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

Cool. Thanks, everybody. Paul Lejuez here from Citigroup. With me, we've got the management team of Five Below, CEO, Joel Anderson; CFO, Ken Bull. We're going to try to be very efficient and get through a lot of questions that I'm sure you guys are all wondering.

We'll start with the holiday, guys. Obviously, it's the news of the day. Maybe talk about what you saw during the holiday period, talk about the peaks and valleys that you might have seen. What worked and what didn't, and if there are any surprises, positive or negative?

Yes. Let me kick it off, and Ken, add anything into it. I think the big news of it, Paul, honestly, is your last statement. There were no surprises for the most part. It was -- as we sat there at the beginning of December, on our third quarter call, we came through November, it was fine. We liked Black Friday. We didn't see the lull in the middle of December, which we've seen several years. And honestly, the only surprise on it was probably Mother Nature. That storm at the end certainly hit pretty hard. It went all the way from Mexico to Canada and came across. And so we certainly saw some disruptions from that. But other than that, it was a very good holiday. Trends were strong, Squishmallows, slime lickers, Hello Kitty. And I think that's something that -- I've been here 8 years now. We've really got a good cadence with those, how to get into them, how to get out of them. And it was a really no surprise holiday for us other than if I could have taken away those 2 winter storm events right at the end there. Ken, anything?

Yes. I think you covered it pretty much as planned until we hit those weather events earlier to Christmas. But if you go back to how we spoke about what our expectations in the fourth quarter around product and Five Beyond and marketing -- and the much improved marketing, what that did for us. So our inventory position is much better than last year. All those things really played out for us, even down to operations. We continue to see the assisted self-checkouts in our stores. We have -- about 70% of our stores have that now, really does a good job in terms of controlling the lines and creating an efficiency for customers, especially during those last couple of weeks of the season.

Yes, those -- look, those of you that followed us for a long time know lines have always been a problem in our stores. The assisted self-checkout has really helped us -- now that -- in fact, in our stores, we don't have it, that's probably an opportunity for us.

See the lines, yes.

To keep fixing.

Yes.

Is there anything you would have changed if we go back at the beginning of the season? Anything that they would have done different?

Well, if I went back to the beginning of the year, I probably would have guided the year a lot different for all of you. In all seriousness, I think as we guided on '22 and we thought about how do you come around the horn on all these stimulus payments, inflation, child tax credit, that's something we hadn't been through before. And so trying to get that right was certainly proved out to be more challenging, especially in the first half of the year, Q1 and 2. But as the year went on, we -- the business has improved. We've gotten more of those headwinds behind us. And in fact, 90% of them are behind us now. And it's really now -- I think the story now is about looking forward and talking about '23 and our long-term vision and everything we laid out for everybody at the March Investor Day that kind of got disrupted with some huge inflation, gas prices, war in Ukraine, et cetera, et cetera. But those are all kind of built into it now, and we move forward and get back to stuff we can control.

Yes, we'll get to '23 in a second. Maybe just sticking on holiday for a second. Five Beyond, obviously, a big initiative for you guys. How did that product perform during the holiday? Did you see any lift that you can talk about in those stores? Just maybe give us an update on what you saw. And anything that maybe you learned from the holiday season that influences how you think about for that section of the store for '23?

What I'd share with you on Five Beyond now is we're very pleased with what we saw. So give us a little time. I mean the 10 weeks just ended Saturday. So we know the what, we know the facts, we shared the facts. Now we got to really do all the math, and we've got to really do the analysis to understand what was the lift in Five Beyond versus the rest of the chain because you got to tease out weather and all those kinds of things. But obviously, with our press release this morning, we said we're going to open 400. I would tell you what the teams did great in '22 was execution. So we went from a state in March of '22 with 1 store, and we're sitting here today with 250-ish. So it was a -- we moved really quickly from strategy to execution. And the teams performed, the concept feels really good. We saw lifts in it. What I would tell you, like we've said in the years past, we see roughly twice the spend of a customer that puts Five Beyond in their basket. That basket is about twice the size of a non-Five Beyond basket. All the feedback has been very positive, and we're going to push forward with it. I don't know, Ken, anything else on Five Beyond?

Yes. I think you hit it. Again, more to come, as we get on to the Q4 call and the March call, we'll dig in a little bit more. But we were really pleased with the results of Five Beyond and seeing, to Joel's point, the consistent performance in terms of those lifts that we've been seeing historically. And it was also good to see the increased penetration out there, whether it was in -- whether it was the product itself, we had more SKUs out there, or the increase in the penetration of the Five Beyond format stores. So the customers really responded well to that.

Yes. I would just add, especially for any of you that aren't following us closely, the original launch of Five Beyond was really items on the shelf. And now we're migrating to a store-within-a-store concept. And to Ken's point, we're seeing about twice the penetration of our stores that just kind of have Five Beyond items on the shelf to now the prototype that includes Five Beyond as a concept store.

Yes. Got it. I think one of the things that investors have been pretty impressed with, especially for the holiday season, is that you're going up against some very difficult trends, very difficult comparisons against some very strong trends. Maybe talk about how you're able to comp some of those hot trends and maybe offset some of the fading trends just in terms of innovation perspective.

Yes. Hopefully by now with 10 years as a public company, many, many years sitting up in front of here in quarterly calls, it seems like we're always talking about trends. And I think it all goes back to '17 with that spinner year. And nobody believed we can come around the horn on that spinner year in comp positive, which did happen in '18. But from the beginnings of those times to now, it's really -- it's kind of part of the secret sauce of Five Below. And it's kind of in our DNA and it's not only about getting into a trend but also knowing how to land the plane and get out of it. You're not going to walk into our stores today and see heavy leftovers of past year's trend products. I mean last year, the Poppers was gigantic. You'd be hard pressed you can find a Popper in our store today. So it's as much about getting into it as it is getting out of it. And we're pretty nimble and quick. There's not a lot of bureaucracy in Five Below. When we identify something, we move really quick to get that in the store, test it and then push it out to the stores. And Squish has been a great one. That's -- actually, that's gone on for a couple of years now. But slime lickers emerged really strong this year, Hello Kitty, we're starting to see some licenses appear for the first time. It's nice to see movies starting to come back. That usually then leads to licenses. But now it's just kind of part of the cadence. You get into some, you get out; you get in, you get out. And it's going to hover probably in that low to mid-single digit -- or sorry, mid- to high single digits penetration of our business. And -- but we feel really good about it, and we're in great inventory shape as we move forward. Anything else?

No, again, I think you nailed it. The other thing with the trends too is, again, as Joel mentioned, we love trends, that what we're all about. It's really kind of the mindset that we have around those. We deal with this all the time. The 2 keys is they do help drive traffic and they also bring in new customers. So we continue to see that. And that's really powerful for the growth of the brand as we continue to do that. And as some fall off, although Squish has been out there for a few years, we saw the introduction of new ones come on. And that happens every year. So we're going to see that continuing.

Yes. Great. Let's move over to 2023. We saw in your press release, I think you said 200-plus. Maybe just talk about the new openings next year, the cadence of the new openings. Also, on your last call, I think you alluded to planning the business around a positive comp. Any update to your thoughts there. And I'm sure everyone's going to want to hear about EBIT margin, expansion opportunity, gross margin versus SG&A, puts and pulls. Maybe talk about those things as you think about '23?

Well, let me set the stage, and I'll let Ken cover kind of comp and margin, how to think about that a little bit. But coming out of the pandemic, getting the engine restarted on new stores proved to be tougher than we thought. And it was important that we included that in the press release, although we'll give you all the details as we get to the March meeting. But as you all said in your models, we now feel like the majority of those headwinds related to new stores is largely behind us. We still -- we have line of sight now to about 200 stores -- 200-plus, I don't want to say about. It's going to be over 200. And the cadence is a little off, right? It's going to be more 1/3, 2/3 first half of the year to second half of the year as we continue to get the pipeline filled back up. But so we feel really good about 200 stores. And then the other piece of it is the 400-plus conversion. So we're really moving fast now to convert our fleet from the old prototype into the Five Beyond store within a store prototype, 250 this year, 400 next year. And we'll continue that path into '24 and '25. So over the next few years, really the entire fleet will be transformed into the new prototype. Ken?

Yes. Obviously, that's the key driver, Paul, is the store growth and the unit growth, and we put that out in the Investor Day with the Triple-Double. That's probably 75% of our longer-term growth is coming from unit growth, but you also mentioned the comps, too. When we -- we spoke a little bit about that in terms of what that -- those numbers would be. We talked about a 3% to 5% comp. We're talking about positive comps next year, and we'll give more color on the March call in Q4. From a cadence of those, I mean, as you can tell, we have easier compares in the first half of the year. But again, more to come on the comps. In terms of the operating margins, you mentioned gross margin and SG&A. One of the things we did on our Q3 call to give an indication of where we're going to be for '23, it wasn't guidance but it was a scenario that we gave out there that if we were to achieve a 3% comp, given what we know today, we would see slight leverage over the midpoint of the guidance for this year. And when I say slight, it's 10 to 20 basis points. And we're up against a few challenges next year. We've got lower incentive compensation this year that we're going to anniversary next year. And we spoke a lot this year about the cost management strategies, how we reacted to the reduction in the number of stores and the reduction in sales that took place earlier in the year. I think the teams did a great job coming together with that discipline to reduce costs. So we're going to be up against some of that also next year. But when you look at our scale and growth and other things that are going to happen inside the business, like I said, we do expect slight operating margin leverage over where we'll land this year.

Yes. And what's the macro assumption that you use as you formulate your view for '23 and how you expect the business to perform? What are you thinking about the macro and just the competitive landscape, rational, more rational, less rational?

I'll jump in after you.

Yes. Let me start. Look, I definitely think it's going to be more rational. But at the same time, I mean, there's still macro issues out there that have to get solved. Inflation is not going away overnight. But on the flip side, we've seen gas prices start to come down. And I think a lot of it's going to come down to where does unemployment land. And the nice thing is, assuming there is a recession, we're going into it with full unemployment -- full employment. And that will play a nice factor into mitigating it from being a major recession or anything like that. But forget that, let's take it back to Five Below. For us, I think, regardless of whether it's a hard recession or a soft recession, easy landing or not, value is going to play out. We saw that play out in fourth quarter. Our consumables, candy, snack, HBA, travel, things that are needs-based for us outperformed non-needs based. And there's no reason that doesn't continue into '23 as well. So value is more important than ever. I think retailers that improve their business model during the recession when there -- or sorry, during the pandemic when there was a lot of money out there are going to do very well. And for us, that was a whole new concept. And we're in the process of rolling that out. We sit here with a nice balance sheet. So we're not hamstring on increasing rates or anything like that. So for us, we're set up really nicely to really accentuate value, drive the customer into our store, and they're certainly going to appreciate it more so than ever. Ken?

Yes. I think 2 other concepts to add to what Joel mentioned coming out of the pandemic. And we saw that right there was -- we saw resilience from the team flexibility, innovation, creativity. All those things combined with our model, right, the 8 worlds, give us the ability to really flex wherever that customer may go. I mean Joel mentioned already what we've seen over the last year or so, and it continued through the holiday season was the strength in kind of the needs categories, right? Candy, food, beverage, travel, beauty, areas like that. That the model has the ability to flex, right, with those 8 worlds, and we can really go wherever the customer goes. So that's another piece that's pretty powerful for us no matter what happens from a macro perspective or with the economy.