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

We're going to get started. Good morning, everyone. My name is Seth Sigman. I am the U.S. hardline broadline food retail analyst at Barclays. My pleasure to have the Five Below management team at our conference this year. Dan Sullivan, CFO. Also in the audience, we have Christiana Pelz, VP IR. Thank you, guys, for being here. Appreciate it. Five Below has delivered incredible top line growth over the last 18 months, double-digit comps in 2025, a record start to '26 on the second quarter earnings. You also raised it in again for 2026. So there's a lot happening here. Seems to be a very different growth story in the last 18 months. Something is really changing here.

So Dan, I'd love to hear from your perspective key top line drivers, what's driving the growth right now? What is new? What's different in the business? And ultimately, what do you think is having the most impact On these strong results.

Yes.Good morning, Seth. Good to see you. Good morning, everyone. Thank you for spending the time with us. we've got a lot of great news and a lot of great things to share and talk about. I think for me, if I sort of unpack this, what you're seeing in the business right now is a very clear strategy that was put in place by Winnie Park, our CEO, when she joined just under 2 years ago, you're seeing proof points that, that strategy is resonating quite well. So let me try to talk to you a little bit about that. I think most importantly, it is a strategy absolutely grounded in clear focus who the customer is. And I say that because I think that is super important. We welcome all customers, obviously, to our brand and our franchise, but we are focused on Gen alpha, GenZ and millennial moms and dads. And when you have that clarity at your core, you start to design and execute a strategy that resonates with that set of cohorts. The strategy itself is sort of 3-pronged. First and foremost, it is about a relentless focus on trend-right new interesting product. If you know Winnie's background and you tracked her career, you would certainly see CEO capabilities, but you would see at the heart a merchant and someone who lives for product and who really understands customer. And so I think the first thing that you would see that she did in her time over the last 18 months is reinvigorate the brand through the product lens. That means new, that means different. That means trend right and that has sort of been the guidepost for what we've been doing. I think the second element then is the in-store experience and how do we bring the product to life, how do we create for our customers, the treasure hunt and the newness and the discovery that is so important to our brand. And then the third piece is how do we talk to our customers differently. The marketing muscles that we are building in the organization around better understanding not only who that customer is, where do they live? -- and how do we continue to bring our brand to them in that space. And so all 3 of these are at different stages in their maturation. All 3 are contributing to what you are seeing in the results. And then I would probably add a fourth piece, which is how we operate as an organization. It is all about collaboration. It is all about agility, and it is a relentless focus on executing against the strategy. And so we've got a very clear strategy, Seth. We've got a very clear customer we're trying to serve and we are executing that strategy better. And so what you see then in the last 12 months to 15 months, and we just posted these results last week. It was our fifth straight double-digit comp quarter. I would argue you could look at it as almost our strongest quarter to date because it was a double-digit comp quarter while cycling a double-digit comp quarter. And in the quarter, we anniversaried pricing. So we didn't have that tailwind behind us. So we are seeing really clear proof points that this strategy is resonating and that this growth is durable.

We'll talk about some of the specific product drivers, but I think 1 of the other takeaways has been the breadth of the performance. Can you elaborate on that, maybe across the store base, across cohorts, across categories as a starting point?

Sure. Yes. This is perhaps one of the more exciting parts to the story is the breadth of growth that we're delivering. And what we're seeing here is across all income cohorts across all demos across all geographies across all vintages of stores we're seeing this growth. So it gives you sort of an idea of how widely -- this strategy is resonating this new focus on assortment and product and newness is resonating because you just don't see that level of growth across all of those dynamics. And so we're certainly encouraged with what we're seeing, and I will continue to say, it is early in what we're doing. The proof points that we are delivering here, we still see as early proof points as we're starting to build capabilities and durability.

Okay. Great. And then you talked a little about this on the last call, but trend items. So in this case, it's squishy dumping, which I think we have some here somewhere that's played a large role in the strong comp growth. Can you talk about the trend, the impact it's having on your business? And how do you think about the contribution?

Yes. Look, we get this question a lot, and you probably are aware of this specific trend item that Seth is referencing the squishy dumping. We were very clear in the earnings call that it contributed about low single digits to our comp profile, and that was pretty consistent in Q1 and Q2. I think if I ladder back though, I think it's important to understand, we are a trend business. We have always been a trend business. We will continue to be a trend business. What is new and different, and this I think goes to the capabilities component I was speaking to is we are better at detecting the trend earlier than we had been in the past and we are far better at amplifying the trend when we see it. And so if you look at this squishy dumping item, which certainly has been a great catalyst for traffic driving and brand awareness, I made clear on that. But what you see is an item that was in the assortment for a couple of years, okay? This wasn't a new item that we discovered or someone else discovered and we bought into. It was there. Our ability to detect trend, our ability to scrape online, our ability to listen socially pointed us in this direction in the fourth quarter -- calendar quarter of last year. We saw some interesting things around how our customers were engaging with this product. And so early detection was key. And then we amplified it. And when I say amplified it, that means we -- in a very unique Five Below way, brought this product to life. We brought it to life in terms of the story around the product, which I think is important for us when we think about our brand. We brought it to life in-store and how we executed against it. We brought it to life as we widened the assortment and brought newness and new interesting products, which we will continue to do over the back half of this year. And so yes, there is an interesting trend item. But I think maybe unlike the past where we may have bought into something and sold through. We see this as an interesting catalyst because we detected it early, and we've amplified it in a meaningful way.

And I'm sure it's top secret, but maybe you could shed some light on maybe the future trends that you see or how you're thinking about that?

Yes. top secret is a good way to describe it. We don't discuss the pipeline. We don't discuss what could be coming next. What I would say is, because of this trend detection capability that we've always had. The merchants have always had a skill as we've worked with vendors and with partners. I think seeing trend early has been core to what we've done. We have now added science to that in some of the tools and the technology that we are building and deploying and if you know Winnie, you would know she spends a lot of her time on social. She is seeing things early, she is passing things along to the merchant team. So you've got this ecosystem now that is sort of historical muscles based on great experience and terrific relationships with vendors. You've got new and emerging capabilities that are being enhanced with science and tech together. We've got a pretty interesting and robust pipeline of things that we think could become something new and different down the road.

So as you think about the growth profile of the business, I think you used the term durable in the past, right? How do you think about the growth rate of this business going forward?

Yes. Look, we're super excited. We're 5 quarters at double-digit -- we've got an updated outlook, as you mentioned, Seth, for the back half of the year. We get the question a lot, how do you comp the comp? And candidly, we see that as a very narrow question. We think the better question is, how do we know this growth is durable. And our conviction that the growth is durable. Based on 2 things. The strategy I described and the proof points that we are seeing in that strategy as it gets executed, but then also this realization, we are so early in this journey. We are so early in building out our marketing capabilities. Our Chief Marketing Officer, has only been with us 15, 16 months and he's certainly the first pure and proper Chief Marketing Officer that we've had. Winnie hasn't even yet hit her 2-year work anniversary. And so as you see these results, which we certainly see through the lens of proof, around the strategy, we're equally excited that it is early, early innings in each of these lanes that we're executing against. What that means as we go forward, time will tell, right? Whether that is a low single digit, mid-single digit today is not the day for us to provide that update. We're simply staying focused on executing the strategy. We've got an exciting outlook for the balance of this year and then certainly in March of next year, we'll talk about 2027. But I think more than the number that we attach to it. I hope you all take away, it's a really compelling strategy, and it's very early in our development.

Given the momentum that you have, especially around some of these product drivers, how do you think about getting that customer back? You mentioned marketing it seems like it's very early innings. So talk about the approach today. What's different about what you've done historically? Because it seems like a big opportunity, a big unlock here.

Yes, it sure is. Seth, you're right. Look, I think the encouraging piece is we are seeing accelerated growth against both retained and new customers, right? And so that, as a macro data point, is exciting, -- it sort of gives you confidence that we're driving that traffic to the store, admittedly, in part fueled by our execution on the trend but also that we're seeing really healthy retention rates. That customer, maybe they're being introduced to 5 for the first time through that experience. They like what they're finding, they're coming back. Like we see that in the early reads and in the early data. Having said that, going back to sort of where we are in the marketing journey, we've really just begun. We're only a year into collecting e-mail capture from our customers and starting to gain some insights on who they are and sort of when they shopped, but we're still doing it through a very general lens. We don't yet have the data or the insights or even the capabilities to talk to that customer uniquely, to curate for that customer specifically to personalize. So the good news is we're starting on the journey to be able to speak to the customer. And what we do know is when we speak to that customer, that customer who's e-mail capture, we've successfully gathered the LTV of that customer is bigger. The frequency of store visit is more and the basket they build when they're with us is more. So that we know. Now we've got to start to build the capabilities and the infrastructure, the talent profiles internally to better talk to that individual. And it's going to take us some time. But again, you can sort of see in the journey here of where we've been a year ago, we didn't have e-mail capture. 18 months ago, we didn't have a Chief Marketing Officer. Now we're starting to progress on a proper CRM journey. And as we build those skills and build those capabilities and are able to talk to our customer cohorts uniquely, we think that's a big unlock.

Okay. Great. I want to shift to store growth. Obviously, the business is comping, but you also have still 1 of the biggest unit growth opportunities in the retail sector today. Previously, you've talked about over 3,500 store opportunities in the U.S., doubling or almost doubling where you are today. How do you think about that target? Why is that the right target? And if there's anything else you can tell us about how the new store economics are playing out, I think that would be helpful.

Sure. Yes. This is perhaps one of the underrepresented interesting facts around Five Below is the new store growth. We have committed to a high single-digit growth profile for new units, but that at 8%, 9%. It's 150 new stores this year as that denominator grows, it will be more next year. And admittedly, when I joined the company, it was probably 1 of the areas that I underappreciated and may have been a bit skeptical about because the comp story is so clear, and you see that, but we are actually growing units now at just over 2,000 stores with a really clear line of sight to 3,500 plus stores. We just entered the Pacific Northwest. That was white space for us a year ago, 9 new stores in that space in theory to a cohort who had never shopped us every 1 of those 9 stores would have set a record for a grand opening at Five Below, but they all opened at the same time. We just moved into our 47th state in Idaho in the quarter that we're in. We have a really, really strong line of sight and strong conviction to that 3,500 plus.Now the economics upon which we do it is simply astonishing. It is absolutely the best dollar return I can get by putting $1 into new store growth. We are seeing 12- to 15-month return time lines and really compelling growth profiles. And so yes, we have this wonderful comp story Equally, we're at 2,000-plus stores today, and we have a clear line of sight that we can almost double that. with a U.S.-focused deployment. So that's the plan. I think we're super encouraged. And if anything, over the last 12 months, you've seen better execution against our new stores. You've seen new store productivity now in the 90% range from -- it was in the 70s, even 18 months ago. So we love all of the signs that we're seeing and highly, highly convicted that, that 3,500 plus is there to be had.

That strong new store productivity, I assume, is also benefiting from some of the trends that existing stores are seeing. So maybe speak to where you think new store productivity can normalize. And then just related to that, it sounds like there has been a change in the real estate process under your leadership. So just walk us through what is actually changing there as you think about site selection.

Yes. And you're absolutely right. Listen, when you're comping double digits, rising tides are going to lift all boats, your new store productivity is going to feel the effects of that and benefit from that. But your second point, Seth, I think, is a really important one. unrelated to that, we took a very different approach to real estate, a very different approach to how we deploy new stores. And it was a bit informed by the learnings that maybe in the past, we had gone too far too fast. We had settled for less than 8 properties -- and we're focused on quantity and needed to rebalance ourselves also focused on quality. So we sort of reengineered the process internally -- we've held a much higher bar to the real estate team on everything from site selection as you look at a market all the way through grand opening. We've put a much stronger criteria on execution inventory levels, labor in the store, just putting our best foot forward as a brand. That process predated me, that started probably 15, 18 months ago, and it's not a coincidence that you are seeing this level of performance in the 25 and 26 vintages. Now and we start to speed that up. I think we can over time. We're certainly not capstraintd, so we have the capital to deploy. We want to mere that the muscles we're building across real estate, dealmaking site selection, execution are structurally strong. We feel really good about that. Now you're left to the third variable of availability of properties, right? And sort of how do you think about new stores and inventory in the market, which is mixed at this point. So we're pleased with the strategy. We see the proof that it's working. We think over time, we can accelerate that. But in the near term, I think that high single-digit growth profile for new units is the right 1 for us.