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

Good morning, everyone. Thanks for joining us. It's my pleasure to introduce Five Below and to moderate this fireside chat. Today, we have with us Winnie Park, Chief Executive Officer of Five Below; and Dan Sullivan, Chief Financial Officer of Five Below. Thank you so much for joining us today.

Thanks for having us.

There's so much to talk about. And so this time, it's going to go very fast. But in the past 2 years, Five Below has undergone quite a bit of change, especially starting with both your new roles. And so Winnie, I wondered if you could maybe now that it's been a year, what has been your biggest learnings about the business? How has your perspective evolved compared to when you first stepped into the role?

Thank you so much, Kate. And we're excited to be here and talk a little bit about the Five Below story, at least for the past 2 years. I think the biggest surprise I've had in the business is how quickly we are able to turn the business around. And if anything, I think it's a testament to the strategy that we put in place, and it's really great to see customers respond to that strategy, but really started with, one, a maniacal focus on the customer. And for us, that meant going back to kids and zoning in on Gen Alpha, really understanding the needs of Gen Z and how they differ from Gen Alpha and then finally, millennial parents, whom we love. And they're always looking for a quick and easy treat for their kids, and we're kind of a one-step destination for that. So I think that, that focus really set us up for success and embedding that in everything we do. The other learning is if you get the product right, they will come. And so with products, we are really moving towards an approach of merchandising that is selling a full assortment as opposed to focusing on one key item. And with that assortment approach curated product storytelling has been so critical. And you add product focus with a way to communicate with the customers via social media and our first-ever world Chief Marketing Officer. And being able to meet customers where they are in social has done tremendous things in terms of driving traffic, engagement and interest. We have just begun the journey of actually capturing customer records, so we can get them to come back and communicate more directly with those customers. The last piece of this is investing in the store experience. We really have invested in terms of getting labor in the stores for kind of the basics of moving products in the back to the front, but also in terms of visual merchandising and making sure that our product stories and that curation of product is really clear. With that, we also simplified pricing. So we went back to the good old fashioned whole price points, $1, $2, $3, $4 and $5, being 80% of the assortment. And stepping up and out, Five Beyond doesn't have to be in a corner of the store in a special area and start with $25. We can integrate those products in line. And so all of those things have been really terrific in terms of getting customers back in the store, engaged with us. And I think they're also the formula for a durable growth story in terms of how we sustain our comp growth, along with a ton of white space opportunity with new store growth. So it's been really, really tremendous.

And you can see that in the stores and obviously in the results. So Dan, I'm going to have kind of a similar question for you. So it's 2 years, Winnie, 1 year for you. Sorry, I misspoke before. What have been your biggest learnings and surprises and observations that you've made about the business in your role?

Yes. I was a huge fan of the business from the outside, both with a bit of jealousy as a competitor and then ultimately as a customer, obviously, my kids grew up. So I thought I knew the business fairly well. Having said that, I think when you get into the organization and you learn the business, I think for me, three things became really clear. One is incredibly powerful business model. It is simplistic in terms of how it translates growth at the top efficiently into growth at the bottom. And that profit then converts to cash pretty seamlessly. I haven't seen many models that work this well with this simplicity. So that was one. I think the second thing is around store growth. And from the outside, when I joined, we were just shy of 2,000 stores. We've said publicly, we see a runway to 3,500 plus here in the U.S. And certainly, I had a question on that. And as I dug in and really got to know the business, spent time with the real estate team I'm incredibly amazed at the line of sight the team had towards that 3,500 plus. In fact, if I were betting today, I'd bet on the plus, I think that's how convicted we are in terms of unit growth, which you just don't see basically a business doing this well that has a clear line of sight to double its stores. And then the third piece, I think, for me, is around the uniqueness of this concept. And I remember when I met with Winnie and we started talking to each other, I said, who's our competitive set? How do we think about that? and she laughed and it wasn't out of arrogance or anything, it was just when you get this model right, when you do what Winnie and the team have done to the assortment to the product, to the newness, we are simply a different concept. We are one of one as Winnie likes to say. And so for me, you don't really expect that level of brand strength, and it creates a tremendous competitive moat for us. So those were my learnings.

Great. So if I can jump back to Winnie. I'm going to go back and forth a little bit. But one thing you had mentioned was the 80% of the $1, $2, $3, $4 and $5 price point and then 5 beyond. But you have been I don't know if aggressive is the right word, but you certainly have pushed towards what you think is appropriate from a higher price point. So could you maybe talk to what you saw that allowed you that confidence to move that direction? And where do you see price points going?

Yes. Great question. I think never waste a crisis would be my motto for the tariffs. And for us, it pushed us to really relook at every item in the line and relative value. And what we discovered is that we could do a lot at $5 and below, but we could pack a ton of value and price points like $7. And it allowed us to do things we couldn't do before, like a really compelling lounge and PJ program. And Five Beyond really stepped all the way up to like $20, $25. But what we've discovered is you can do a lot of great things at $10, $15. And we've taken a very careful approach, and this is really, I think, Five Below's magic is everyone thinks about value and how much cheaper can I get it than the competition? If there's an animatronic ghoul that is 6 feet tall and it's $60 elsewhere, how can we get that at $25, $30 at Five Below? And that's really the approach that we take. So we start with the customer, what is it they want? And then how do we go after the things they want but deliver that amazing relative value. And so I think we've got a lot of opportunity given the fact that the response has been tremendous to things that are above $5 as long as that relative value is packed in.

And Dan, you had mentioned unit growth in the 3,500 plus. Can you share a little bit more about some of the changes maybe that you've made internally in terms of the real estate process and how we should think about the pace of that growth to get to the 3,500-plus?

Sure. Look, we've always been bullish on white space and fill in opportunities and store growth. And so the conviction level that we've had towards how we can grow units has always been quite high. I think in the past, we may have let a focus on quantity of stores, outpace a little bit of quality of locations. And so a little over a year ago, I think the team made the decision to sort of pull back put a little bit more rigor into all aspects of real estate from site selection all the way through to grand opening. And focusing the team on a bit of a higher threshold. So we wanted great sites. We wanted great economics. We wanted to put our best foot forward as a brand when those doors opened, whether it was fill-in or white space and really set a higher bar of what really good looks like. And that admittedly meant we were going to slow down unit growth at the same exact time that we're seeing tremendous, tremendous results from that. So the two are very much related. And so if you look at what we've done in terms of opening new stores, '25, '26, we're talking about a new store productivity level that's in the upper 90% range. Last year, we went into the Pacific Northwest, which was white space for us. Nine new stores, every one of those stores would have set a record for a grand opening except they happen together. So we have real confidence that the model we put in place, the rigor we've put in place, what we've asked the teams to deliver is paying off for us, so we like that. In terms of the pace from here, I think high single-digit unit growth is still the right algorithm for us. So whatever it is, 7%, 8%, 9%. That number will increase in terms of boxes we open simply as the denominator gets bigger. We're not capital constrained. So that's the good news. This is all about us continuing to operate and execute at a really high level and obviously subject to market availability and inventory.

Thank you for that. I think you mentioned the Pacific Northwest wouldn't have been an area that you thought you could open in the past. Again, what's giving you the confidence that entering these new markets is going to be so successful?

It's really interesting. I was always bullish on the Pacific Northwest. And I just look at the simple fact that we are a destination for kids. Are there kids there? Can we be a resource? We want to find the right real estate and had our eyes on the right real estate and we were opportunistic with Party City going out of business in terms of claiming real A locations. And with the openings being so amazing and sustained business momentum, we're going to go after and fill in that white space in that market. But I see so much opportunity for us in general. In my home of Chattanooga, Tennessee, the two Five Belows are about 45 minutes apart. And there are a lot more kids to be served. So just a lot of opportunity for the brand if we can execute well and if we're choiceful about where we land the stores.

So Winnie, you had mentioned in your recent earnings call, some changes you're making to the store layout and the design, including the back of the store and creating a dedicated World of Play. Could you maybe provide a little bit more detail on the specific initiative and strategic rationale?

Absolutely. Kate, this journey started last year as we started to move the Five Beyond items in line in their respective homes. So Five Beyond was created to be a walled garden in the back of store. It literally was walled off and had its own signage and fixture package as we move those items out, it presented an opportunity to make that area much more productive. And also to make the shopping experience easier. So what happened is inadvertently with those walled -- that big wall in the back of store, customers actually can't sneak to the store. Their shopping journey actually stops at by beyond. You hit the middle aisle and you have to go back. So what we want to do is take those -- detach those wells, take the heights down, so you have clear line of sight. We also generally had our tech section in the back. And we decided that, that should be moved forward because it's not only a trip driver, we think it will reduce shrink. But the real customer-facing idea here is to create a world of play in the back. And it is definitely our strong suit is an area that I think we win and we dominate is in play. And so by creating that world, you put your best foot forward and you get customers to penetrate the store from the front to the back. And so we've started that work in terms of looking at renovating and testing within stores as well as most of our new stores are actually built with play in the back, and we're seeing tremendous results. So that's giving us courage to push that process further. We are also looking at with that change, how do we make the world's more contiguous for customer segments? Gen Alpha gets to shop the back and play. Gen Z may want a world of style, contiguous with beauty as well as room decor. So those thoughts are all percolating. My final ambition is also have a line queue that's super shoppable. So we get the benefit of an additional unit in the basket before you check out.

Great. And then, Dan, is there a potential cost to these changes? And how should we think about the deployment of that and the time line?

Yes. It's largely a modest level of capital, about $40,000 to $45,000 per store to achieve all of the benefits that Winnie discussed. We have already been deploying this sort of new design, new concept as we roll out new stores to do it in the most efficient way that we can, meaning when we're already in the store for resets or PI, physical inventories, we'll use that opportunity. And then, of course, in about a month's time, we'll be knocking on the door of holiday where we would obviously sort of shut this program down and pick it up again in January. And so long story short, I think it's a reasonable level of capital given the benefits that we expect to see. We're going to execute at a really high level and ultimately, the pace will be sort of marked to what the store and the fleet can digest as we work through, obviously, other business priorities.

The question, I think, that we get the most is just the strength of the top line has been so solid. And it's just how do you think about your ability to continue to grow to lap the strong growth? And just what makes you confident that the business can continue to grow from here?

Great question. We've had 5 consecutive quarters of double-digit comps. And we feel like, again, it's a testament to the strategy and the operating model that we've built. We think it's got real legs and durability. And the secret to Five Below is the sustained comp growth along with new unit growth. And I think that what we have built on the comp front is the merchandising approach that is fueled by newness, curated product storytelling. And there's always something new. And there's always a new trend and being able to attack that the way we do with great agility, speed and also do it in a way that the customers know about it because we have a tool we never had in the toolbox before, which is called marketing. And for us, social and engaging in social is not only about storytelling, it's about engaging with customers in terms of what they see, they love, they like. So I think the second piece of that is we've just started capturing customer records. And that is powerful. The ability to build a relationship with a customer over time is super powerful. We still don't have a CRM system. We still don't have leadership in the marketing team to lead that initiative. So really early innings in terms of what we can truly do with marketing because beyond that, there's a question of how do we attack loyalty. So there's a lot left for us to do on that front in terms of driving our own traffic and engagement. And I think the last piece is there's still a lot of opportunity in our stores. There's opportunity in terms of making that customer experience more compelling in terms of getting people to shop the full range of what we offer. And also, we've got finally a new head of stores. We -- my team is finally complete. And I think there's a lot of opportunity in terms of consistency of standards and practices. So that the experience can be that much more consistent every time a customer visits. So a lot of runway ahead of us.

And in that context, Dan, as Five Below continues to grow. How are you thinking about the long-term algorithm of this business?

Yes, that is the interesting question, right? I think historically, we've talked about this business, certainly prior to Winnie or my arrival as a low single-digit comping growth business. That gets harder to defend certainly when you talk about 5 straight quarters of double-digit comp growth. And in fact, I would argue the quarter we just exited was our strongest over the 5 because it was double-digit growth on top of double-digit growth, and as we anniversaried price actions from the year before. So there's certainly a very compelling point that says this business is getting stronger here as we continue. Now what does that lead to then in terms of algorithm top and bottom? Today is not the day for us to get into that. We're certainly focused on all of the areas Winnie discussed in terms of how do we execute against this runway because while we're super proud of what we've done to get here, we're actually more convicted on what lies in front of us to deliver sustainable growth for the business. What I would say is two things as far as how we think about this business going forward. One is the role of growth, unmistakable in terms of both comp and new unit. We see ourselves as a high-growth retailer, and our investments are disproportionately geared to continue that. So that's one. And then secondly, with a growth profile at the top, we also run this business to deliver increased growth at the bottom. So said another way, it's not unreasonable to think that profit growth will continue to outpace top line growth. Part of that is the magic of this model that I talked about earlier. And part of it is the way that we balance both investing to deliver the growth and also leverage and productivity to deliver profit. So that's how we run the business in terms of putting a number and a name to that and the algorithm not for today, but certainly at some point down the road, we will.