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

Welcome, everyone. To kick off our program, please welcome our Vice President of Investor Relations and Treasury, Christiane Pelz.

Everyone, welcome to Five Below. It is so nice to see all of you here today. And thank you for coming, and good morning as well to those watching virtually. This is a very important day for Five Below. It's our first ever Investor Day. It's a big milestone for us. We are here with our entire leadership team who are very excited to share with you insights about our business and to meet you. Joel Anderson, our President and CEO; and Ken Bull, our CFO will start with a quick review of Q4 and fiscal year '21, and then Joel will introduce our growth vision for 2025 and beyond. Our executives responsible for components of our growth strategy, including product, supply chain and experience, will discuss their respective areas. We'll take a quick break at that point, and then Ken will share more on our long-term vision and thoughts on fiscal year '22, which, as you may know, is a unique year for us. At that time, the formal part of our presentation will conclude, and then we'll open it up for Q&A. I'll give more information about the lunch and the store tour and the meaning of the dots on your name tags at that point. Throughout this presentation, we may make certain forward-looking statements that pertain to our future. These statements reflect our knowledge -- our current forecast based on our knowledge of our business today, and we are under no obligation to update these statements. In addition, actual results may differ materially from these expectations due to risks and uncertainties as outlined in our public filings. Now before I turn it over to Joel, we're excited to show you a short video taking a look back at where we came from. [Presentation]

I too want to welcome you to Five Below's first ever Investor Day. I would remind you, though, this is not the Academy Awards. This is the Investor Day for Five Below. We will have no unwelcome guests joining me on stage this morning. But we got lots of candy back there. It's not for looks, it's for there for you to eat. And if you see some special item, enjoy that too. Where's Janet, I was talking to you earlier. I know you want those [Burke's] out there, there for you. So enjoy. Seriously, we're here to have a lot of fun. And what's amazing is that we're in person, right? It's hard to believe that we're -- being in persons amazing but it's great to see all of you, and we are looking forward to having you here, and I promise you, you will not be disappointed. I want to recognize that there's also a lot of people with us online, and I thank you for also joining us. Behind me, you'll see a deflated basketball. Allow me to tell you the story. It is something that we give to everybody at Wowtown, that's our corporate headquarters and our field leadership after they successfully complete their first holiday. It's iconic. It's a tradition at Five Below. And it serves as a reminder for all our associates that we wake up every day and our goal is simply to break the paradigms of retail. There's no packaging, there's no box, there's no air. All of that saves on freight. It takes costs out and allows us to bring an unbelievable item with distorted value to our customers. That's what we do at Five Below every day. My basketball also has a number on it, it's 331. That serves as a reminder of how important growth is to Five Below. We've nearly quadrupled the number of stores since I joined. Now listen, we're going to have a great event today, but we're going to be fast. We're only going to be up here for an hour, and then we'll take a break, and Ken and I will come back for guidance and a Q&A session. And finally, the most exciting part of the day is we're going to finish with a tour of our new store, our new prototype, and I hope you are as excited to see it as we are eager to show it to you. It's Five Below's newest growth vehicle. So let's get started. What a milestone today is. It's hard to believe that it's only been 20 years since Five Below was started just outside of Philadelphia. We've come a long ways from the beginning. Many things have changed, but I want to talk about what hasn't changed. And while that store, that picture you see is only 4,000 square feet, it was a unique concept then and it still is today. It's never been replicated. There isn't a mirror image of Five Below. It was built on the values -- it was built on a foundation of incredible value in a fun treasure hunt experience. Five Below was created for tweens and teens. It was a place where they could spend their allowance and call Five Below the yes store because mom always said, yes. It took us 10 years to perfect the concept of Five Below, and that was validated with our IPO in July of 2012. This year marks the tenth anniversary of that celebration and what a celebration it was. Sales have grown 10x, operating income is growing 15x. Our operating margins improved 400%, and our stores, well, they're up 6x. All this growth, and we are just getting started. Now let's quickly turn to Q4 and our 2021 results. It was a record year for us in a very tough macro environment. And as I share these results, we will do that and then turn to our future growth vision. I'm going to ask Ken Bull to join me up here to look at these results. And while Ken needs no introduction as everyone in this room and online knows Ken. He's been with us since 2005, and I want to share a fun fact. His basketball number is 27. Ken has seen it all. He's taken Five Below from a great concept to what we are now creating is a great company. So let's turn to the results. As I said, what a year it's been. We opened the most stores ever, 171 to be exact. And just weeks into 2022, we've already crossed the 1,200 milestone. The "yes!" trends, well, they're the strongest in our history, Squish and sensory and slime lickers all at the same time, and in fact, Squish even became a craze. We love all our trends as they expose new customers to Five Below and then they come back and become loyal. We've also made significant advancements around product, experience and supply chain, and you're going to hear more about that. With that, Ken, I'll turn it over to you to share the financial results.

That's great. Thanks, Joel, and good morning, everybody. Really great to see everybody live and in-person, probably the first time in a while. As Joel noted, 2021 was an amazing year for Five Below. We finished the fourth quarter with nearly $1 billion in sales. Actually, it wasn't too long ago. In fact, it was in 2016 when we first reached the annual $1 billion in sales milestone. Included in the fourth quarter was a great holiday season, where for the 9-week period, we achieved a 7.7% comparable sales increase on top of last year's 10.1% increase. Total sales for the fourth quarter grew 16%, and we achieved a 3.4% comp sales increase, which was driven both by an increase in transactions and ticket, and which was on top of last year's record fourth quarter comp increase of 13.8%. As expected, January was a difficult comparison against last year's 38% January comp increase as we were lapping stimulus payments. Additionally, we experienced unfavorable weather in the back half of the month. We opened a record 17 new stores in the fourth quarter. And going forward, we'll continue to open more stores in Q4 than we have historically as our store count, geographical footprint and capabilities increase. Gross margin increased by about 10 basis points over last year, driven by efficiencies and leverage, which were partially offset by higher inbound freight costs, and the shift in store freight we discussed on our third quarter call. SG&A expenses of 21% were about 100 basis points higher than last year, driven by higher store expenses, and this all led to an operating margin of 18.8% and diluted earnings per share of $2.49, which was a 13.2% increase over 2020. Additionally, we also executed $60 million in stock repurchases in the fourth quarter, buying back about 369,000 shares. So now turning to the full year. I'll compare our results against 2019 as 2020 was impacted by store closures due to COVID-19. Sales for the year were $2.85 billion and grew 24% on a 2-year CAGR basis. For existing stores, we achieved a record $2.5 million average unit volume. Looking at profitability, gross margin was down about 30 basis points due to higher inbound and outbound freight costs and SG&A expenses finished at 22.8%, which was 190 basis points lower than 2019, driven by leverage of store expenses and lower marketing spend. Overall, operating margin for the year was a record 13.3%, up 160 basis points versus 2019 and up 100 basis points compared to our previous record in 2017. Diluted earnings per share for 2021 was $4.95, which was more than 1.5x 2019's diluted EPS of $3.12 and a 26% 2-year CAGR. We ended the year with 1,190 stores or a CAGR of 15% on a 2-year basis. We also remodeled 45 stores during the year. Ending inventory on a per-store basis was up 6% compared to a more normalized 2019, and our balance sheet remains strong with a cash position of $380 million and no debt. CapEx for the year of $288 million was driven by new distribution centers in Arizona and Indiana, 171 new stores and 45 remodels and investments in systems and infrastructure. And with that, I'll turn it back to Joel. Joel?

Thank you, Ken. There's a lot of numbers to absorb. The team worked really hard in '21 to accomplish what we did, and I'm so proud of those results. But now let's turn to why we are all here, Five Below's growth vision for the future. In order to do that, though, you've got to look backwards in order to look forward. And I want to remind you what our last vision was that we shared with you in 2016. It was quite simply 20/20 through 2020. We're going to grow the top line 20%, and we're going to grow the bottom line, 20% plus. And we're going to hit 1,000 stores in that period of time. Let's see how we did, right? We focused on disciplined, profitable growth. Those sales, well, they grew on a 6-year CAGR, 23%. The bottom line, 30%. We hit those stores 1,020 and our earnings per share was up 5x. This was significant leverage, especially for a growth company as we realized several scale benefits. Now hopefully, that gives you confidence that we're going to achieve what we're about to outline for you in the future. Five Below is about execution. But if we're going to continue to grow, it always starts with people, right? You know several of the people on this slide. You certainly know Ken. He just finished up here with me. You're going to have the opportunity today to interact with all of them, and everyone on this slide is going to join me up here in a little bit. Now look, this team was with me throughout the overwhelming majority of our 20/20 through 2020 journey. This team was instrumental in guiding Five through our last vision, and they're going to be important in our next vision. They are a reason for our continued success. They helped us play offense. They helped us accelerate our growth, and I couldn't have done it without this team. But listen, my proudest accomplishment through our last journey was what we've done to build out the broader team. And most of this team, you have not met. In fact, only Aaron Bookman was with us when we went public, and I'd encourage you to interact with Aaron. He knows a lot about our history. He knows how important execution is to us and how important building out a great people culture. We were purposeful with building out this team. We chased some of the best talent in the country. We've built new capabilities and most importantly, we built a stronger foundation for our continued growth. I'd encourage you today to meet as many as possible. Hopefully, you met some of them out here for breakfast, and you're going to have that opportunity at lunch. Specifically on the tour of our store, you're going to meet Todd and Idalia, and Felipe Zardo is going to join us also up here in a little bit. A big thank you to this entire group. In fact, I give a big thank you to our entire Five Below crew. They are the ones that constantly unleash their passion so that we can achieve the impossible every day and WOW our customer. It takes people like this that have the right mindset to wake up every day committed to delivering our purpose and quite frankly, making an impact in the communities we serve. Speaking of purpose, it's real simple. We try and create an environment for our customers, a place where they can let go and have fun in the most amazing experience where they can buy the newest, coolest stuff. My goal is that 100% of our customers hear these 5 words. Hi, welcome to Five Below. It puts a smile on their face and it knows that they've just entered the fun zone. As I said, we also have a deep commitment to the communities we serve. And ESG gets at the heart and soul of who we are. I'm proud of the progress we've made in this area. And throughout the day today, you're going to hear specific meaningful examples of what we've done. And in our proxy later this spring, you'll see a full report. Okay. Listen, enough of the warm up. Let's turn to the specifics of our growth vision. And I'm very excited to share with you today our future vision is called the "Triple-Double." That's right. The "Triple-Double." We now believe we have the opportunity to triple our U.S. store base to 3,500 by 2030. And we'll double sales and we'll more than double earnings by 2025. That's our "Triple-Double." We are still a strong growth retailer. In fact, you might even say we're accelerating growth because the numbers we're talking about now aren't only big in percent, but they're big in dollars. So how do we get there, right? What are the details behind the "Triple-Double?" If you're going to have the same conviction that you did for the 20/20 through 2020 vision, as you are going to have for the "Triple-Double," you need to understand our framework for success, and it's real simple. There are 5 drivers. First, innovation. It's all about a culture of innovation, and you'll hear about that. Second, product. It's pretty simple. How do we continue to distort value with relevant trends and constant newness. Third, supply chain, that's all about controlling our destiny, so that we can drive speed, visibility and efficiency. Fourth, experience, which is about executing amazing fun every day. And fifth, growth. We'll give you the details how we will remain a disciplined, profitable deliverance of growth. So let me start with the meaning of culture of innovation. And then I'll turn it over to the team for the remaining 4 drivers. All right. In order to drive our "Triple-Double," you have to see innovation. And innovation for us shows up everywhere at Five Below. It shows up in big ways and it shows up in little ways. But where it's most visible to our customers, and quite frankly, all of you is in the continued evolution and optimization of our prototype. Allow me to take you through a quick journey of that prototype so that you understand where we're going and you understand how fast change is continuing to happen at Five Below. The prototype is a measurement of all our success. It's a measurement of how we deliver amazing experience to our customer. The first evolution, which you see on the screen behind me took place in 2008. That prototype, we call vintage. It was introduced in 2008, and it was a racetrack layout. And by racetrack, we meant easy-in, easy-out. We doubled the size of the store to 7,000 square feet. And keeping this easy-in, easy-out environment was important to parents at that time that Five Below was still a safe zone to parents. Today, that prototype is only in 30% of our chain. The second iteration was our fresh prototype. The fresh prototype was introduced in 2017. It's what we called a runway layout, one way in, one way out. And it was also our first attempt at creating an environment that delivered on our purpose of let go and have fun. The store was brighter, the shelves were white. We invested in music. We had fun interactive departments like Sugar Rush and the $5 T-shop and 5B style. And while the wheelbarrows remained, they got stacked and they became much more interactive. The size of the prototype, it grew again to 8,500 and now represents about 40% of our chain. The next generation. Well, that one only took 3 years to improve the experience once again. And that's when we introduced the beyond prototype in 2020. Quite honestly, we perfected the idea of easy-in, sticky-out. As the shops became more defined, we expanded the customer value to $5 and beyond. We imagined new trip occasions and new rituals to celebrate. We also completely reimagined the checkout experience. And finally, for the first time ever, we eliminated lines of Five Below at holiday. Once again, we grew to -- the prototype grew and now 9,000 square feet, and it represents about 30% of the chain. So where do we head next, right? I'm going to ask Michael Romanko, our Chief Merchandising Officer, to join me in a minute up here and share the details of our product journey. Most of you know, Michael. Michael is extremely passionate, more passionate than me. He leads our merchandising organization. He heads our product development, our sourcing, and our brand marketing initiatives. Michael has been with us since 2015, and his basketball number is 364. That's a triple for Michael. Michael is going to share our product vision with you. And as they say, a picture is worth a thousand words, a video must be a million. So we're going to give you a quick sneak peek of what you're going to see this afternoon on the store tour, and then Michael will join me up here to share the details. Let's roll the video. [Presentation]

So thank you, Joel. Good morning, everyone. I get a chance to talk about products. Good morning, everyone. All right. There we go. It really is so nice to see everyone. For those of you who have been following us for a while know that our 8 worlds haven't changed. Not only have they not changed, it's one of the reasons that we're set apart from other retailers. We're not category constrained like those other category killers. In fact, we're just the opposite. It's our 8 worlds that remain relevant, give us that flexibility to give that constant growth and innovation. And I think all of you know how much I love growth and innovation, but really what I should have said, our 8 amazing worlds. That's what allows us to find, we distort and we bring all those unbelievable items to the customers. No other retailer offers the relevant trend-right product at our incredible value. We're trending. We're not spending, but we're always relevant for way low prices. And we never sacrifice on quality from sweets to sensory toys, Bluetooth to bedroom decor and the latest style. I like to say, "WOW, me, now, right? It's our amazing product and expert merchandising that really is a foundation of what we do, and value never sleeps. We are determined on having Five Below be the #1 choice for teens and tweens. It is the 8 rules that I just spoke about that have given us the license, the freedom, the ability to celebrate the rituals of life and milestones of growing up. The more rituals and milestones we serve, the more successful Five becomes, I kind of want you to think about this for a second. What other specialty brand, it's not a quiz. But what other specialty brand has those marching orders. We are the "yes!" store filled with fun that makes you smile. And we celebrate those rituals of life and milestones of growing up every day. Getting your ears pierced? Yes, we are piloting ear piercing in 150 stores. Balloons on a budget, now that's a party, and we are piloting an expanded selection of balloons in 250 of our stores. Having your own room is a big milestone and guess what, our room world really allows kids to create their own personalized space from blankets to pillows, wall decor and so much more. Who remembers getting their first car? Yes, that was a huge milestone. And I wish I had a blinged out steering wheel, but we have it now at Five Below. And I will tell you, it's an unbelievable value, and the kids are going to feel unbelievably special. And we love our pets. Over 23 million pet adoptions happened during the pandemic, and get ready for this little pun. We are [pawsitively] psyched to bring more fun to our furry family members. Yes, we curate the best products each season for our customers. We care about kids and kids care about the planet. That means Five Below cares about the future of the planet. We are striving to be so much more eco conscious with our products and packaging. In our tech world, we have reduced 400,000 pounds of paper and plastic per year with our new cable packaging, which is 100% recyclable. By incorporating less packaging, we are using less cardboard and less plastic. And there's an added benefit. We're just going to save about $1 million per year in freight and packaging on just this one item. Our young customers are caring deeply about the environment, and it's our turn to do our part to help the planet. Didn't you just love that video a few moments ago? I mean, seriously. I am so excited to have the chance to unveil the ever-evolving Five Below prototype. And I want you to think about it like this. Crawl, walk, run. Our first phase was crawl. Five Beyond was simply extreme value items on the shelf. Today, the phase we're unveiling is walk. Think about Five Beyond as a store within a store. It's easy to shop. It's light, it's bright. It's an inviting experience filled with unbelievably great product with impactful signage. Now I cannot imagine what the run phase will be, but we will save that for another time. But honestly, I really am excited about what we're going to unveil today with the iteration of what Five Beyond actually is becoming. It's going from a concept based on items on a shelf to the unveiling of a store within a store. You're going to see it later this afternoon on the store tour. But let me give you a few fun facts. First, we expect mid-single-digit lift for all our remodels to the Five Beyond prototype. Second, we know our customers who buy Five Beyond product spend 2x the amount the typical basket size. And third, we have seen 50% higher units per transaction. Can you blame them? The Five Beyond experiences here and the value distortion is clear. In addition, we are also unveiling our new reimagined tech department, which you're going to also see later on the store tour. We are the pros at bringing disruptive product at extreme value while always focused on relevancy, whether it's a trend, a craze or new licenses. What do we do? We find them. We distort them. Like Joel spoke earlier with our restaurants, squishmallows, slime licker and sensory toys. We love them all because they do expose us to more customers who then love the brand. One of my favorite topics you've heard me speak about is our scale and leverage, and this has allowed us to capture more market share with key licenses with big companies and big brands like Disney, Marvel, Squish and Bugha. Bugha. Yes, he is the Fortnite World Cup Champion, who just claimed his third consecutive Fortnite Champion Series title. He is more than just a gamer. He is a world-class influencer, a champ and he's only available at Five Below. With Bugha, the team collaborated, we create it, and we launched a gaming brand within a champion of himself. It is these exclusive relationships that really allow us to create and bring our own direct-to-retail items. I love to say we're about cool stuff, an amazing product and all that innovation, which keeps us going. But we're also here to inspire. And we do this in a fun and cohesive store environment where merchandising, marketing, visual come together and make everything fun. And you're going to get to see it later in action on the store tour with Tom and [Idalia]. And do not forget to shop. But remember, Extreme fun, extreme value. That's how we do it at Five Below. I'm going to leave you today with this awesome video highlighting one of our current trends squishmallows. It's the power of this video that's going to show you the power of Five Below and the loyalty of our customers. I hope you enjoy it. Thank you and have fun. [Presentation]

Well, that's a fun video. Thank you, Michael, and I couldn't be more proud of the entire merchandising organization for what they've done to create Five Beyond. This is truly going to be an exciting growth opportunity for us. But now let's turn to the supply chain. This is an area we've made a heavy investment in the last 5 years in both people and infrastructure. Speaking of people, we hired Rich Tannenbaum. He's our Senior Vice President of Supply Chain. Encourage you to meet him as well at lunch. Rich reports to Eric Specter, our Chief Administrative Officer. Eric is now going to join me to share the progress we've made on our journey for the supply chain. Eric has been with us since 2014. His basketball number is 336. That's a quadruple for Eric. In addition to supply chain, Eric also leads our planning and allocation teams as well as real estate. Eric has a true end-to-end perspective of everything that impacts our supply chain. Eric?

Thank you, Joel, and welcome, everyone. Really great to see everyone and thanks for joining us this morning. Joel talked about going public in 2012. Back then, we just had 1 small distribution center in Delaware. Our supply chain network looks quite a bit different now. For those that have been following us for a while, you know that we've been making significant investments in our supply chain over the past 4 years, especially focused on our distribution center network so we can quickly and efficiently distribute product to our stores and our customers. Since 2019, we have opened the doors on a brand-new distribution center each year ending with our latest in Indianapolis that's getting ready to be fully operational this spring. Building out this network has been a $400 million investment over the last 4-plus years. We look at this as a strategic investment by purchasing our distribution centers and investing in technology and automation. We saw the importance in controlling our destiny by building out our 5 node distribution center network, servicing most of our stores in 1 to 2 days. We also added e-commerce fulfillment capabilities at 3 of our distribution centers to support our online customers. We have started to see the benefits of scale throughout our supply chain as we have continued to grow and mature our capabilities. For example, we've been able to reduce the average distance to our stores by nearly 40% over the past several years. These benefits have helped us to successfully navigate through the challenges that presented us -- themselves over the last 2 years and continue here into 2022. Scale and control are 2 major themes we think about our global supply chain. First, a few key points on how we leverage scale as we continue to grow. The current distribution network -- center network can service 2,000-plus stores. Our shared inventory model where we have inventory for all channels under the same roof gives us flexibility to manage inventory at stores and to support our omnichannel initiatives, including e-commerce fulfillment, BOPUS and ship from store. Our continued growth and scale of the business enable us to drive efficiencies with speed and accuracy, moving our product faster through the network. We have begun to implement engineered labor standards to drive additional productivity increases to help offset rising wages. We also implemented scanning technology in all distribution centers, decreasing the time it takes our stores to move product from the back door to the floor by eliminating approximately 50 million carton scans annually. Continue to build and develop strong relationships with key vendors globally. These relationships foster innovation, provide greater efficiencies and give us more control over our sourcing, creating a more streamlined and efficient supply chain. For example, these strong relationships enabled us to proactively secure multiyear ocean container contracts that cover approximately 90% of our product demand for '22 and '23. Shifting to control. Our Five Below owned distribution centers give us better control over our network to service both stores and customers. In fact, our existing distribution centers have a total expansion capability of over 1 million square feet to support our upcoming growth. Related to our sourcing strategy, we have plans to increase our direct import penetration to approximately 50%, providing a range of benefits, including product development, and innovation, speed to market and logistics management, all to deliver the WOW product at extreme value that Michael just spoke to. To support the growth of our business, we are continuously diversifying and expanding where we source our products from globally. We've developed important relationships in countries like India and Vietnam, that allow Five Below to deliver amazing values to our customers. We've also established bicoastal consolidation points on the East and West Coast to consolidate domestic vendors product. This drives lower freight costs and improves our upstream visibility. We have had success piloting our own truck fleet with good ROIs while gaining more control in timing, consistency and reliability in delivering product downstream to the stores. At the end of the day, with all the uncertainty in the world, we are taking control of our own destiny.

Thank you, Eric. It's a lot that Eric had to unpack there. It's no small feat what we've accomplished. Think about it, a new 1 million square foot distribution center a year as we continue to take control of our destiny. And it's been on time and on budget, and it's been a massive unlock for the service to our stores. Now speaking of service, let's turn to our fourth driver, the experience in our stores and on digital. And to do that, I wanted to have Judy Werthauser join me on stage. Judy is our Chief Experience Officer. She's been with us since 2019, and her number is 755. And during this "Triple-Double" vision, she's going to experience a triple. Judy leads several of our teams like strategy, data analytics, technology and our people teams. All those teams help us improve our experience. Felipe Zardo is also going to join us on stage with Judy. Felipe's number is 975, and he'll experience a double during this "Triple-Double" vision. Felipe is a great example of the amazing talent we hired during the middle of the pandemic, and he leads all of our digital efforts. So I'm going to turn it over to them for an overview of our journey to improving our experience.

Good morning. It is so great to be here with you all to highlight our focus on our customer and also share more about how we care for our crew and community, all of which helps to fuel our growth. As you heard from Joel, Michael and Eric, we always walk everything back from our customer. And we continue to focus on learning who they are, how they interact with Five Below and how we further shape the experience to expand their engagement with us. One of the critical investments that we have made over the last few years is leveraging data to drive improvements throughout our business. Examples include improving productivity, perhaps maximizing our store potential and perhaps most importantly, deepening our knowledge and relationship with our customer. I'm going to turn it over to Felipe, who's going to share more about how we create and leverage this data to create more amazing and relevant experiences.

As Judy mentioned, every decision we make begins and ends with our customers in mind. This has been true at Five Below since day 1. Our founders, Tom and David would speak to every customer that walked into that original store in Wayne, Pennsylvania, and those interactions provided them key insights that allowed them to dial in both the experience and the assortment. And as the business grew, we layered on other means to collect information, like mining our point-of-sale data and leveraging customer panels to improve our knowledge. But as the business scaled and the quantity of data that we collected increased, it was quickly becoming too transactional and relatively anonymous. We saw an opportunity to get back to that intimate knowledge that Tom and David had in those early years but at scale, by leveraging modern tactics and techniques. To support that vision, we've made strategic investments in data and analytics that are helping us understand the behaviors of individual customers, unlocking richer and deeper insights into how individuals are interacting with the brand. This is providing our teams with data on customer lifetime value, customer product and category affinities and their omnichannel behavior. These insights have broad applications across the entire business to drive sales. But one area that really stands to benefit is marketing. While it is still early days, our teams have started to deploy our new learnings into how we acquire and retain customers, and we are very pleased with our initial results. And ultimately, we see these efforts coming together underneath our Five Below loyalty program by 2025. We are taking our time at this because we simply do not want members in a database. We see an opportunity to harness the innovative thinking that has been the catalyst for our continued success to create a program that builds long-lasting relationships with customers by providing personalization, value and relevance. We also leverage our qualitative and quantitative understanding of our customers as a key input into how we design and deliver amazing experiences for them. Assisted self-checkout is a great example of how we do this in our unique Five Below way. Assisted self-checkout is a result of customer feedback that we received during the busiest days. Customers told us that while they love visiting our stores, waiting in line to pay was a hassle. So our teams got together and delivered a solution that is knocking it out of the park. Customer feedback for assisted self-checkout has been off the charts. They love the speed and convenience that it provides them. And if that wasn't enough, the design also freed up additional space on our sales floor, to allow our merchants to assort even more amazing product. And it pulled our crew out from behind a cash wrap, allowing them to interact with customers where it matters most, on the sales floor. This truly represents the culture of innovation that we have here at Five Below. Assisted self-checkout is already available in 60% of our doors and it will be chain-wide by 2025. George will take you through the experience during the store visit later. Another area I want to highlight today is digital. This is probably not a surprise for you to hear that our customers were asking us that they wanted for more ways to interact with the brand digitally. And our new data and analytics capabilities are telling us that when customers engage both in stores and online, they have higher brand affinity, they have a better retention rate and they spend more, which is why I am so excited about the digital experiences that we are bringing to our customers. In summer of 2020, we deployed our Five Below app to complement our dot-com experience. This put Five Below literally just a touch away. Last year, we provided even more convenience for our customers by enabling same-day delivery in all of our markets. And later this year, we will roll out ship from store in select locations and buy online, pick up in store across the entire chain. This will truly create an omnichannel experience that is seamless for our customers. And this is just the beginning. We have additional investments planned in the coming years to further enhance how customers can interact with Five Below digitally.

At Five Below, we believe an amazing customer experience starts with our crew. And as you can see in these photos, they live our purpose of letting go and having fun. They are a huge part of our winning formula, and we're now 20,000 strong. And that number doubles during holiday. Speaking of doubles, here's a fun fact. We've doubled the size of our crew since 2015, and we'll basically double it again by 2025. We leverage our Five Below way to create a culture where they feel included and belong and bring their unique personality to bring our purpose to life. Connected to our purpose to let go and have fun, are 5 values that we live by every day. WOW our customers where we commit to delivering incredible value and creating a positive difference in the lives of our customers, unleash your passion, aiming to leverage the superpowers of our crew to make a difference, hold the penny hostage showing our commitment to efficiency and reinvesting value for our customer, achieve the impossible, our internal challenge to go beyond and think big and work hard, have fun, build a career where we commit to creating possibilities for our hard-working crew. Our purpose and values drive a highly engaged team, and we're really proud to say we are in the top quartile in overall satisfaction according to Gallup. I'd like to bring our purpose to life for you through the eyes of one of our customers. It's a story from a mom of a little boy named Henry. Last year, Henry, who's from Minnesota had to have back surgery. One of our leaders discovered a post Henry's mom made on Facebook while he was in the hospital. In her post, she said, Henry is really looking forward to getting out of here. He can't wait to go to the store called Five Below. He's requesting 2 toys and 1 candy. Living our purpose of letting go and having fun and creating an amazing experience with unlimited possibilities our store crew sprang into action. But rather than tell you what you -- what they did, I'll let Henry's mom tell you from her next Facebook post. Following Henry's back surgery, Five Below contacted us after some of Henry's followers called in and shared his video from the hospital. They closed down their store and gave Henry a shopping experience of a lifetime. We couldn't believe how amazing they made this experience for him. Shout out to Five Below in St. Cloud, the one we frequent the most. Creating moments and memories like this for Henry are at the heart of our purpose. Our crew made all the difference to this 1 family. And what they did, it isn't in our employee handbook or our training guide. It's not something we teach. It's a spirit that lives in our team every day. I think Henry has become a customer for life. The value of creating a positive difference extends beyond the walls of our stores and distribution centers and into our communities. There's nothing that gives our crew more pride than serving the communities in which we work. Take a look at some of the different ways we partner with local charities to make a difference. And of course, our partners focus on kids in need, and we are proud to be in a position to contribute. This year, we're excited to set a goal of $10 million in giving. And that means that by the end of this year, we will have raised $40 million since going public. In fact, our St. Jude campaign is currently running. And we invite you all to participate in this giving campaign later today when you visit our store. And on behalf of our customers, crew and St. Jude, thank you. Our focus on building an incredible experience in each store we operate and each community we live in, starting with our crew is a huge differentiator for us. Our customers love Five Below, and we are just scratching the surface of the amazing relationships that we can build with them as we continue to learn more about who they are. We have a saying here at Five Below, there's nothing but upside. The combination of our focus on customer, crew and community to drive our experience positions us well for our next stage of growth. Thank you.

Thank you, Judy. Thank you, Felipe. As you can tell, experience is at the heart and soul of everything we do. Stories like the one Judy shared happen every day at Five Below, and that's what's so amazing about this brand. Now I want to turn our attention to our fifth and final driver of our "Triple-Double" growth vision. Joining me now is George Hill. He's our Chief Retail Officer, and George leads our entire stores organization. George has been with us since 2017, and his number is 555. That's a double for George. He is also -- the stores organization is also, in many ways, the recipient of and must execute all our growth initiatives. So who better to share the vision of our growth than George Hill. George?

Thank you, Joel. Good morning, everyone. Again, how are you doing today? That was a little bit of active participation there. Sorry about that. Okay. Hey, honestly, I couldn't be more excited about the opportunity I have to share with you a vision of our oncoming record growth. So far, you've heard Michael speak to the relevancy of our products and the flexibility of our 8 worlds. Well, that equals growth. Eric spoke to our supply chain infrastructure and the ability to build capacity to help grow our business. Well, that equals supporting our growth. Judy and Felipe, you just heard from spoke to a deep understanding of our customers, of our crew and the importance we place on serving our communities. And ultimately, this informs, it shapes and it guides our growth. To be clear, we've been a high-growth retailer, and let me tell you something. We're going to continue to be a high-growth retailer. How much growth? Well, earlier you heard Joel speak to when he unveiled our "Triple-Double." And I'm going to provide you context, more context of what this really means. We'll triple our U.S. store base growing from 1,200 stores today to over 3,500 stores by 2030. Listen to me. That's 10x as many stores as we had just in 2015. We'll double our top line and we'll more than double our earnings per share by 2025. And as I said, our supportable store base potential now is to operate over 3,500 stores in the U.S. Said another way, we believe Five Below anywhere. We believe in that deeply, and here's how. We're expanding into new geographical markets. And as we continue to scale outside our home base of the Northeast, we are encouraged by our new store opportunities. For instance, growth in states like Texas, in California and in Florida. They provided much bigger opportunities than we had first originally planned. And those states now have a larger store count than our home state of Pennsylvania. We continue working with leading analytics firm to help define our future growth, identifying more opportunities for Five Below anywhere across the U.S. Our urban opportunities are stronger than we originally thought, too. In fact, in 2022, we'll open 15 new stores in urban markets, 11 of those will be right inside New York City. We've learned and are executing on our ability to densify suburban markets, and I'll show you an example of that in just a moment. In addition, we continue to be very encouraged by the performance in our smaller semi-rural towns. This is what we think of internally as a semi-rural surprise with several stores exceeding our initial sales volume expectations. As an example, our Flowood, Mississippi store ranked in the top 5 overall stores for us in total volume last year. And like Flowood, some of our top-performing stores are in these smaller semi-rural markets, including towns like Ashland, Kentucky; Charleston, West Virginia; and Hammond, Louisiana, and that's just to name a few. Another example of innovation, you heard Joel speak to when he first started, innovation is about Five Beyond -- excuse me, Five Below anywhere is our recent store opening in a working distribution center. Now that's a first. So as we continue to see strong performances across these diverse markets, combining store growth with our emerging digital experience you heard Felipe speak to, we've no doubt created a model that enables Five Below anywhere. And as I mentioned previously, we have a unique opportunity to densify store locations inside established markets. So as an example, here's a view of our oldest market, or DMA in our hometown of Philadelphia. I wanted to share this market with you specifically because it's one of our oldest -- it's our oldest market, and it's one of our most dense. And yet you will see significant growth opportunities. This is also an example of how we will realize our overall store potential now and again, over 3,500 stores by 2030. So let's take this journey together. We opened our first store in Wayne, PA in 2002. At the time, we believed we could grow this market to about 20 stores. As the success of our brand and our value offering continued to grow, in 2012, we were proud to say we opened our 30th store in the Philly market. And over the next 10 years, we grew our store count in Philly an additional 30 stores. To that end, we will finish this year 2022, with over 60 stores in the Philadelphia market. That's more than double where we were in 2012. And you know what, we're not even close to being finished. So here's the future view of our hometown. Over the coming years, we believe we can double our store base again, successfully densifying the market to over 120 stores. Now you talk about Five Below anywhere. That's big. And as you can see, we're rapidly becoming a coast-to-coast, border-to-border retailer. We are committed to accelerating new store growth over several new markets and over the years to come to deliver on our long-term potential. Our plan is to open 375 to 400 stores over the next 2 years. We also plan to open approximately 550 to 600 stores in fiscals '24 and '25 combined. That's approximately 1,000 new stores across 48 states. So it took us 18 years to open our first 1,000 stores. This plan has us opening another 1,000 stores in just 4 years. And we couldn't be more focused, more determined and more encouraged to do exactly that. But this story isn't just about store unit growth. It's all of that and beyond. Just like I talked about Five Below anywhere, we also recognize our growth strategy is about Five Beyond everywhere. We see Five Beyond as a significant part of our growth strategy and an unlock to help us grow comp store sales. Our forecast of 3% to 5% comps is built on the strength of our 8 worlds and the addition of Five Beyond everywhere in the coming years. We've assembled a comprehensive strategy to get to over 80% of our stores into the format we unveiled today, and you'll see later on by 2025. This strategy leverages our new store build-out and our ability to convert about 750 of our existing store base into this new format. And as I speak to conversions, recognize these conversions take less than 2 weeks, and we don't close a store to execute them. Look, in the end, we're going to go profitable sales, whether it's a new store or a comp store, whether the customer is new to the brand or has been with us for years, whether they're digitally native or brick-and-mortar centric. Five Below is poised for growth, and we'll continue to have a relentless focus on our customer and Five Beyond everywhere. In closing, recognize the entire enterprise. Everyone in this room, everyone that's out there in the Five Below universe has the passion, has the vision and has the expertise to triple our store base, to double our top line and more than double our bottom line. That's our "Triple-Double". Thank you. Joel?

Thank you, George. Not only is George excited. The entire team is excited about our future. Our future for the "Triple-Double". And as I said at the beginning, it's all about 5 drivers. Innovation, never standing still, product, celebrating the rituals of life and the milestones are growing up. Supply chain, we're going to control our destiny, experience. It's about connecting, connecting with our customer, our crew and our community and growth, we've got Five Below anywhere. Five Beyond everywhere. We are accelerating. We are stronger than ever. And now we're going to take about a 15-minute break. And when we come back at exactly 10:20, we'll restart the streaming webcast. And with that, we'll do guidance in a Q&A session. Before we break, we're going to run a quick video and then I'll see you back up here in 15 minutes. Enjoy some of that candy, get a cup of coffee, and the restrooms are out that way. We'll see you all in 15 minutes. Let's run the video. [Break]

All right. If everybody could take their seats, we will continue. Okay. Welcome back, everyone. I'm here to walk you through the details of our long-term vision and algorithm and our expectations for annual performance in fiscal year 2023 through 2025, before providing some color on our fiscal 2022 guidance and color. As Joel and George, they mentioned our "Triple-Double" Vision. So we see a huge opportunity to triple our current store count over time. And by 2025, we expect to double sales to $5.6 billion and more than double EPS to $10. On a 4-year CAGR basis from 2021 through 2025, this represents 18.6% growth in sales and 20% growth in EPS. Beginning in fiscal 2023, we plan to generate leverage on our sales growth and achieve an approximate 14% operating margin by 2025. As Joel mentioned earlier, our 20/20 through 2020 algorithm called for sales growth of 20%, driven by high-teens unit growth and low single-digit comparable sales growth with more than 20% growth in earnings. As you've heard so far today, we will continue to be a high-growth retailer. Our 20/20 vision is to grow total sales from 2023 to 2025 by 20% per year, with over 75% of that growth coming from new stores. On a 3-year CAGR basis from 2022 to 2025, we expect to continue high-teens unit growth. We also expect to grow comparable sales on an annual basis beginning in 2023 from 3% to 5%. Now we've got multiple drivers for this expected sales growth including increased penetration of five beyond, growth in our e-commerce business, new customer acquisition through increased brand awareness, customer data and new trends, sales lifts from remodels and conversions and selective merchandise price increases in response to inflation. New stores will continue to be the main driver of our growth. The performance and returns on our new stores have remained remarkably consistent. The pro forma model we presented at our IPO 10 years ago, has grown significantly in both total sales and store profitability. Our new store model for the new 5 beyond prototype calls for a year 1 AUV of approximately $2.2 million. Four-wall EBITDA margin of approximately 25% with a net cash investment to open a new store of approximately $400,000. Based on these metrics, our payback period will remain industry-leading at well under a year. I'll say that again. Our payback period will remain well under a year. And we also expect new store productivity to continue to be strong. Now on to guidance for the first quarter and the full year fiscal 2022. As you've heard, 2022 will be a unique year for us: first, we'll be lapping significant government stimulus, including the third round of payments that began in March of last year, plus accelerated child tax credits in the back half of the year; second, we'll still be operating in an environment with residual pandemic impacts, primarily on supply chains and store openings; third, there are ongoing inflationary pressures, especially and most recently, fuel costs; and fourth, we'll be cycling a very strong year of multiple trends. The first quarter will be the most difficult comparison given the timing of last year's stimulus payments. We have now cycled about 2 weeks of these stimulus payments. And with the later Easter this year, the key holiday selling weeks are still ahead of us. Our outlook for the first quarter includes approximately -- opening approximately 35 new stores, sales of $644 million to $658 million, comps of flat to negative 2%, diluted EPS of $0.54 to $0.62 and a 25% effective tax rate. At the midpoint of this guidance, we expect operating margin to be down about 400 basis points over last year with a little less than 1/3 of that decline in gross margin driven primarily by fixed cost deleverage on a negative 1% comp. And the remainder in SG&A expenses, driven by fixed cost deleverage, higher store wages and increased marketing. As Joel and George noted, we plan to open between 375 and 400 new stores over the next 2 years. For 2022, our initial plans were to open 200 stores. However, due to industry-wide construction and permitting delays, we've had to shift certain store openings later into the back half of 2022 and first half of 2023. As a result, we now expect to open approximately 160 stores in 2022. Also, about 100 to 110 openings in the second half of this year, including approximately 20 openings in January. This later cadence of store openings in 2022 has a significant impact on sales for the year and unadjusted new store productivity. In addition, during the year, we expect to complete about 45 remodels and about 200 conversions to the new five beyond prototype. So for fiscal 2022, we expect sales of $3.16 billion to $3.26 billion with comps in the flat to positive 3% range. We expect the second quarter to be the easiest comparison of the year, with operating margin declines moderating from first quarter levels. We expect comps for the back half of the year to be in line with our full year guidance. We also expect operating margin of about 12.7% at the midpoint of guidance, with a decline versus last year driven primarily by higher SG&A expenses from a more normalized marketing spend. At the high end of our guidance, operating margin is assumed to be relatively flat year-on-year. And with an effective tax rate of 25%, we expect diluted EPS of $5.19 to $5.70. For the year, we will spend approximately $220 million in gross CapEx, excluding tenant allowances, primarily for opening new stores and executing remodels, opening a new distribution center in Indiana and investing in systems and infrastructure. And for other details related to our results, please refer to our earnings press release. And with that, I'll turn it back over to Joel. Joel?

Thank you, Ken. As you can tell, 2022 has been a celebration of milestones. It's our 20th anniversary since we were born. It's our tenth anniversary since our IPO. And today, once again unveils another amazing growth vision. So five below expects to double in the next 4 years, double in the next 4 years. With that, I'll have Christiane join us back up on stage, and she will lead us in a Q&A session. Christiane?

[Operator Instructions] I'll start with John since he was the first person I spoke to this morning.

All right. John Heinbockel, Guggenheim. Two, real quick second one. The first is when you think about five beyond and expanding the TAM, right, and not just product but also age. What do you think that does in terms of an older customer, right, and keeping you relevant for a longer period of time? And secondly, you didn't mention e-gaming, which still seems like a huge opportunity long term. How do you think that plays out over the 3-year period?

Yes, John, great question. As you think about TAM, go back to what Michael talked about celebrating the rituals of life and the milestones are growing up. And quite honestly, I mean, that's how we go to market every day. And our merchants just continue to find new rituals that we can bring to market and new milestones. Ear Piercing is a great example of a milestone that in today's world happens in an overwhelming majority of our customer. Look, having worked at Toys"R"Us for 12 years, what we don't want to do, though, is go the other direction and become an infant and pre-school store. And we're constantly trying to -- how do we continue to keep the store aging up so that the younger kids aspire to go to Five Below. And that's how we wake up and think about it all the time. You asked about gaming. Look, we still believe strongly in gaming. Michael went into details about Bugha. Unfortunately, the pandemic really -- we took a setback on being able to open local hosts. Those are starting to come back to life with live events. And we'll have to now see how those do is certainly that wasn't in the program where we started it 2 years ago, ironically, right before the pandemic happened. And it's taken much longer to get live gaming going back, but that's what we expect to happen. So it's not booked into anything planned.

All right. I'll continue with this table, Chuck, and then Matt.

Chuck Grom from Gordon Haskett. Ken, can you talk about the puts and takes ahead for operating margins? 14% is a nice uptick from the [ 13.3% ] you just reported, but when you think about doubling sales over the next few years, it seems pretty conservative. Just wondering what the potential headwinds can be, particularly since it seems like the DC rollout is complete, at least for the time being.

Yes. No, good question, Chuck. As you -- we started with '22, so we gave our '22 guidance, right, a little bit down at the high end of our guidance. Operating margin is relatively in line with last year and then, in our vision, growing to a 14% operating margin out through 2025. And if you look at some of the things we're talking about, right, the drivers: We got a 3% to 5% comp that we're looking at in those years '23 through '25. You heard Eric talk about the development of our distribution network and the efficiencies that we're driving there, so really, how we're going to see that happening, you're probably going to see the leverage happening in both gross margin and down in SG&A as we should have the ability to lever those fixed costs at the comp that we're putting out there.

I'll just add, Chuck, it's important you also look backwards. We were stuck at 12% for a number of years.

Yes.

And so this last year was a big unlock, and then taking it to 14% will be another unlock. And what also hasn't fundamentally changed is, as we continue to get scale benefits, especially on the gross margin side, we're going to let Michael reinvest that into product. We are not going to let quality sacrificed, but 14% is a nice expansion, and you know what, we'll see where we can go from there. Where are we going, Christiane?

Matt.

Matt.

Matt.

Great. Matt Boss, JPMorgan. So maybe Joel. So your top line has proven more resilient in the past year with times of consumer stress. I guess, what do you think differentiates the model to be well positioned in today's dynamic macro backdrop? And then Ken, on comps, could you help bridge drivers of the 3% to 5% same-store sales in this plan relative to low single digits in the past plan? And maybe just I'll throw in the near term. Any comments on the last couple of weeks lapping up against the stimulus that gives you maybe increased confidence?

Look. I think, Matt, you've got to go back to what Michael outlined in the 8 worlds. I think that is really at the heart of what makes this concept so unique. One of the worst things about Five Below is its name. One of the best things about Five Below is its name because the name -- is it a cold-weather store? What is Five Below? But the best part about it is, every time there's a new trend, it gives Michael's team the license to go after that trend. And there's very few retailers that can go at that breadth of a trend, and that's what's really helped us continue to grow this business. And I think, look, nobody has been through this inflation. Certainly, when it happened back in the '70s, I was riding in my dad's car sitting in a long gas line, and -- but what has happened and every time there's been a consumer setback is Five Below wins, right? As consumer looks for value, that's a real opportunity for us.

Yes. And then Matt, on the comp drivers we spoke about. And you heard a lot about it today. I'll go back to Michael and the presentation on five beyond and just the excitement around that product. And we see that as a key driver of the comps in the business as we're going forward. You heard Felipe talk about what we're now going to learn about our customer. I mean we've come all this way really with just transactional and, as he would call it, anonymous data. And now we're going to have true customer behavior and be able to react to that and respond to that, so we think we have the ability to not only garner new customers but also retain customers longer. And then you have things like e-com and the increase in the penetration of e-com. We also talked about the remodels and the conversions, a significant amount of those that we think will also help drive comps and drive the top line there.

Look. We've been experimenting with remodels for quite some time. And with what we put up on the board there today, you can tell we're ready to accelerate. And that will really probably be the single biggest driver with five beyond.

Yes. And then I think the last part of your question was around the where we are now going up against that stimulus. We're about 2 weeks into it versus when that third payment came out. And as we always do, when we provide our guidance, we really look at where we are today. And we also need to look forward and see if there's any anniversaries or anomalies. This year is a little bit different. There are some shifts going on with Easter, but based on our guidance, you can see kind of how we feel about where we are, so far, guiding to that flat to negative 2%, up against some pretty significant payments and impact that you all remember from last year's first quarter.

Look. You can all back into how January was. March is playing out pretty much, we think, the same way, but with -- landing at a relatively close to flat comp is pretty impressive given what we're up against from last year.

Yes.

Over to Michael.

It's Michael Lasser from UBS. Over the next few years, you're expecting your per-store volumes to approach $3 million in light of probably going into less-productive real estate. The 2,000th store is probably going to go into an area that's maybe less densely populated than the 50th store. And there might be more competition. You've got Dollar General with pOpshelf. Is there risk that you're going to see diminishing productivity of your boxes as you grow?

Michael, great question. And think back to what George shared with you when we're outlining growth. What's really been surprising is just the opposite, and it's why we're kind of saying Five Below anywhere. We've continued to push into smaller markets. We've continued to push into more dense markets. And places like Flowood, Mississippi being in our top 5 stores, and then George rattled off a bunch of other examples, probably gives us the confidence that just the opposite is going to happen. Five Below is still a unique concept. We are the only national kids general merchandise retailer. And so I -- that's a scenario that could happen, but right now we don't really have any signs that it's going to kind of go the direction you just outlined. I don't know. Ken, anything?

No. I think you're dead on, Joel. Michael, I mean, we called it out too. The average unit volumes now of existing stores is $2.5 million. I mean, honestly, that's pretty impressive for what we've now achieved. And we look back too. During the pandemic, we saw a lift in the business; and really we saw it across all different types of stores in all areas and all locations. And yes, there is a little bit of a dispersion in sales in that group, existing stores, between densities, populations and different factors, but we're pretty confident in that ability to be able to grow that based on what we've seen. And again, Joel called out in -- some of those semi-rural areas that have been really big surprises for us and the outperformance there and then now the potential to grow in urban locations. Because I think the pandemic opened up some opportunities for us there.

Where are we going, Christiane?

Simeon.

Simeon Gutman, Morgan Stanley. You put the slide up. The 4-wall EBITDA margin on the new build is around 25%. I want to talk about incremental return on capital and the scope for that to maybe be a little bit bigger, granted the focus here was on growth. I think you showed it was a $400,000 build-out. Question is the math going forward is going to be better on comp. You're internalizing some parts of the business. You talked about transportation. I know it's not about margin, but is there scope for that to be better over time given some of the positive things happening [ on the top -- in the ] margin?

Yes, I'll take that one. The...

Yes, you get that.

You're right, Simeon. We laid out -- and again that's our model, right? We see the stores starting off of that $2.2 million productivity and about 25% EBITDA. You mentioned distribution. That's not in the -- that's not the number that's in the 4-wall EBITDA, but the amounts that are in there: Remember you've got wages in there. And we're going to make sure we continue to be competitive and we get the appropriate talent out there from a wage perspective. And you probably heard us talk about last year. We increased our wages towards the end of the year last year, so there might be some of that that's continuing to move forward, but there is an opportunity to improve that down the road. But in terms of a model, that's what we're looking at in terms of laying out. And we think again that's pretty healthy. And really you saw the significant increase in 4-wall EBITDA from when we started 10 years ago, and I think I called it out in my presentation. It's still amazing how consistent the performance is from store to store. So no matter if you're looking at a store that's based in New York, where your rents are higher, obviously the store productivities are higher; or a store, say, out in Flowood, Mississippi, again a pretty tight range in terms of EBITDA margins there, but that's what we expect going forward.

Karen.

Right here in the middle, to your left.

Karen Short, Barclays. I just want to clarify one thing, and then I had a bigger question. The road to 14%, is that more or less linear as we go '23, '24, '25? And just to clarify: That's largely leveraged on SG&A, with the idea that you would continue to reinvest gross margin to continue to improve -- maintain product quality and improve product quality, but the bigger question I had was just on the loyalty program because that seems like a big unlock potential, so I'm wondering. Why not move a little faster on that?

Ken, if you want to discuss margin, and then I'll take on the loyalty.

Yes. So again, we see operating margin moving to that 14% when we get to 2025. I mean there's going to be puts and takes as we go through the years. I guess it's relatively linear once you start in '23 and go out to '25. We should see, as you would guess, on a 3% to 5% comp, again, the investments that we've made in the distribution facilities in the network, that we should see some leverage there. Obviously, fixed costs, there's occupancy and cost of goods sold. To Joel's point, we could very well reinvest some of that back into the product and gross margin. And then when you look at SG&A, it would be on the fixed-cost components of SG&A where see that leverage.

And it is relatively linear...

Yes, yes.

Look. On the loyalty program, I know it's a topic that's come up for many years here, and I'll take accountability for that one. And I think it'd be really easy, quite honestly, Karen, to speed that up, but -- and Felipe talked about it in detail. Hopefully, you caught some of what he said. The other side of it, though -- and I hope [ you all will reserve ] when you get to the store later today. Where we've chosen to go is on the prototype, right, and then completely committed to improving the experience in our store. And we just haven't run out of ideas, and we just keep getting better and better at developing an amazing experience. And I think, honestly, there's a lot of retailers that launch a loyalty program for the sake of trying to save their business model. And we're in a fortunate spot that we don't have to play defense. We can play offense. Now having said that, we don't have blinders on. Felipe and our entire IT organization is working on getting to know our customer better. Adding tokenization in, we need a year to kind of have that all caught up, is a key driver to it. We're -- we didn't have color, style, size before. That's a key driver to it. So there's a lot of foundational things that, honestly, we're just doing it the right way so that, when we do it, it's just not a program but it's something that really the customer gets excited about. And right now the energy and effort, especially after 2 years of the pandemic and a lot of other distractions, has been into the store experience, but look. We put it on the slide. We usually pretty much deliver what we say we're going to do. That's what Five Below is great at, and we'll have it done by '25.

Scot.

Scot Ciccarelli, Truist Securities. So for your 3% to 5% comp expectation, can you help us understand how much of a driver of the five beyond program is supposed to be to that? Because you did mention that's one of the keys, number one. Number two, when you think about whether it's 2025, 2030, how much do you expect the $5-plus price point to be as a percent of sales when we kind of think about that algorithm?

I'll take the second half of that, and Ken can unpack the same-store sales side of it. What hasn't changed and what we've learned from a lot of customer intercepts is there's still a lot of value in Five Below. And the customer really doesn't want us to lose Five Below, and we're not planning to. As we've created five beyond, one of the impacts of it is how do you keep it separate and segregated. And what you're going to see today is really the direction we're heading with five beyond. And what you're going to see is a lot of room and a lot of tech. We've broken the $5 price point. That is all contained inside of five beyond. And it -- truly, as Michael said, we have migrated from "items on a shelf" to a "store within a store" concept. And our goal, Scot, is to continue to keep it that way; that when somebody walks into the front half of that store, it still overwhelming, I'm talking 90%-plus, feels like it's Five Below. And that's the commitment Michael has. It's a commitment the merchants have. It's a commitment he gets from Ken and the finance team, but you'll see it today firsthand. But we are keeping it pretty much contained back there. If anything, we'll just continue to grow the size of our prototype so that, that part stays part and parcel and true to five beyond and the front stays true to Five Below...

Right. And then Scot, your other question, around the comp drivers in five beyond. Five beyond is probably going to play a pretty big role in that. We went through a lot of the factors behind that both through a combination of remodels and conversions. I mean you heard us talk about the number of remodels that we're going to do this year; and then conversions, right, 200 conversions that we're going to do. And we'll talk about that too a little bit later, and then just the impact of five beyond [ for ] the new stores and then when they start to turn comp and the ability to drive that. So I would put that as probably one of the largest drivers out there for us, but again we're still -- we're going to be looking to increase customer acquisition and retention, which should help to drive traffic also on an overall basis.

Ed.

Ed Kelly, Wells Fargo. I was curious. Michael has brought a lot of energy and success on the merchandising side since he's come to Five Below. And I'm curious as to what his thoughts are on the opportunity that's still ahead in that perspective. How excited are you today versus what you were when you got there? And then as part of that, how are you thinking about lapping some of the trends like [indiscernible], for instance, as we think about the remainder of this year?

Yes. Look. I mean one of the advantages of an Investor Day is we're all here. So Michael, do you want to talk about some of that...

Yes. I think it's great. Thank you very much. Hopefully, you still recognize the passion. So I love that part. Listen. I will say this. We have still an unbelievable runway. And I'm also fortunate that I have 2 great senior vice presidents and [ GMMs ] that share that passion. You're going to get a chance to meet them on the store tour, but I said this when I came into the company over 7 years ago: We have so much runway at $1 to $5, and we're going to continue to do it. What five beyond -- look at that picture back there. What five beyond does, it creates that white space that we're going to go and capture. We're going to capture that, continue to be relevant, use the flexibility we have within our worlds. And then we still have the $1 to $5 business. As it relates to the trends, I remember when there's this trend called Frozen happen. And we were like, oh, just let it go, but we actually went out and we actually killed it. And then a spinner came. And we were like, [ how are we going to do ] the spinner? We did it again. What we continue to do is recognize them. We find them and we'll distort them. And I say that constantly and it's not just us saying it. It's proof that we actually know what our customer is looking for and we listen to them. And again the great merchant team that we have really is a young, strong group that goes after and utilizes it. And you'll see that -- see us continue to do it. As I say to the team, it's our J-O-Bs and we're going to continue to go out there and find it. And when you see the store today, remember it's an experience. That's really what we continue to do.

Yes. And Ed, I'll tell you Michael is starting to see some other trends emerge, but like always, we kind of keep those under our hat until they take off, for obvious reasons. But I think what you'll see in the store today will give you a pretty good sense that he hasn't run out of ideas. We're going to continue to develop on the rituals of life and milestones of growing up. Thanks, Michael.

Great. Joe.

Where are we going, Christiane?

Joe.

Joe.

Joe, yes.

Joe Feldman, Telsey Advisory Group. Actually this might be more for Michael, but what are you guys displacing? And I guess we'll see it in the store, but with all the new merchandising things -- like you talked about ear piercings and balloons and even the pet category. Like that takes space, so how are you repositioning the store and rethinking other categories within it?

Yes. That's a great question. I was mentioning it to someone earlier. I think I was talking [ to Matt ] about it. We've actually been really strong with our efficiency. And [indiscernible] will call out certain areas where we've actually made the store much more efficient. We've done some great things with new fixturing. So you'll see we actually haven't displaced classifications. It actually have allowed us to be smarter, become more efficient with the box and then go after and distort those other classifications, like in pet, like in the ear piercing and like you'll see with balloons. When you -- when Joel talked about keeping the five beyond area confined, we have higher walls. And those wing walls have allowed us higher efficiency [ with one of your footage ]. So let me be really clear. You're going to see in that store everything that you'd see in an existing store, except for the expanded Five Beyond, the balloon and the ear piercing.

Yes. I would, Michael, just add, like, if you think about tech as a specific example. Our iPhone chargers used to be this big. And while Michael's team shrunk it, you'll also now see wireless in there. So the customer changed. It's not that those cables aren't -- it's still important to us. It's just we don't need as much space and the customer has shifted. We're also going to do a little Q&A after the tour, so if you don't see some really good examples of that during the tour, ask the question again.

Good call, yes.

Yes, yes.

Yes, plus the packaging got smaller.

And packaging got smaller, yes. That's helped a lot. It's true.

All right, Brad.

Brad Thomas, KeyBanc Capital Markets. I wanted to follow up on the remodeling plans; and hoping you can give us an update on where the vintage stores track in terms of sales per store versus the fresh, versus the beyond. And then there's been a trend of the stores getting bigger as you've done these new formats. Dovetailing off of Joe's question, with all these interesting merchandising initiatives that you have, do we think the stores should get bigger than they are today?

Look. I think -- and Ken, you can add any of the details, but look. We will probably continue to evolve the size of the prototype, but the difference is we're not moving on the size of the prototype until we have ideas to put in it. And so what it does is it provides for a nice, constant evolution. And so certainly, some of those original vintage stores, we will have to move to a bigger box. Or we'll remodel them to a smaller prototype, but we have a lot of options there. The classic, which was our original store, 4,000 square feet, we only have -- we have 8 left...

[ Less ]...

Yes, less than 10, yes.

So as the vintage comes up on its -- their tenure initial real estate lease, we have the option to either take some bigger space, keep them in that and remodel it, but I think what you're going to see today is relatively in line with the size of the box and where we're heading.

Yes. I think you also asked about the kind of productivities of the types of stores. It's interesting because the -- those older stores, they've been around for longer, so they've been comping. And it's one of the groups that actually the reopening from the pandemic benefited pretty significantly. So we, you don't really see a huge dispersion around the performance of stores based on the type. It's some more some other factors that are impacting it, but again I think Michael mentioned it too. The lift that we would expect when we remodel the store and go to a five beyond is that 500 basis point lift, so we feel good about that. And then you have the conversions also just to go from a five beyond to this new five beyond prototype.

[ Andrea ], your table.

Yes, Scott Mushkin from R5 Capital. So we've done a lot of modeling on the potential downside to Five Below of some of this, the Ukraine war. And stimulus really starts to hurt you guys. When you look at your -- because we have a hockey stick here obviously when we look at 2025. When you look at your downside modeling, how do you think of the business in a very aggressively negative or in a recession environment? How do you think it will perform?

Well, as it relates to the stimulus, the overwhelming majority of that piece is almost behind us. January is already behind us. We're in the middle of the March, April 1. And when you get to the child tax credit in the back half of the year, that is this big compared to what we're going through now. And you can tell by what Ken outlined. The difference in our first quarter comp to our ultimate comp for the year shows you that we've got pretty good data now on we're getting through that. And we really have the overwhelming big piece behind us. As it relates to some of the downsides you're talking to about inflation, war, et cetera, like I said earlier, while we don't have an exact replica of this inflation like this was -- long before Five Below was born, every time there's been some sort of consumer setback, take '08 as an example, Five Below has been a winner in that. And I see no reason why that wouldn't be the case this time as well as there's a customer who seeks value. And the last thing I would tell you. 12 years of Toys"R"Us, the last place parents cut back is on their kids. They are going to do everything they can to make sure that the kids have a great experience around a birthday, around Christmas, around Hanukkah, whatever those rituals in life that they're going through, so I'm not near as pessimistic as your model might outline.

Yes. And Scott, as you can hear from Joel, we tend to be a little more positive in terms of our approach and our outlook, but we do the downside. We look at the downside. And when we look at it, again we think we have huge opportunities from a top line perspective. I mean you heard it today in terms of the product and the experience in the store, inflation that we've all talked about, right? We've been talking about this for the last year, when they said it was going to be transitory and it's still here with us, but you also heard the things that we can do to be able to offset those input costs: the efficiencies that we're driving. Again you heard about our distribution network and being -- the ability to lever that now, some of the things we're doing with our own fleet, the scale of the business. Scale is a huge benefit for us throughout the entire organization, whether it's talent, whether it's vendor relationships, whatever it is, to really help drive down those costs. So again we feel pretty good about what we're kind of laying out and the levers that we have to pull to be able to offset any of those downsides.

The other intangible is people, Ken.

People, yes.

We laughed earlier. "I'll take this one." Ken and I have been doing this so long together. We just kind of finish each other's sentences, but that team over there has been with us too. And so we all kind of know how each other work. And it really takes a lot of the unknowns out of the equation as we kind of move from year to year or quarter to quarter.

Yes, good call.

Christiane?

We'll go over to you.

David Shepley, Windancer Holdings. I was hoping you could share some more detail on your customer demographic by age. One of the things I'm always fascinated by when I shop the store is how wide it is. You clearly have your core teen, tween customer. And I do my best with my girls to get them there, but I am just curious if you have any breadth of metrics that you could share in the millennial demographic or mom, grandparent, thing of that -- things of that nature.

Yes. I mean look. We always say the store was created for teens and tweens but [ then also finish ] with a universal appeal for all. And that's the other unique aspect of this brand is that, as our awareness continues to grow, more and more non-teens and -tweens continue to discover us. The only area I'm really dogmatic about is we're not going to allow it to go downward, infants and preschool. John, you asked earlier. If anything, we're expanding it for older age groups. Squishmallows is a great example of this trend. Boy, the people you see in line on our Sunday squish, it's big with college-age girls. We're seeing lots of teens in there. And quite honestly, it's attracting a collector group as well. It's not the age of everybody in this room. And so I know I'm not giving you the specifics. We can get those for you, but what you're really hearing from me is on the household income side we've got a big segment under 50,000, but shockingly -- what are we, about 1/4 over 100,000?

Yes, over 100,000, yes.

Yes, [ over 1/4 ]. It's about 1/3 under 50,000 and 1/4...

Over 100,000, yes.

Over 100,000. So we can go through every single one of them. And it's pretty amazing how wide it continues to get. And I think, as Michael and the team, we stay focused on staying older. That's only going to bode well for us.

Paul.

Paul Lejuez, Citi. 2 questions. One, just curious how you're thinking about rent. Are you seeing better deals as you're expanding the stores at the pace that you're opening? How do you think about rent as a percent of sales over time? Is that a lever in the model? Do you get any leverage on that? And then second, just curious how you're thinking about e-com as you think about that long-term big sales number that you put out there. What role does e-com play as a percent of sales? Or just how it can kind of become an omnichannel initiative for you even more than it is today, if that's the way you're thinking.

Yes, let me start with the second half of that. And Ken can give you specifics on rent. I was having this conversation at break with a couple of you. E-com, we think of as icing on the cake, not the cake. And what I mean by that is with our core customers, teens and tweens. They start with that phone. That is their life. That is where everything begins and ends. Having said that, we -- you're not seeing us do free shipping. You're not seeing us trying to juice the business for the sake of juicing the business, same philosophy with loyalty, but we need to have a digital experience with our customer. And what Felipe and team are working on is not only e-commerce. We got to get -- hey, look. We've got to be really good at that, right? You've got to be able to order on it from us and get what you ordered and get it in a timely basis. Now you're going to have to pay for shipping for that. At the same time, Felipe also outlined many initiatives are coming forward this year that truly creates an omni environment. We have not had BOPIS. We had to get color, style, size done so that we could really deliver on that. So that's coming later this year. So we're implementing many of the core tenets of omnichannel, but it's a part of a bigger belief that it's more about a digital experience. It's about brand awareness. It's about having a connection with the customer, not only e-commerce but having some fun with the brand. And I think you're going to see us continue to get better with that experience online. Don't just think e-commerce, but just think about the experience, as it is as good in the stores from that perspective. Ken?

Yes. And then Paul, on rents: We've got a phenomenal real estate team. They've been doing this for a long time. That team is growing. And you can see by the results that we've talked about in terms of especially the year 1 economics and how consistent they've been. From a specific rent perspective, those guys are -- the team is cutting deals all the time. I don't think we've seen anything dramatic in terms of the shifts in rents recently. The one callout I'll have, and it was really pandemic related, was the opportunities in the urban locations to really kind of open up for us. We are going to open a good amount of urban locations this year, and the majority of those are going to be in New York City. And that -- it wasn't too long ago that New York City was too far removed for us to really work from an economic standpoint. And those reductions in rents have really opened it up. And then I think you talked about kind of going forward as we grow with that 3% to 5% comp. That's one of the things that I called out, I think, for Karen's question too in the levers that we would be able to and should be able to lever on occupancy costs as we move forward.

[indiscernible] boroughs...

The boroughs, yes.

And Manhattan.

But it does include Manhattan, yes.

Yes. We just -- George, where did we just open?

Union Square...

Union Square, yes.

Yes. We just opened in Union Square a few weeks ago, and you're going to see us open in Times Square this year.

Times Square.

So there's been some great opportunities there. It's actually rent going the other way.

Joel, you mentioned style, color, size. I don't think we've talked about that with this group. Do you want to try to explain it?

Yes. Look. A lot of our products in the past came as assortments. That works fine for an in-store customer. They come in and they can choose pink or black or white. For an online customer, we had to really break it down so that, if you ordered pink, we didn't send you white. If you ordered black, we didn't send you pink. And so over the last year, a combination of several teams, planning and allocations, IT, we've -- the merchandising group -- really broken down everything so that it doesn't come as an assortment but that -- as somebody now orders online. And quite honestly, it helps us just to have better visibility into our sell-throughs and will only make us stronger both in our stores and online.

Back of the room.

Blair Bodek, Pacifica Capital Investments. I wonder, as you enter this next stage of growth, if you can talk about if your thinking on returning capital to shareholders has changed at all.

Yes. I think one of the biggest changes for us going forward -- and as you've seen the significant investment that we've made over the past few years not just in the distribution network but also in things like systems and IT -- I mean we've made some pretty large upgrades over the last few years. That's going to continue as we move forward. We always talk about the foundation that we have to build to keep this successful growth going, and that's a combination of people. That's systems and infrastructure, but we see -- we do see an improvement in that return on invested capital as we move forward. And then in terms of allocating the capital, as you know, obviously with the returns that we see on new stores, that's our best investment at this stage. It's to continue to do that. And we'll continue to invest in the foundation [ of ] business to be able to grow it. And you also heard us, and we've talked about it before, in terms of stock buybacks and repurchases, that we'll look at that opportunistically. And we called out today that we actually took advantage of that in January. So I think that's kind of the -- some of the drivers and the combination of that as we're going forward.

Kate.

In the back, yes.

Kate McShane, Goldman Sachs. I just wanted to ask a question about the supply chain. I know you mentioned the opportunity for adding 1 million more square feet to your existing DC network. Just could you maybe talk to us about the cadence over the next few years, about how you plan that? What about any kind of future DC growth? And then just one question around the truck fleet: Is there a goal in mind in terms of how much of that you'd like to own?

Yes. I think the theme in all of that is, as you just said, control. It's controlling our destiny. And all the recent distribution centers we've built, we own the land. We built the building. And the expansion opportunities in those collective DCs adds up to about 1 million square feet. If we do nothing, the current network gets us easily to 2,000 stores. We have the option then to add that square footage that then takes you up to the 2,500. Kate, I think ultimately, as real estate finds more and more opportunities, that will drive where we go next, whether it's expanding the current network or building something like up in the Pacific Northwest or a second facility in the Northeast, as those are probably the next 2 opportunities, but for the most part, there's a pretty -- you're going to see a couple-year pause now on the need to build any distribution centers. It will have some impact on operating income but not near like the old days when we, what -- used to run, what, 60 to 80 bps of drag.

Yes, yes, yes. The -- we shouldn't really see any material impact of bringing on that incremental square footage in the distribution network. And I think she had another question, on the truck fleet...

It's, look, no goal. I think it's -- something we called out that started last year is just a really good example of controlling our destiny. It has a very nice payback for us. Rich and the team are really evaluating how far we can take that into our network, but all the signs, so far, have been very positive. Considered a pilot at this point in time, but we also put it up there. As you understand, the culture of innovation happens not only in our stores but in every department throughout the organization.

Go ahead.

Corey Tarlowe with Jefferies. First, just broadly, could you talk about the health of your core customer perhaps by income level? And then secondarily, you mentioned that you're increasing your direct import penetration to 50%, I believe. One, where is that today? And then two, what countries do you expect to be of greater emphasis going forward?

Yes, the 50% is where it will be this year. So that's specifically talking current, 2022. Look. China is still the overwhelming majority of where the imports come from, although we have reduced that reliance for a number of years now as we continue to move into other countries like India and Vietnam. And Andy, our Senior Vice President of Product Development, is here. And he'd be another great person to meet, as he's joined us recently. And we'll continue to explore other countries, and the supply chain is truly becoming global. As far as the core customer goes, look. It's really hard to decipher exactly what's happening with the core customer as we're right in the middle of lapping the stimulus from last year. And it's playing out very similar to what we thought it would be once we saw the January results. We haven't seen anything on top of that, so I think it's a great question. We need a little more time to kind of get through the end of that and see if there's any lingering impacts, but it's all accounted for in the guidance Ken outlined for you.

Yes. And just -- and to that end, I mean, that's the -- I mean the lower-end customer is the one that's probably going to be the most stressed, right, from an inflationary standpoint, but again as you heard from Joel and we've seen in the past, that's where we do well. And the customer comes back to us because that's where the value really steps up. And you've heard it from everybody here today and especially Michael in terms of the product. So we think we're really well positioned to be able to support that customer during difficult times.

All right, has every table had a chance to ask a question? All right, so we'll go to the online. Are there any questions -- online that would like to ask?

Yes, there were a few. Jeremy Hamblin from Craig-Hallum: He says the guidance for FY '22 is much wider than typical. Can you discuss the factors for why there is that much uncertainty contributing to that wider guide?

Sure. I mean I think we've talked about it a little bit today. We're talking about lapping stimulus and we're talking about inflationary times moving forward. And we are going to be up against some pretty significant trends out there that we had last year, so really I think what you're looking at is that there is a little bit more of uncertainty and just a little bit wider range than we normally do to be able to cover that, but again we feel confident in terms of what we've seen so far this year. And one of the biggest anniversaries and challenges is going up against the stimulus. So based on what we've seen, so far, you see how that's translated into our guide for the first quarter.

Look. I think it's also, Ken, why so many retailers and companies, for that matter, last 2 years haven't given guidance.

Right.

And I think, while we could have gone down that route as we sit here unveiling for you all a long-term Triple-Double vision, we needed to help you understand where we're going with some specifics. And so our guide gives you a range of potential outcomes.

Outcomes, yes.

But Michael, back to your pessimism, but I'll tell you what. Given that we're almost now through -- or halfway through the stimulus from last year, I think -- you tell me how the war is going to play out, how inflation is going to play out. We think long term, though, we'll end up a winner in that as customers turn to value.

And there's one from Anthony Chukumba at Loop. Of the incremental new store potential you outlined, about 1,000 incremental stores, can you talk about the mix of those stores, whether it's new market versus existing markets; just drill down...

Yes, real quick. I mean it's going to -- the overwhelming majority will be in the existing markets. It's one of the very reasons George highlighted Philadelphia as an example where we're going to densify that from 60 to 120 stores. Very few new markets, and quite honestly, that's been the case for the last several years, so really no change in strategy. All right.

All right, any last question before we wrap it up? Okay, great. Well, thanks for all the questions. And I'm happy to answer them in the coming weeks, as is Ken. And we look forward to continuing the dialogue.