Five Below, Inc. (FIVE) Earnings Call Transcript & Summary

Great. Thanks. It's Matt Boss, Department Stores and Specialty Softlines at JPMorgan. I'm happy this morning to host a fireside chat with the management team at Five Below. We have President and CEO, Joel Anderson; as well as CFO, Ken Bull. Format will be prepared questions followed by open Q&A. With that, I'll pass it over to you, Joel, and then we can get started.

Yes. Thanks, Matt, and welcome, everybody. As you probably saw this morning, we released our holiday sales results. As Matt said, I'm here with Ken, and we're anxious to give you a little color on how holiday 2020 went and look forward to spending the morning with everybody. With that, Matt, I'll turn it back over to you, and thanks, everybody, for Five Below ICR fireside chat.

Great. That's a perfect place to start, I think, Joel. Strong holiday release, I think you said strongest since 2011. Maybe, could you just walk through some of the drivers of the holiday same-store sales performance? Maybe touch on the cadence of the quarter, any highlights or performance by world.

Sure. Well, Matt, as we did release this morning, it is our strongest fourth quarter holiday since 2011. So obviously, we're very pleased with what we saw today. And I think maybe if I break down the quarter a little bit for you, I think the first place to start, Matt, is to probably look at internal factors and then external factors because I think both played into the success of the holiday. From an internal perspective, honestly, we hit on all cylinders. From the merchandising perspective, it was really a broad-based -- nearly all our worlds contributing to the success we had in Q4. We continue to see Room and Tech lead the business along with our Games and toys business. So really pleased with merchandising. In addition to that, five beyond is something we launched earlier in the year, and that was very successful and resonated very strong with the customers. So great merchandising success, really happy with that. The other aspect of the internal factors is a major shift for us from a marketing perspective, away from our traditional paper circulars to 100% digital and pleased with the strategy we've taken from a marketing perspective as well as the continued increase in our e-commerce capabilities. Happy to talk about that more a little bit later. A couple of other internal factors. Look, our operators did a great job. This was a very unusual holiday season. They really focused on safety, focused on how do we process customers faster and really nice job by the operating team to deliver the numbers we needed in a very different environment around social distancing and the like. And then finally, the supply chain. This has been a multiyear strategy for us, to increase our supply chain capabilities. We're now on a path of opening a new distribution center every year. And this year, we brought up the Texas facility, which Texas is now our largest state, and that really helped speed transit times into that Southwest area. And then on the external side, clearly, the customer shopped very different than in years past. And we did see a pull forward of shopping earlier into the year. And honestly, I think that worked well for us to -- as we were really focusing on social distancing, and we didn't have to deal with the huge spike in crowds that last week to 10 days. And then finally, on the external side was the calendar shift. We talked a little bit about this on the third quarter call, 2 extra shopping days. Hanukkah was earlier, 6 days between Super Saturday and Christmas. So all of those worked to our favor in this pandemic year to spread out traffic and bring that together. And then finally, the weather. Honestly, other than one storm in the Northeast, it was a pretty good weather year for everything. And so, Matt, great year, great holiday, and we really like what we saw both internally and externally.

Clearly. Congrats again. Ken, maybe, could you speak to the margin performance in the holiday or fourth quarter? Any factors to consider on the gross margin or the expense side?

Sure. And thanks, Matt, and good morning, everybody, and happy new year. It really is working from a gross margin perspective into what we had expected coming out of the third quarter. And on our call, we did mention that we would expect gross margins to be in that 39% to 40% range. Again, more normalized versus where we landed last year and then also a combination of some of the merchandise mix and the customer preferences that we saw. So we still expect, for the fourth quarter, for our gross margin to come in to that 39% to 40% range. And keep in mind, the overwhelming majority of the costs in cost of goods sold are related to merchandise costs. But we did see and we expect to see some leverage on the comps in the fixed component embedded in the cost of goods sold, particularly in occupancy. And then if we look at SG&A, if you recall, on our third quarter call, based on a more normalized sales level, we had expected to see deleverage in SG&A. Now based on the outperformance that we've seen here and the comp that we achieved, we expect that to flip to leverage for SG&A. And a big portion of that is going to be driven by lower marketing spend. As we worked our way through the season, one of the things we did around a safety perspective was to try to take the foot off the pedal with regards to marketing not to push customers into our stores in those few weeks before Christmas. As you know, that's a very busy time for us. And given where our sales were up to that point and due to safety, we did make a decision to pull back on our marketing spend. So we're going to see some meaningful leverage there. And then that is going to be offset in part, by higher incentive compensation costs, which we talked about on the third quarter also.

Joel, maybe to switch gears back to the top line. I mean, so best comps in the back half of the year since 2011 as we said. But I think one thing that really sticks out is the solid performance every single month since you've reopened the doors. What do you attribute to the consistency? What do you attribute to the magnitude of the recent performance that you're seeing?

Yes. Thanks, Matt. And look, we said it a number of times, really, any trend is good for Five Below. And the makeup of our eight worlds really allows Five Below to kind of participate in any trend. And Matt, you've followed this for a long time. We had the spinner trend back in '17. That was in our Sports world. There was a selfie trend, which is in our Tech world. There's the adult coloring trend that was in our Create world. And so certainly, with the pandemic and a big push on PPE product, that was largely in our Style world. And so what -- the reason I outline all that is what we're really good at, and the merchants did a great job as we canceled a lot of orders, we bought back in to where we expected the customer shifts to happen. We saw a big shift change in back-to-school this year. Room has been dominated as people have been home and spending a lot more time decorating their house or kids being in dorm rooms, putting more time and investments into that. And so I think the bigger picture of this and why we've been successful is the eight worlds really give us the flexibility to kind of shift into the direction we need to go. We're not kind of pigeonholed into one particular genre or type of merchandise product. And that overall is probably what drove it more than anything. And clearly, there's also been the shift in consumer discretionary spending. With hospitality and restaurants really muted, a lot of discretionary spending has gone into retail. And as I gave you several examples there and our pivot in merchandising assortment, it really allowed us to capture that. And it's been a very successful, both third quarter and now fourth quarter, and we expect that momentum to continue on into first quarter here.

So to touch on one of the points that you mentioned. I mean, I think one of the things that we've seen following Five is how you do take something from each one of the trends when you have greater customer awareness and customers in the store. So can you speak to new customer acquisition that you've seen during this time period, initiatives in place maybe to accelerate the market share and drive return trips on the other side?

Yes. I'll just remind everybody, we don't have a loyalty card or own credit card. So it's hard to specifically track a little bit of our information's anecdotal. We do traditionally, coming out of holiday, do a lot of post-holiday surveys with our customer, where we'll capture a lot of data, how they shop, where they shopped, first time shopper at Five Below. And so that's one area we will pick up a lot of information about the customer. The other big change this year is we have talked about for quite a while now, the acceleration of our digital assets, namely the acquisition a year ago of Hollar.com. That's now fully integrated. We've migrated onto that platform. That's allowed us to get an app up and running. That was not on the horizon in 2020. It certainly, with our e-commerce business, it allows us to track customers. And we saw a lot of new customers really migrate to our e-commerce platform this year. And so while it remains a small piece of our business, it does give us a sense of tracking what customers are buying, how often they're returning to our sites, are they starting to shop in our stores, et cetera, et cetera. So anecdotally, and there's no reason to believe otherwise, every time we see a new trend emerge that exposes somebody to Five Below for the first time, they like the value, they have a great experience in the store and then they continue to shop with us. And so while the bar is pretty high for Q3 and 4 of 2021, like in '17 and '18, we keep a lot of those customers and came back strong with a continued growth of the business. So new customers certainly emerged, it's just quantifying the exact amount that's the tough part for us. But we're really feeling good about where we're at with customer acquisition.

And then maybe along those same lines, brand awareness. I know this has been a nice multiyear opportunity for you. Where do we stand today nationally, maybe if we look back a few years? And how best to think about the opportunity in brand awareness over the next maybe 3 years?

Sure. I think the -- well, first of all, we do a brand awareness study every year. And we usually do that in the spring of the year. And with the pandemic happening this year, it was tough to do it. So we'll be back in '21 here doing a full brand awareness study to really measure the increases from '19. But what I would tell you is that the biggest change is that for us to get to 50% brand awareness in a new market, it used to take us 7 to 8 years to get there. We've really shifted that into more of the 4- to 5-year time frame. And then in new markets, we used to be in the teens a couple of years out. And now what we're seeing is that brand awareness is hovering in the low 30s. And so those are the 2 big areas. How fast can we emerge with a solid number in a new market and where is our overall brand awareness? So look, as we get some official brand awareness numbers here in the spring of '21, we expect those numbers to keep moving up and to the right. But the 2 areas we look at most are how fast do we grow it in new markets in that 0 to 2 years, and then where is our overall brand awareness nationally. And so I think the last comment I would make for you on this topic is we went into new markets this year, like Las Vegas, and the Denver, Colorado area. And those markets, without any advertising, new to Five Below, we really didn't do grand openings this year due to the pandemic. We saw really good success in a couple of new markets we entered. And that just shows you the brand awareness truly is increasing.

It's a perfect example. So on -- to stay on the topic on new stores, on the pace of new stores, how best to think about new store growth in 2021? And as we think about high teens in the past, is that the right pace? And if so, why, in terms of thinking forward?

Yes. Thanks, Matt. And what I would tell you on the pace of new stores, and we've traditionally announced it at this ICR conference, our expectation for 2021 is to open between 170 and 180 new stores. This is a great number. We feel really good about it. Basically, what you can tell from that is we're back to playing offense. We're back to growing the number of stores again. I would tell you, it was tough to get to that number, much tougher than we've experienced in the past, largely due to there's several other retailers that have slowed their growth. You've got government agencies that are slower in permitting and licenses and those type of things. And then you got landlords that have kind of slowed up their store or their development of new centers. But we're going to open 170 to 180 in 2021. Feel great about it, and we feel great that we've got the store engine going again.

And this might be one for Ken, but on the new stores, what performance have you seen from some of the more recent builds? How should we think about new store productivity? I think you've been pretty consistent in that low 90s level, if not better. So just kind of thinking as we continue to scale new stores, how to think about productivity?

Sure. As Joel mentioned, too, we've been -- again, we've been really happy with the performance of our new stores, even this year with the disruptions that we've had around the pandemic. And it's made the comparisons a little more difficult, right, with us pulling back on our grand opening marketing. Also, the hours of operation, we had mentioned in the prior quarters, we were down from our standard hours of operations. And obviously, that impacts the new stores also in a comparison to the prior year. So what we saw, if you do the calculations, we talked about this a little bit on the third quarter call. And if you do the math based on our fourth quarter guidance, we're in and around that 80% productivity rate, again, impacted by the pandemic for this year. But we would expect to get back once we get through the pandemic to back to more normalized levels of productivity. But again, we had some things happen this year. But I think the real key takeaway, Matt, as Joel mentioned also, we're very happy with the performance of the new stores, especially in some of the other regions out there outside semirural areas where the performance is really -- the positive performance has really even surprised us. And that's something that gives us confidence as we move forward into that opportunity for more new stores down the road.

Joel, in terms of that more new stores down the road. So longer term, what's your confidence in the 2,500 plus stores for saturation? And maybe even more specifically, how large do you think that plus can be?

Matt, it's a great question. What I would tell you, while I can't quantify today how big that plus is, we're very confident that it is plus, it's not finishing at 25. And I'd tell you that for a number of reasons. One, I mentioned Denver and Las Vegas. So here we are opening new markets in the middle of the pandemic with no marketing, no grand opening, and the success was very strong. Ken mentioned semirural. That was another one that was not contemplated in the original stores back when we were at 2,001 to 2,500. So those are 2 status points that really tell you it is going to be plus. Now the original plan was in 2020 to go out with another study. We -- the last study we did was back in -- was it 2018, Ken?

'18.

And because of the pandemic, we did not do our analytics study. We will do that in '21 to kind of quantify exactly what the 2,500 plus means. That will be our next benchmark piece of it. But when you look at Denver, when you look at semirural, we feel pretty confident about the plus side of the 2,500. And just more to come, we'll kind of work on that in 2021 here. But regardless of that, the reality is we're just barely over 1,000. We've got a long runway to go just to get to the 2,500 number and feeling very good about the 170 to 180 for 2021.

Okay, perfect. So maybe a couple on the margin side. On gross margin, could you just speak to multiyear, some of the drivers as we think about merchandise margin, occupancy leverage and any efficiencies on the distribution side?

Sure. And Matt, you broke up the gross margin into those key components, right? So the first one you mentioned there was from a merch margin perspective. And we've said this all along over the years, and we expect to continue this as we go forward, relatively flat merchandise margins. So to the extent that we do get benefit from scale in the business where there is some pricing that we get some benefit of down the road, we're going to plow that benefit back into the product. And we call that the reinvestment cycle, and that's what helps to create the WOW product that we have. So from a merch margin perspective, relatively flat. You mentioned occupancy. That is a -- obviously, a stable expense, and we have the ability to lever that. That falls into the bucket, and we've said this before, and we still see this in the near-term, that we have the ability to leverage at about that 3% comp. So we should expect to see that going on with something like occupancy built into cost of goods sold. And then you mentioned the distribution centers. And we've said over the last couple of years, and we still have a ways to go. We're going to continue to build out our distribution network. It was a big benefit for us this year in the holiday season. Facilities that are closer to the stores and getting the goods replenished to the stores faster than we ever did. So we're going to continue to see that benefit as we move forward. As you know, we added a distribution facility outside of Houston, Texas this year. And we've broken ground on a facility in Arizona to support the West, so that will open in 2021. And then our expectation is so that we're going to have another facility, probably somewhere in the Midwest in 2022. So from a financial impact of this happening, our scale benefits us here. The impacts that we've seen historically, they'll be a little bit more diluted. You're probably talking about 10 to 20 basis points in total this year for the impact of the Houston facility and then probably relatively less than that as we move forward into the future years. The other piece I'll throw out there, too, is we're talking about gross margin. So the distribution costs that are within the 4 walls are housed in cost of goods sold. For our Atlanta distribution center, our Houston, DC and also for the Arizona facility, we've purchased and built those facilities. So we have depreciation related to that. That's down in G&A -- SG&A, sorry. So when I talk about the DC, it's really a combination of what's going on there in cost of goods sold and then also depreciation.

And then maybe a follow-up on the expense side. What's the best way to think about the long-term SG&A leverage opportunity? It sounds like there's opportunity in marketing coming out of the pandemic and just your ability or your comfort as you look at wages and maybe efficiencies to offset some of the pressure that other retailers are speaking to on the wage front.

Sure. So we've said this before, and again, I just said it a little while ago when it comes to SG&A and those fixed costs, we still feel that, that 3% comp for us is that tipping point where we can start to see the leverage. And again, we feel that going forward. We set the vision, the longer-term vision, we set back at the beginning of 2016 all the way to 2020, where we had [ 20/20 ] until 2020. And that implied top line growth, bottom line growth slightly more to achieve that leverage. And I think we've seen that over the years. The -- you mentioned marketing. One of the things that we continue to do is optimize our marketing spend, and you've probably heard us talk about the shift away from less TV, more into digital, straight digital, getting directly to the customer. Along with that, gives us the ability to have more effective outreach to our customer and interaction. But also, it's more cost efficient, so I think we do have a potential opportunity there as we move down the road from a marketing perspective. You also mentioned wages, and we continue to plan for increases in wages. We raised the hourly rates of our associates in 2020, and we are going to expect to do that again in 2011. But the key there for us is all about making sure that we have the appropriate talent and that we remain competitive. And I can tell you, with all the stores that we're opening and all the existing stores, there's been no issue with us in terms of getting talent. But we understand we have to remain competitive. So that's one of those things that we do understand that there's going to be a little bit of a headwind there from a wage perspective. And then you mentioned a little bit about just the other expenses out there, and this comes back to the scale benefit that we probably don't talk about it enough, but there's things that are happening out there in the macro environment. And sometimes, we don't talk about them as much as other companies. And that's the benefit of scale that we can apply. And we've continued to see that, whether it's related to something like inflation around services or something like freight, that maybe others would experience a higher impact of freight costs versus us because, again, we're coming to the table with some more purchasing power in areas like that so...

That's great. Perfect. On the balance sheet, how would you rank priorities for cash flow and general plans to return cash to shareholders on a multiyear basis? And any changes in light of the pandemic to consider?

So we've always said, and as you can see from the results, and it's going to continue here, the best investment of our cash is in stores, right, we -- based on the payback and the ROI that we get. So you're going to continue to see that be our #1 priority. The -- right behind that is the #2 priority, is around continuing to build the foundation of the business, to make sure that foundation stays up to speed with the growth and we can deliver that consistent and successful growth. So obviously, things like people, systems, infrastructure, I just mentioned the distribution centers and building those out. It makes sense for us from a control standpoint, from a flexibility standpoint, to purchase the distribution centers, and that takes a significant amount of capital. So we're going to continue to focus on that. You mentioned the pandemic and has that changed anything for us. I think one of the things that really -- what it showed us, and I think it showed every retailer. The #1 concern coming out of '19 into the beginning of 2020 was liquidity. And it was pretty good to have that cash on the balance sheet and to know that we still have the ability to make the decisions that we needed to make to get the customer experience ready to go. And Joel had mentioned that, too, in terms of the success of our operations while we were closed, to be ready to reopen and accept the customers, chase the inventory that we needed to chase. So it does continue to show you that it's always good to have that [ kitty ] on the balance sheet, to have a clean balance sheet like we did, and we still do. And then the last piece of that from a share buyback perspective, we do have a plan in place. It started back in the beginning of 2018, a $100 million authorized facility. To date, we've spent only about half of that. And again, we'll make decisions on that as we move forward. But I'll go back to the priorities being investing in stores and the foundation of the business is really where our focus is going to be around capital allocation.

That's great. And then just to finish out initiatives, Joel, there's 3 that I wanted to touch on: five beyond, Instacart and gaming. So maybe with five beyond, could you update us where we stand on the rollout of five beyond today? How do you see that evolving in 2021? Just kind of overall where we're at today from a five beyond perspective?

Sure. As it relates to five beyond, I think the first thing to share with you and everybody is we're now in a position where it's part of our official prototype. I think that's the biggest change. You go back 18 months ago, we were really playing defense. The tariffs impacted us, forced us to break the $5 price point for the first time, and we toyed with Ten Below, just WOW. And where we've really landed now is on five beyond. And what I'm pleased to report is the -- this really is resonating well with the customer. This is no longer about raising prices, this is about delivering value and WOW. And there's a couple of aspects of our five Beyond strategy, the first and most important part about it is the prototype. And so all new stores and the majority of our remodels will now incorporate the five beyond section in the back of the stores. And that's really the direction we're moving with the prototype. What we've learned from the customer is they truly want us to keep it separate from the rest of the store. And so the front 2/3 of the store in this prototype are really true to $5 below. And then the back part is where it's almost like entering a store-within-a-store concept of five beyond. So that's the primary direction we're going with it. We're very pleased with it, and you'll continue to see that go. There is an aspect, we call it the WOW wall. And we -- as we transition to this new prototype, we do have the existing fleet. And from time to time, seasonally, we will introduce the WOW wall. You just saw it at holiday, we'll probably bring that back in back-to-school this year, and we'll continue to evolve that. But the main priority is to change the prototype. We're really excited about it. It's part of our growth and you'll see us continue to move on five beyond.

And then maybe to move to Instacart. Could you just elaborate on the partnership, how it performed over holiday and how you see the partnership evolving?

Yes. That's another good one. One last thing I forgot on five beyond. We also did test the $15 price point and saw really no pushback on that. So it just shows you, we're moving more to the center of the plate instead of just being stocking stuffers. As it relates to Instacart, Matt, I think this is what you should take away from that more than Instacart per se, is that this is another good example of us really evolving our relationship with the customer. If we go back 15 months ago or even 13 months ago, we're making the acquisition of Hollar.com, we're adding the Five Below app and now our relationship with Instacart, great test. We got into about 300 stores plus tested curbside in about 90 stores. And look, the reality is, especially during the pandemic, we had to have different ways to interact with our customers. So now with our e-commerce capabilities, Instacart relationship, what you should take away from that is we'll just continue to evolve and have more touch points with the customer.

And then just maybe last on gaming. How do you see the investments in gaming evolving? How does that aid in new customer acquisition in your view?

Sure. I think you've got to look at gaming big picture. For Five Below, it's a multipronged strategy. There's a product aspect to it. There's an investment aspect to it, and then there's a potential prototype aspect to it. So starting with the product side, that's probably the most developed area. We launched Bugha this year. Very successful. That went chain-wide. It certainly touched on five beyond as well as the price points were higher. But we believe in gaming. We believe that's where our core customer teens and tweens are spending time, and we need to be there interacting with them in the first place to start and really develop is in the product side. That's the first part of it. The second part of it is an investment. And that's in Nerd Street Gamers. Great company, great leadership there. We have worked really well together. They coincidentally happen to be headquartered in Philadelphia. So that makes it easier geographically as well. But we will continue to invest in Nerd Street Gamers infrastructure company. They've done very well during the pandemic, pivoting their business a little bit. But so that's an investment. We'll continue to grow that, and we're one of several investors there. And then the final one is Localhost, which will be run by Nerd Street Gamers, and that's probably the least developed of the 3-pronged approach to gaming. And not because we don't want to develop it or they didn't want to develop it, but really as a pandemic came along and live events really got shut down, we had to put a pause on that. So we'll start to bring that back we do have 3 open, although not operating right now. And we'll start to bring those back as local ordinances allow sometime in 2021. So that's the approach on gaming. It's where our customers' time and effort is spent, and we need to be there. But look, let me close out on those 3 because I think you've got to bring them all together, and it's really, Matt, about us keeping a pipeline full of innovation. So the brand is evolving. We have to continue to improve our experience. Value will always be a key part about it, but whether you're talking about five beyond, Instacart or gaming, it's really 3 great examples of innovation happening at Five Below. It's alive and well and a nice way to finish out 2020, Matt.

Absolutely. So I think that -- at this point, we can move to any questions in Q&A. I'm looking now. There are a few so maybe to start off, larger, this one, it looks more larger picture. Just any learnings from COVID that you can take forward into 2021 and beyond? How would you rank opportunities operationally that you can apply going forward that maybe you learned from during this pandemic?

Yes. I'll take that first, and Ken, feel free to add anything. First and foremost, I mean, us, no different than every other company, really had to go through a crisis in this first half of 2020. And for Five Below, really, we hunkered down and honestly, never waste a good crisis. We got more efficient. We found out where we could take costs out. When you're growing as fast as we are, sometimes you can get a little loose on that. And we really figure out a ways to take several costs out of the business. We operated with less. And at the same time, new ways of working. We're all working in the Zoom environment. We opened a distribution center in the middle of it. Our operators figured out how to operate on less hours per week. And so I think overall, it was a real nice way to improve efficiencies in the business. I don't know, Ken, if you have anything to add on that?

Yes. It's -- and Joel, you had mentioned this before, I think it forced all of us to kind of look inside ourselves, look inside the business. And what we saw was the resiliency of the business, the adaptability, the flexibility. Joel mentioned this early on in terms of our business in the eight worlds and what we present to the customer and the ability to be able to shift with trends no matter what they may be, whether it's a spinner or whether you're responding to a pandemic and what customer preferences are. And just a shout out to the teams internally that Joel has mentioned. I mean, the merchandising team that had to flip on a dime to show us now that we can do that, we can do that even better in terms of chasing product. And then operationally, all the things that we really haven't talked about too much but the things that we continue to do, putting in a new merchandising system and bringing on the Holler platform and things like that, that we have the ability to continue to do. I think that takes forward with us a lot of confidence in what we can do with the business, with the people and then combine that with the strength of the model. We think that's pretty powerful.

There was another one on five beyond. So with the rollout of five beyond, how do you see this expanding the total addressable market? Do you see this expanding category opportunities? And maybe financially, any metrics that you've seen with five beyond, whether it's the basket, and do you think it's bringing in a different customer or a new customer?

Sure. Look, as we do all the time, we tend to move a little conservative, really test it out. And then once we feel good about it, we move with pace and -- once we get beyond pace and diligence, we move with speed. And clearly, as I shared with you, it's not part of our prototype. So obviously, we feel very, very good about it. I think the biggest learning is, I mentioned, and that's why I wanted to make sure I got that answer, I'm glad the question came back. We tested $15 price point and saw 0 pushback. So we're obviously starting to -- maybe it's not a new customer yet, so I -- but I think we're a different occasion for our current customers. So where they might have only thought of us a stocking stuffer at holiday time, we now kind of have the opportunity to be part of the main gift, if you will. And so more to come on that, we obviously have to continue to develop that going forward. But we will always stay true to Five Below, and that's why I think it's so important that -- what I love about the new prototype is it's like a store within a store, and the front part is still Five Below. So for the true value seeker that doesn't have a lot of disposable income, that front 2/3 of the store is what it's always been. And then for the customer seeking a different occasion, we'll certainly start to attract different customers. Too early to talk about that, Matt. We don't have the data on that yet. We certainly believe that's another opportunity for it.

Great. And this one, I think maybe goes hand-in-hand with that, and I think you kind of touched on it earlier. But the question was basically, how does your business hold up historically in a more inflationary environment? So I don't know, maybe five beyond plays into that, depending on the pace of inflation, but the question was basically just around inflationary environments and how business holds up.

Look, what's great about our culture. The last thing we want to do is raise prices to the customer. And there's a lot of retailers, price goes up, their costs go up, the first place you move is to raising retails. That's honestly the last place we go. Michael is very adamant about that, the merchant team is very disciplined about that. Ken, even though leads finance, is equally as passionate about that. And so what that means is we will always deliver value. But now that we've moved beyond the raising prices due to cost increases, and it's more about delivering value at higher price points as inflationary pressure happens and it happens in the industry, we have a vehicle in which to withstand that, whether we're talking about wage increases or we're talking about material increases. But what I still see happening in the vision long-term is as we go above Five, that stays in the back of the store. And what happens in the front of the store stays Five Below. And look, Ken talked a lot about scale. And as we get stronger, that will help tamp down our sourcing capabilities, continue to get better, and we'll do everything we can to stay there. But we certainly now have the means and the vehicle in which to withstand any inflationary pressures to move above Five.

Great. And then there was one on new stores. So the question was around potential new real estate opportunities that maybe emerged out of COVID, where Five can grow. Anything geographically as well as given your growth, any changes in the quality of the real estate, given potential leverage with some of your landlords?

Well, look, thankfully, we're not a mall-based retailer. So if you learned anything during the COVID, we -- our worst-performing stores were our mall-based stores. That -- I can count that. It's less than 25 stores, so it's an immaterial impact on the overall business. So clearly, we're not going to pivot to a different strategy moving into malls and that like. But I think it's more about -- Ken talked about semirural. I talked about new markets. We really haven't seen any market that this doesn't resonate. So all 50 states are up for grabs. We're continuing to densify in our oldest market, that being Philadelphia. And while we do see cannibalization, we've talked about earlier in the year, we expect cannibalization to be about 100 basis points. We see that continuing to happen. We're not afraid of cannibalization, we think densification is the right way to grow market share. And if we can keep that number in that range, we'll continue to densify our stores. But look, we'll do the studies this year to understand. You asked about the plus side of things, and we'll see where that goes. But we feel really good about strategy. And we don't have to pivot it, which is the nice part about it.

There's 2 last ones. The first one is, how do you interpret recent sales strength in terms of the magnitude at Five Below? Do you think it's more a function of internal efforts, a number of which you spoke to versus the overall health of the underlying consumer? And any dynamics on the macro side?

Hey, look, it's -- when I answered that first question, Matt, that's why I was -- it was important to me that I said there was internal things and external aspects to it. I certainly can't take 100% credit for it. We guided to approximately 11. So obviously, we're seeing an acceleration here in January. That is probably due to the stimulus money being out there. And that's fine, that's great. It exposes new customers to five below, and they see a different reason to come into our stores. Our stores are very different now than they were at holiday as we're in our fitness and wellness. But overall, I think it was a mix, Matt, and both of those attract new customers and will serve us well for the long term.

So that kind of leads into the last question. You touched on it a little bit, but could you speak to January, what you're seeing? You weren't open the last time around when the stimulus dollars really flowed. So how are you going after stimulus dollars? What categories do you think maybe will be impacted most? And to your point, have you ever seen a trend? Have you ever seen something that draws incremental customers into your stores, where Five Below didn't retain something coming out of it?

Yes. Well, clearly, we're seeing an uptick. And I think it's less about -- because the stimulus dollars that we're the destination, this is clearly an example where they're buying groceries and we're next door. We've always said, we're about 50-50 the destination sometimes and then we feed off the strength of the power center other times. But to the end part of your question there, go back to what I said earlier in the conversation, I talked about spinners, I talked about selfie sticks and I talked about adult coloring. And the reason I specifically brought those up is each one of those touched a different world. And as we go into this pandemic, Room was positively impacted significantly as people were at home more. And so net-net, there hasn't been one. The eight worlds gives us an incredible amount of flexibility. I'm sure one will come along sometime. But in our short 18 years of history, we just continue to pivot. The merchants do a great job of shifting to -- we don't create the trends, but we're fast followers, and we bring it to life in the stores.

I think that's a great place to close. Ken, Joel, thanks a lot for your time today. Congrats on the really solid momentum and best of luck going forward.

Matt, really appreciate it. It's a great 2020, although we're nice to put 2020 behind us and get back to a little bit normalcy for everybody. And everyone, have a blessed 2021 and stay safe, and we'll talk to you all soon.

Thanks, Matt. Thanks, everybody.

Thanks again.