wild products.
Our model is very flexible with their eight worlds and breath of categories.
And this flexibility is a key attribute to buy below.
That enables the strength of our business model.
We remain firmly committed to providing extreme value to our customers.
On fresh.
High quality trend right products in a fun differentiate shopping experience.
With that I'll turn it over to Ken Ken.
Thanks, Joel and good afternoon, everyone.
I will begin my remarks, with a review of our second quarter results.
And then discuss our outlook for the third quarter and full year.
As a reminder, we adopted the new lease accounting standard at the beginning of the first quarter of this year.
This new accounting standard impacts our financial statements.
But does not impact our cash flows.
This new standard requires us to now record operating leases on our balance sheet.
And also requires us to expand certain architectural and legal fees, which we previously capitalized.
Our sales in the second quarter of 2019.
$417.4 million up 20% from $347.7 million reported in the second quarter of 2018.
We opened 44, new stores during the quarter compared to 34, new stores opened in the second quarter of 2018.
We ended the quarter with 833 stores.
And increase of 141 stores or 20%.
Versus 692 stores at the end of the second quarter of 2018.
Comparable sales increased by 1.4%.
Driven by an increase in com transactions of 1%.
As I mentioned on our last earnings call.
We expected approximately 20 basis points of operating margins the leverage in the second quarter.
Operating margin for the second quarter declined by approximately 10 basis points over 2018.
[noise] gross profit for the second quarter increased 20.1%.
To $146.2 million.
From $121.8 million reported in the second quarter of 2018.
Gross margin was 35%.
Which was flat over last year.
[noise] ramp up costs associated with our southeast D.C. combined with occupancy the leverage on the comp results.
Were offset by the timing of certain merchandise costs, which shifted into Q3.
As a percentage of sales S.G.N.A. for the second quarter of 2019 increased approximately 10 basis points to 26.4% from 26.3% in the second quarter of 2018.
S G.N.A. expenses as a percentage of sales were higher than last year.
Due primarily to depreciation costs related to the opening of our new southeast distribution center and adoption of the new lease accounting standard.
Which were partially offset by reduced corporate expenses.
As a result operating income increased 18.4% to $36 million versus $30.4 million in the second quarter of 2018.
Are effective tax rate for the second quarter 2019 was 23.2%.
Compared to 20.2% in the second quarter of 2018.
Our tax rate was favorably impacted by Sharebased accounting, which as is our practice was not included in our guidance.
Net income increased 15%.
The $28.8 million versus $25.1 million last year.
Earnings per diluted share for the second quarter was 51 cents.
A 13.3% increase over last year's 45 cents per diluted share.
The impact of Sharebased accounting was the benefit to second quarter 2019, deluded D.P.S. of approximately one penny.
Compared to a sharebased accounting benefit of approximately three cents in the second quarter of 2018.
We ended the second quarter with $270 million in cash cash equivalent than investments and no debt.
During the second quarter, we repurchased approximately 146000 shares at a total cost of $16.6 million.
The date in 2019, we repurchased 337552 shares.
At a total cost of approximately $37 million.
Inventory at the end of the second quarter was $273 million.
As compared to $228 million at the end of the second quarter last year.
Average inventory on a per store basis was approximately flat versus the second quarter last year.
Due primarily to improved inventory management.
We are pleased with the level and quality of our inventory exiting the second quarter and heading into the fall selling season.
Now I'd like to turn to our guidance.
As a reminder, our guidance does not include any future impacts from Sharebased accounting we're share repurchases.
We will update our guidance quarterly with actual reported results.
But as is our practice, we will not guide to the potential future impact from these items.
We are widening our guidance ranges to reflect the tariff increases announced on Friday last week.
As Joe said, the complexity associated with the fluid terrorist situation leads to a wider range of outcomes.
The high end of our guidance reflects the assumption that the 2019 tariff impact is fully mitigated.
While the low end assumes the tariff impact is not fully offset.
For fiscal 2019, we now expect sales to be in the range of 1 billion.
$872 million to $1.892 billion, an increase of 20% to 21.3%.
The comparable sales increase is still expected to be approximately three.
We plan to open 150, new stores.
And expect to end the year with approximately 900 stores or unit growth of approximately 20%.
The majority of these new stores will be an existing markets.
Our full year guidance still assumes a slight operating margin decline.
Due primarily to the cost of opening our new owned southeast distribution Center.
And the new lease accounting standard.
Both of which impact S.G.N.A.
While gross margins are expected to be relatively flat.
We expect a full your effective tax rate for 2019 of approximately 22.5%.
Which reflects the benefit from Sharebased accounting realized in the first and second quarters.
[noise] net income is expected to be in the range of 173.
Point $4 million to $179.9 million.
Representing a growth rate of approximately 15.9% to 20.2% over 2018.
[noise] diluted earnings per share expected to be in the range of $3.08 to $3 in 19 cents.
Reflecting a one cent improvement versus our previous full year guidance.
Due to a lower share account from a year to date share repurchase activity.
Excluding the tax rate benefit from Sharebased accounting in the first half of the year.
Diluted earnings per share are expected to grow by 15.2% to 19.5%.
With respect to cat backs, we plan to spend in total approximately $210 million in 2019.
Engross cat backs, excluding the impact dependent allowances.
This reflects the investment in the new Houston Metro area D.C.
Payments on the new southeast D.C. and the cost of opening 150 new stores.
Approximately 50 re models and investments in systems and infrastructure.
For the third quarter ending November 2nd 2019, net sales are expected to be in the range of.
$369 million to $374 million, an increase of 18% to 19.6%.
We plan to open approximately 55, new stores in two three this year as compared to 53 stores opened in the third quarter last year.
In our assuming a <unk> Q3 comp sales increase of 2% to 3%.
Versus the 4.8% comp increase in Q3 2018.
Net income for the third quarter of fiscal 2019.
Is expected to be in the range of $7.6 million to $9.8 million.
[noise] diluted earnings per share for the third quarter of fiscal 2019 of expected to be 14 to 17 cents.
Versus 24 cents and diluted earnings per share in the third quarter of 2018.
The third quarter of 2018 had a two cent benefit to the P.S. from Sharebased accounting.
Our third quarter outlook. It seems an operating margin decline of approximately 175 basis points.
Driven primarily by three distinct reasons.
First as I discussed on our queue for earnings call in March when we initially provided 2019 guidance.
We expected 40 to 50 basis points of S.G.N.A.D. leverage.
Primarily from depreciation costs of our new southeast D.C.
And the new lease accounting standard impact.
Both of which are recorded in S.G.N.A.
Second as I previously noted for Q2 results, we experienced the shift of merchandise costs from Q2 to Q3.
These costs approximated 50 basis points.
Finally, an additional 70 basis points of net unmitigated tariff costs will impact Q3 gross margins.
In the fourth quarter, we expect to significantly leverage operating margins due to improved merchandise margin on toy product versus last year.
And the benefits of our tariff mitigation efforts, including reduced corporate expenses.
These benefits will be offset in part by the impact of our new southeast P.C. and the new lease accounting standard.
For all other details related to our results in guidance.
Please refer to our earnings press release.
And with that I would like to turn the call back over to Joel to provide some closing comments before we open it up for questions Joel things can as you can tell.
It hasn't been just business as usual for the last 90 days.
We were navigating through a very fluid situation with respect to tariffs.
And while terrorists present additional complexity.
We are confident that our business model and the flexibility of or eight worlds.
As well as the strengthen agility of our leadership team.
Well drive continued success.
I'm proud to lead an amazing team that everyday shows up committed to unleash their passion for our customers.
We are excited for the opportunity as to why our customers as we head into the fall and holiday seasons.
Through innovation, we believe we're elevating our customer and associate experience.
Which combined with our continued focus on providing extreme value.
We'll make five below.
And even stronger retail there and brand.
Would that I'd like to turn to call back over to the operator for questions.
Operator.
Well it isn't gentlemen will now begin the question and answer session to ask a question you May Cross store and then one on your Touchtone phones. If you are using a speaker phone we do as you. Please pick up your handset before pressing the keys.
To which all your questions you May press star into.
Did you ask you please limit yourself to one question. If you do have further questions you may reenter the question queue.
Well paused momentarily to assemble the roster.
Our first question today comes from John Heinbockel from Guggenheim Securities. Please go ahead with your question.
<unk>.
Yeah, I got to John Tomorrow afternoon.
Afternoon, So two things.
When you your pricing chest on the five dollar plus items in particular, but but maybe all of them.
What did you see happened to customer bask in size.
And items per basket.
You know what it was there much impact in in terms of but either of those.
And then in the event of you know tariff postponement cancellation.
You know what what is the thought process I I assume you will you know you wouldn't there'll be some aspect of a price roll back.
Yeah, I'm just curious how you manage such a fluid process of you know kind of up and down without damaging you know your price credibility with the customer.
Yeah. Thanks, John .
You know both we lay the questions to exactly what we've been wrestling with the last 90 days and I think and hopefully you'll appreciate as we do with everything we appraised approach would pace and diligence and you know I I think we originally had planned to roll. Some of this out earlier and then you know would list for came on and then last week some additional ones.
We you know we've.
Approach this very slowly and make sure we get it right. So we aren't you know going up and down with the customer and we're sure exactly sure what we want to accomplish and you know specifically to your question you know the last two city was really in line with our expectations and.
While there was a slight decline in demand there was an overall lifting sales and it was right in line with what we expected.
And so we will continue to test that in fact, we rolled out another test last week.
That as I said in my prepared remarks, you know expanded the number of items that we went beyond $5 on.
And a few other aspects just to make sure we've got this right but.
You know what.
What comes last is raising prices what we've done first.
Is mitigate the costs and you know I'll tell you as I said earlier on what the vendor partners and what our merchandise team has done.
It has been phenomenal and mitigating you know more than half of the overall tariff impact.
Thanks, John .
Our next question comes from Charles Chrome from Gordon Haskett. Please go with your question.
Hey, Thanks, a good afternoon can just on the on the third according to talked about 70 basis, which pressure from the unmitigated costs from the tariffs just wondering what that would be in the fourth quarter or is it expected to be neutral because you're gonna be raising prices I believe chainwide and you're just going to be able to offset it just just whenever you kind of just walk us through how it's expected to you know transfer during the bounce beer.
Sure.
Yeah. The the as I mentioned, we're going to see about 70 basis points of net unmitigated tariff costs in in Q3.
Really a couple of things going on there there's a piece of that that's going to be the actual terror of costs themselves that are up in cost of goods sold and then there's.
Preparatory costs for the price changes that Joel mentioned going you know taking place in the fourth quarter costs around.
Associate training signage things like that.
So they're going to have a little bit in cost of goods sold a little bit down in in S.G.N.A.
So the net of that amount that unmitigated amount, we expect based on the pricing increases that we're going to put into place in Q4 and as.
Evidence in the you know the high end of our guidance range.
That we would mitigate those plus more obviously to put ourselves in a position.
From a full year position at the high end of guidance that we would fully mitigate.
All the tariff cost that that that we're experiencing.
Thanks Chuck.
Our next question comes from Matthew Boss from J.P. Morgan. Please go ahead with your question.
Oh, great Oh, so maybe if you look at the bottom half of the year.
When the holidays sort not how would you rank the opportunities you see across your eight worlds versus a year ago, and maybe how best to size up the license backdrop and the position of these things are on today, okay versus the last time, we saw a licensing opportunity like this.
Yeah.
<unk> I think for US. It you know it goes back to the you know bigger statement as we've kind of explain.
Craze is you know to everybody and you know I think what nurse explained trends and one of them is craze is one of them is license and the third one is relevancy and you know clearly what is shaping up for the back half of the year is is you know a a license trend.
You know, we saw a little bit of that emerge with a couple of the movie breaks the summer.
Toy story for Lion King said her but you know clearly I think everybody is anxious for frozen too. It's been six years since the last one oh there'll be a whole new set of.
Customers that haven't been exposed to frozen too.
You know unlike star Wars, which is kind of comes out every year. This is a really unique opportunity I think what's unique and different on top of that for us is.
You know six years ago in 13, when that came out.
And then spilled into 14, we're a much smaller company and this year you know our by from frozen is much more planful and strategic and so we're we're really excited about the impact Rosenthal potentially have on the back half of the year you know impacts are toy business.
Our create world our tech World. So, it's a pretty broad based impact on on the business.
Great Festival.
Thanks, Matt Thanks, Matt. Our next question comes from Edward Kelly from Wells Fargo figure out what's your question.
Oh.
Yeah, I <unk> I, just wanted to Oh to catch all about the the the cadences the comp got in so you know two to three in Q3, and then and then applied for into for maybe can you just probably additional context around the acceleration and I know you're excited about the licensed art, but how much of this is you know holiday optimism.
Versus the benefit that you might see from a pricing perspective, given <unk> and then if we were to annualized pricing action you just help us understand that you know that the net impact on the concept that that that might have really in the end of 2020.
Yeah.
Good question AD in.
You know, it's hard to speculate at this point in time.
[noise] when it all shakes out how much of it is.
You know the optimism or what I was just answering that question on and how much of it is.
Relays, the terror of price changes, but clearly you know the way we are <unk> mitigating.
The impact the tariffs and planning to four is is to raise some prices. So that will be a <unk> a piece of it I think the bed bigger and better way to probably go look at it AD is.
If you go all the way back to 2015.
And you look at three or stack you know like 13, 14, 15, and you continue that all the way through 19.
You you will see a really really tight range of no less than 3% no more than.
4%.
And so this year's.
If we had this year's guide that probably in indicates a 4.5% so it'd be slightly above the range. We've had you could probably attribute that to.
You know tariff mitigation, but that's a little speculative on my part right now and I I would tell ya.
You know, we're obviously excited about the you know the line up we see coming for fourth quarter, and then you know the tariff a peaceful certainly move calm store sales up.
From that aspect, but how it shakes out we'll have a better sense exactly one would get get through fourth quarter, but both probably contribute equally.
Ken would yeah, yeah, Yeah, just one other thing that I think you asked about potentially the the full year impact to those price increases in the fourth quarter as you.
As you probably noticed from our our guidance or full year guidance, we're still guiding to an approximate three.
So it it's not a material impact the least we're seeing at this stage of the game from a full year perspective.
Thank you.
Thanks, Thanks that.
Our next question because I'm Karen short from Barclays. Please go ahead with your question.
Hey, Thanks, a couple of questions just on the price increases so.
Can you maybe talk a little bit about the numbers skews impacted by the one to four buckets and then number of stores you tested it in and then.
The same question for a number.
Excuse the 555, and then maybe any color on whether there's any meaningful differences.
Plasticity and I guess in those two separate pockets.
Yeah.
Can we we tested the 555 in about 5% of the chain.
And the one to four in a slightly less subset of that number.
In both cases, you you can see the the price changes incense not dollars.
You know the going from five to 555 is 10% and and then the two to four dollar bucket. It was even less than that on a on a percentage basis. So you know the price elasticity was about the same in both of those and you know we continue to you know look for ways to mitigate and but most importantly, delivering value is the key.
And we I've seen you know the customer respond favorably to each and every one that we've done.
And then just remember when it's all done inside the large majority of our skews will still be below $5. When when all this is implemented in fourth quarter.
Yep. Thanks, Yeah.
Our next question comes from pilot Trust or from torture Bank. Please go ahead with your question.
Good afternoon.
Just looking back.
It's it's pretty rare for you guys to fall short.
In in terms of your top line guidance or at least a Tom guidance.
So just just looking for.
Any additional color on the shortfall was it entirely.
In the seasonal category or were there Oh, there you know worlds that maybe.
Disappointed and while I know, you're not going to get as specific kind of numbers, maybe if you just help us understand the magnitude.
Of the underperforming so seasonal or maybe contrast.
The muscles may.
In June versus what sounds like bad or trains coming out of the quarter and hit it into.
Three q. Thank you.
Yeah, there there's a lot in their Paul and I, we we tried to be really transparent and clear on our prepared remarks.
You know in fact, I don't remember a quarter, where we've ever actually commented on all three months in the in the in the same corridor. You know clearly you know the the comment on July as as whether normalize so did our our sales pattern and and I also shared with everybody a call out to I think it was five worlds outside seasonal and outdoor.
That performed really well and and drove comp. So it really was isolated to our our seasonal related categories.
In that matter and then you know I I would tell you that.
You know look we were clear that I mean, it was disappointing to what we guided but you know about every six quarters are so we we have missed on the on the comp and.
I think this is also an opportunity remind everybody as I've said many times.
You know the engine that really has driven five below for the last five years and will continue to be for.
You know five plus years is is these new stores and so <unk> despite being on the low end of sales.
Were you know at the top end on the on the earnings side in you know 80% of our growth continues to come from new stores and we continue to be pleased with the new store productivity and how strongly been opening another seven stores in our top 25.
But I think that hopefully Paul gives you. Some good color on you know how we saw it but outside of seasonal we felt really good.
[noise]. Thanks. Thanks, Thanks, Paul Paul Our next question comes from <unk> from City. Please go with your question.
You guys have to carry on for Paul I, just wanted to go back to the five dollar test for for a minute just to understand this a little bit better what so what happened in the overall store when you introduced but the higher price point.
On the on the five dollar an a product and then if it was good good what did you the basket like do you still keep strength in the in the one to $4 category and then secondly, just the 10 below concept you mentioned that you were going to be adding that to a store along with some of the five dollar not test.
Or is that something that you're <unk>, you're going to utilize going forward to sort of offset some of these parents sake.
Yeah in the five dollar tests I I mean I. It is today three things happen.
You know one we had elasticity learnings and those you know Kelly actually you know played out pretty consistent with what what we expected meaning.
Yeah. There there there was a little degradation, but but not a lot. Secondly, we really studied the customer response and you know that what we really weird as they still appreciated our value and could really see the value and that's a good thing right. There's we we have a wide gap a value and despite raising the prices slightly they still saw the value. The third was we had a lot of communication learnings and and really what the customer said to US is you know be transparent with US you know and and they really challenged us to eliminate the absolutes, you know and bring the <unk> World a social media, we got to bring the customer on the journey with us and by Absolutes, I mean things like everything never ever and so you know I think the medallions a good example of that were.
You know we've started to modify that away from the word everything.
But most importantly, the the customer solve value and that is why the last to city you know still fell within the range are we expected and as for 10 below I think what I was trying to say there is look we've been playing offense with the 10 below concept for a couple of years now we started work on that long before tariffs.
And it's <unk>, it's through a lot of those learning for the 10 below store within a store task.
That you know really amplified how much the customer appreciates our value.
And so we will use that to look at the strategies, we used for communicating that value.
And we're kind of implementing that in these.
Five dollar plus test stores as we make sure we get it get it right with the customer.
<unk>.
Customers still loves our value we've got to do an even better job on communication and you know the last two city is such that there is still an overall lift when we're done Ken Hi, I think you'd be covered it. Thank you.
Thanks Kelly.
Okay.
I think our next question comes from Michael Ross or from U.B.S. place you have with your question.
Good evening. Thanks, a lot for taking my question given how the tour of timing is taking place how much of the chair of actually heat.
2019, presumably that 70 basis points.
Of impact in.
The third quarter is mostly going to come from a at least one through three.
Do want this extend through 2020, all else being equal in Ken how should we think about the assumptions that you made at the high end of your guidance versus the low end of your guide you said the high end is fully mitigated what does that mean that you passed along pricing increases.
To fully offset the tariff impact in what would have to happen to be at the lowest thanks bye.
Yeah. Thanks, Michael.
Ken what kind of two guidance. There you know I think on on 2020, you know it's too early to be you know kind of forecasting all that I think the difference between 19 and 20 is you know the biser in and purchased.
As we head into 20, we still expect to mitigate more assuming the tariff stay as is but yeah. I think as we all know those are kind of changing weekly.
And we're also migrating you know tens of millions a into other countries. So 2020 is going to be a lot different game. The 19 and I think the focus on our guidance has been on 19 and I'll, let you kind of clarify that Ken.
Sure.
Michael on the from from a guidance perspective, the high end of our guidance and.
And obviously the what we've mentioned in the prepared remarks around the fluidity of the situation. The timing you know the announcement that took place last Friday.
You know, we still need a little bit more time to to navigate through some of this but our high end of the guidance assumes that we will mitigate.
The full impact of tariff costs in 2019.
As you can see we provided a a wider range.
Of outcomes from any P.S. perspective than we have historically, if you look back you'll see kind of the range we've done.
That incremental amount in the range is really the portion that we would feel would be not covered or the unmitigated portion of tariff costs and if we're unable to cover that so I kind of gives you an indication of where we are kind of high end and low end.
Guidance and what that means for for 2019.
Yeah, We I think we tried to really ring fence it and.
Give me a a good sense of.
The high and the low and you can see it's still relatively tight considering you know how big impact it is and like I said in prayer remarks.
The teams are vendor partners boy everyone's just been great partners in helping mitigate this thanks, Michael Thanks My thing.
Our next question comes from Simion Guttmann from Morgan Stanley . Please you have with your question.
Hi, This is Michael casler on for for Simian. Thanks to hear a question so going back to to calm for the back half and how the licensing trends whoa, how plane to that so I'm curious if you give a sense of how much frozen hadn't maybe benefited you guys. You know five six years ago, and how or if not how that compares to your expectations for the back half licensing trends this year.
And then just on the on frozen itself last year, you took out I think some of the licensing in the store.
To move in the toys.
This year are you planning.
Coming out of a different you know area of the store, where you'll be kind of putting more the licensing in our house I can work and.
To add to this period of the year.
<unk>.
Yeah. Thanks My Michael.
But you know I I think it's.
Certainly frozen was a impactful in 2014 <unk>. Despite the movie came out and 13.
And I think the difference between 14 and 19 is we're we're in a much better position now to capitalize on frozen were much larger company.
You know Michael <unk> been here five years. He has got a seasoned team. We're doing you know several exclusive items that was not the case at all back and 14.
And so you know we really approached this one strategically.
And excited about what's to come as far as how to be presented you're going to see a really strong frozen presents in our stores as well as an overall toy presence. There is some overlap there there's a lot of toy frozen.
But I think you.
I know, you'll see frozen pretty front and center.
As well as as toys, and so what's great about the flexibility of our eight worlds as we can can track worlds that aren't selling and we can dial up ones that are in this will be another case, you'll see as it plays out here and.
Two three in Q4.
Thank you Michael.
Thanks.
Our next question comes from Michael Moore Tanney from ever <unk>. Please go ahead with your question.
Oh, Hey, guys Ah. Good afternoon, just wanted to follow up on tariffs a little bit if I could and I was wondering if you could give us some color given the most recent terrorist that have come out how much of the mitigation. You know would you describe is kind of vendor leverage versus specific cost out initiatives.
You know versus the price increases that you all been making.
And you know would you be able to mostly are fully mitigate.
Those costs into 2020, if you kind of.
You know how the runrate constant from four Q.
Yep.
Oh, My God I, I don't know that I want to get into the specifics of it I would tell you a a large majority has been between.
Our our vendors and factories.
The the reason it's hard to exactly quantify as you know a lot of times. It depends you know when the tariff goes then how long a lead time we have.
This last round you know literally had some items changing within a weeks and whereas you know list 123, we had months to prepare so when you're talking weeks. You know you have zero mitigation because it's already on the water it's already negotiated so each.
Each implementation of a new rounded tariffs has been different but what shouldn't be lost in is we have a lot of leverage the pool and and we've really been using all those and and have great partners that have been leaning in to help us and it's it's exact benefit a scale.
And you know, we feel really good and and like I said at the very beginning we're going to end with price increases and that'll be our last resort and that's the stage. We're in now, but we're going to approach it with pace and diligence.
Thanks, Michael you very much.
Our next question goes from Brian <expletive> from Oppenheimer. Please go ahead with your question.
Hi, good afternoon, Thanks for taking my question.
So I apologize right you want to ask a question on on tariffs.
Big topic here I can't believe it I I never thought anyone would ask me any questions on task, but go ahead.
So.
You got wind in great detail here, you know the the the average you're you're undertaking and some the near term impacts on the business.
I think you meant it I think it was mentioned prepared comments about.
Longer term or over a longer term.
Working with vendors to move out of China.
Mhm. So my question is is is we look at.
<unk> to what extent is that a possibility and how should we think about maybe the weather into 2020 or be odd how would that further change the source of the impact of a tariff situation.
Well.
I mean, there's a lot of speculation an answering that question.
What I would tell you is.
You know we've had people in our source of G.M. up to and including Michael.
I'm already overseas.
In other countries you know sourcing product changes there are certain categories that are will be relatively easy and there's others were you know mitigation efforts within staying within China are probably the best short term effort.
But I can tell you that you know, it's probably moving faster than I would have told you three months ago.
And I I think as the tariff escalates, it'll probably move even faster. So I think a lot of that will be dictated out of Washington, and but at the same time I I think what you should be reassured and why can't and I've tried to be as transparent as possible with all you and giving you a lot of detail and what we're doing.
On one hand, we're protecting the customer first and foremost.
And on the other hand, we've got a whole host of teams here working hard to.
Mitigate this is close to 100% as possible and that's why.
While the ranges widened it's still relatively tight range from best case to worst case, and that's combination all the above and.
Sorry, I can't be specific on moving out China, but it I would tell you it's accelerating not do salary.
<unk>. Thank you.
Thanks, Brian .
Oh Nice question 'cause from David Buckley from Bank of America Merrill Lynch.
Hi, Thanks for taking my question.
The church impacted how Michael and his team are looking at buying merchandise, whether by focusing more on certain categories of price ranges.
Yeah, clearly it's had an impact on on the merchandise team. It's it's had an impact on our vendor community.
But you know we have a a great relationship with the vendors they've been very supportive you know and and I think the fact that we have eight worlds gives us the opportunity to change classifications, you know flex up in a world that you know has less tariffs on it you know that it's it's very dynamic very fluid and the the teams are working very hard to to mitigate these and but yeah that it has changed how they're approaching it that's for sure.
Okay. Thank you.
Our next question comes from Scott's this early from RBC capital markets. Please go ahead with your question.
Oh <unk>.
Just so we understand the magnitude of your tire mitigation process, what we're supposed to be assaulted clouds are impacted by the <unk>, including with four I think can you might told US about 15% was previously impacted by this one free and then relate to that was there anything else going on with the average ticket I guess I would expect it a bit more strength in average ticket just give them. The the price increases that were implemented thanks.
Oh, yeah, the price M- increases really had no impact on Q2, Scott. That's why you really haven't seen any change there.
Other than the markets, we were testing it in but that's.
Relatively you know small amount.
As for let's three I I think we shared earlier with the with all of you. It was relatively about 15% of our you know mid teens overall by from that.
I guess I'm curious, what what was the incremental impacts on list for.
Oh, Yeah, Scott, we haven't quantify that out obviously with you know last week's announcement you know we're still you know accelerating receipts in on the December impact and you know, making a lot of changes to try and quantify everything that was announced last weekend. We're just going to need some more time that was only you know four days ago five days ago.
Okay.
Thank you <unk>.
Our next question custom chairs a fireman from Chelsea. Please your what's your question.
Yeah, Hey, guys.
Why don't ask I I think China's you talked about two four.
Mm.
The margin you you mentioned some getting significant leverage.
Boys can you.
<unk> why that would be could you just explain that again.
Sure Joe last year in Q4, if you recall with the toys R. us store closings and.
The customers that we garnered last year, we did a a good amount of toy business. As you would expect we had a a toy island.
In the store and we took advantage of a good amount of opportunity product out there in the marketplace.
And you know great results and Q4 for US last year, we did have.
A margin degradation in Q4 related to toys that we call it out.
So given where we are this year and what we see in terms of our buys moving forward into queue for we expect to you know turn that into a favorable this year. So that's why recalling that out.
As a.
Central upside in the queue for gross gross margin.
Okay, <unk> and and I guess on the license product is that similar margin into the you know on the toys I guess is everything else like so there's no issues with that.
Yeah, No. It's I mean, it falls within line with our our plans that other but other products and we feel good about.
Not only the product, but the the the margins that we should be able to deliver on their products.
Yeah.
No no major impact yeah. Thanks, Joe.
Good luck this quarter goes.
Yeah. Thank you Joe.
Our next question comes from Judah Straumur from credit Suisse figure out what's your question.
I guess I'm just circling back on some of your comments on a less this city with the price tests.
Do you see any connection in the consumer's mind between tariffs and the price tests or is there some decline in consumer confidence as far as you can tell or is there perhaps just some push back because the pricing model at five below is changing for them.
No I actually we've done a lot of customers steps and you know the majority of customers do not connect price changes with specifically with terrorists.
And you know like I said in my some of my other remarks, they still responded very favorably to the value.
And the area, where where we've you know really dialed up our focus has been on the our communication strategy.
And making sure where more transparent with the customer and you know eliminating the absolutes and I gave you. Some examples of those but and and you know we really haven't seen any you know pull back from the customer at all and I was like I said as soon as we get through the weather business back to normalize.
You know you start looking ahead of what we guide and everything there I think it shows you we feel pretty strong about the back half of the year.
Okay, great and just to follow up.
Is it right to think about you guys versus you know call it value competitors kind of of all sizes in terms of price gaps you know or or are you looking at similarly, or a similar product and price gaps relative to others and have those changed at all with the price.
You know what we we certainly did priced test price checks before we started the tests and we saw a large gaps you know as we you know complete these price test and the chain will certainly be back out there again.
But making sure we maintain value.
And deliver wild or the customer where it remains one of the key tenets of what this business was built on and that's not changing we still continue to see the gap we expected.
<unk>. Thanks.
Thank you.
Thanks.
And our next question comes from Bob Summers from Buckingham. Please go ahead with your question.
Yeah I'm good afternoon, so I just want to clarify that.
The the Chainwide price increases, you're you're talking about things that you've already tested and and that's what's really.
Embedded in the current guidance and if you could maybe characterize that in terms of percent excuse or percent of sales that'd be great.
Yes, we are talking about stuff that we've tested to be clear Hmm you know we.
Especially with last week's announcements, we've you know went and run another test where we've you know widened than the number of items that we've tested but clearly when it's all done inside Bob the vast majority of our items will still be price below $5. So you know and when I say that it's you know I'm in 90% number.
And so it's a combination of you know.
Working in the two to four dollar range and a very small percentage of our overall.
Five dollar items.
And then just on the the 555 price point it was very centralized.
Centralize category in the store that I was and I would argue it's one that has very strong value. So to me it's not.
Surprising that there was you know little demand destruction, but as you think about expanding that would you do it in the same way in terms of blocks within the store would you be more product specific.
I think we it'd be a combination of the two and you know I appreciate your call in that out by because that's exactly how we looked at it.
And we really did focus on the areas, where we thought we had the biggest.
Gap and and value and you know I think as we expand we'll we'll move into some other areas that we believe we we have a large gap and and in price, but at the same time I think doing it you know ones e. to the all over the store is is a little disingenuous and it's really hard for the customer to understand that so it'll it'll it'll be concentrated in blocks for sure.
Okay. Thank you.
Hey, thanks spot appreciate it.
Yeah, and ladies and gentlemen at this time in showing no additional questions I'd like to turn the conference call back over to management for any closing remarks.
Thanks, everyone for joining us today I know you had a lot of questions about tariffs and hopefully we've been.
Pretty transparent on those in and helping you understand where we're going we look forward to speaking you again during the holidays and as always encourage you to get out there and visit our stores and let go and have fun appreciate the sport or five below have a great evening.
Bye.
Ladies and gentlemen that will conclude today's conference call would you take you for attending you may now disconnect your lines.