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Five Below, Inc. (NASDAQ:FIVE) Q3 2023 Earnings Call Transcript

Five Below, Inc. (NASDAQ:FIVE) Q3 2023 Earnings Call Transcript November 29, 2023

Five Below, Inc. beats earnings expectations. Reported EPS is $0.26, expectations were $0.24.

Operator: Good day and welcome to the Five Below Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Christiane Pelz, Vice President of Investor Relations. Please go ahead.

Christiane Pelz: Thanks, Gary. Good afternoon, everyone, and thanks for joining us today for Five Below’s third quarter 2023 financial results conference call. On today's call are Joel Anderson, President and Chief Executive Officer; and Kristy Chipman, Chief Financial Officer and Treasurer. After management has made their formal remarks, we will open the call to questions. Please limit yourself to one question to enable us to accommodate everyone in the queue. I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.

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Those risks and uncertainties are described in the press release and our SEC filings. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements. If you do not have a copy of today’s press release, you may obtain one by visiting the Investor Relations page of our website at fivebelow.com. I will now turn the call over to Joel.

Joel Anderson: Thank you, Christiane, and thanks, everyone, for joining us for our third quarter 2023 earnings call. We are very pleased with Five Below's financial performance and operational execution in the third quarter. We exceeded our guidance on sales, comps and earnings and our comparable sales results were remarkably consistent with the first two quarters of the year. We opened a record 74 new stores while continuing to successfully convert stores to the new Five Beyond format, which also drove new customers to our stores. The Five Beyond format now accounts for approximately 50% of the comparable store base. In addition, we made progress on optimizing inventory and finalized preparations for the holiday. Now, on to the specific results for the third quarter.

We delivered sales growth of over 14% to $736 million and a 2.5% comp sales increase, which continued to be driven by transactions. Comp transactions, which are our proxy for traffic increased approximately 3%. This increase represented our fourth consecutive quarter of positive comp transactions. We believe this demonstrates the relevancy of our extreme value and fun shopping experience. Diluted earnings per share for the third quarter came in at $0.26, $0.01 above the high end of our guidance. Many of the trends we've seen through several quarters continued throughout the third quarter, and we assured our assortment reflected them. As we have shared with you in prior quarters, we continue to see our customers focused on needs-based product, which for us is primarily seen in our consumables offering in the Candy World and beauty department.

In addition, our unwavering focus on value is strongly resonating with our customer as reflected in discretionary category strength in games and toys and our seasonal offering with Halloween. Hello Kitty, Squish, Anime and Collectibles were also very popular and the license business returned to a more normalized sales level. In what most would consider a still challenging backdrop, we performed well and made progress against the five key strategic pillars that support Five Below's long-term triple double vision. I'll provide a quick update on each. The first pillar is store expansion, the driver of our long-term growth. In the third quarter, we opened a record 74 new stores across 31 states. One of these openings in Alaska, Wisconsin made our top 25 fall grand opening list.

We remain on track to achieve the goal of opening over 200 stores and expect to complete new store openings next week. Our real estate teams have built a strong pipeline of new stores for 2024 and have also started working on 2025 stores. As we have been able to secure leases earlier in the year, we are making meaningful progress towards returning to historical store opening cadence where we complete the majority of our store openings by Thanksgiving. This will also result in progress towards a 50-50 store opening cadence for the first half versus second half of the year. Moving to the second pillar, store potential. We announced the new Five Beyond prototype in March of 2022 and have been very pleased with the customer response and the performance of the stores converted into this format.

These stores are driving traffic, they're attracting new customers and they're retaining more current customers. They are driving a mid-single-digit comp outperformance in the first year post conversion and the small subset of stores that have entered their second year post conversion are delivering a positive comp. As I said earlier, at the end of the third quarter, approximately 50% of the store comp base was in this format, and we will continue to convert stores next year. Beyond the conversions, we also see a large opportunity to evolve the Five Beyond product assortment and over time, grow the penetration of these products, which will benefit top line sales. The third pillar is product and brand strategy. As you know, delivering WOW product is who we are and what we do and is key to our success.

Our merchants hunt down new disruptive product at extreme value with the flexibility of our 8 worlds. They have ample opportunity to adjust as trends change. For example, in Q3, our merchants grew the Halloween assortment, sourcing new to core and costumes, including incredible huge inflatables for the front yard and light up face masks. Our customers love the new products we brought this assortment to life through our social media channels. Five Below's presence on social media is growing with a focus on TikTok, Facebook, Instagram and YouTube. We believe we have established Five Below as the go-to brand for value and fun, though a big opportunity remains to increase brand awareness. The investments we have made thus far in integrating data and analytics with digital marketing are delivering.

We are pleased with the positive trends we've seen in both customer acquisition and retention. The fourth pillar, inventory optimization, is another area where we have made meaningful progress in order to drive sales and maximize profits. As I mentioned before, this is a pillar Ken is leading as COO. Our teams are focused on improving inventory productivity by leveraging more sophisticated processes, technology, and analytics. We are developing methods that will improve our ability to predict demand further optimize inventory levels and track the movement of product through the supply chain. As a result of the team's efforts under this pillar, we are well-positioned with inventory levels going into the all-important holiday season. The fifth pillar, crew innovation focuses on the store crew and the pipeline of talent that is critical to achieving our aggressive growth.

A family happily shopping for everyday items in a specialty retail store.
A family happily shopping for everyday items in a specialty retail store.

At this time of the year, our primary focus is on hiring and training seasonal associates in time for the holidays. Over 20,000 seasonal associates will be working in our stores and ship centers, integrating each of these seasonal workers takes a lot of effort, and I want to thank the stores, the ship centers, and the recruiting teams are going the extra mile to ensure their smooth onboarding and a great shopping experience for our customers in the peak selling weeks. In summary, we are very pleased with our third quarter financial results and operational accomplishments. As I've mentioned in the past, we turned from a store wants in quarters one through three, into a store needs in the fourth quarter. Our customers need to buy gifts, whether for their kids or their nieces, nephews or grandchildren or even office co-workers and we are the perfect place to find that awesome gift at an incredible value.

Our merchants have sourced an amazing line of fresh and trend-right products at outstanding values. We believe our customers will love our holiday assortment ranging from warm and fuzzy plush lounge, pants and blankets, holiday Tees, Marvel action figures and more. While the biggest holiday weeks are still ahead of us, we are really pleased with the start to our fourth quarter. With that, I'll turn it over to Kristy to review the financials and our outlook in more detail.

Kristy Chipman: Thanks Joel and good afternoon everyone. I will begin my remarks with a review of our third quarter results and then provide guidance for the fourth quarter and the full year. As Joel said, we are pleased to report results that exceeded our guidance. Our sales for the third quarter of 2023 increased 14.2% to $736.4 million from $645 million reported in the third quarter of 2022. Comparable sales increased by 2.5%, with a comp transaction increase of 3.1%, partially offset by a comp ticket decrease of 0.6%. This decrease in comp ticket was driven by lower units per transaction, partially offset by an increase in the average unit retail price, similar to what we have seen for several quarters now. We opened 74 new stores across 31 states in the third quarter compared to 40 new stores opened in the third quarter last year.

We continue to be pleased with the productivity of our new locations. We ended the quarter with 1,481 stores, an increase of 189 stores or growth of approximately 15% versus 1,292 stores at the end of the third quarter of 2022. Gross profit for the third quarter of 2023 was up 7.2% to $222.8 million versus $207.8 million in the third quarter of 2022. Gross margin decreased by approximately 190 basis points to 30.3% as anticipated. This decline was primarily driven by recording actual shrink results for the stores that completed their physical inventories in August as well as recording the true-up of shrink reserves for the full chain, which we shared during our last quarter's earnings call. As a percentage of sales, SG&A for the third quarter of 2023 decreased approximately 90 basis points to 28.1% versus last year's third quarter, driven primarily by the timing of marketing spend and leverage on certain store-related expenses.

Operating income finished at $16.1 million versus $20.9 million in the third quarter of 2022, resulting in a decrease in operating margin of approximately 100 basis points to 2.2%. Net interest income was $3.4 million as compared to $0.5 million in the third quarter of 2022 as we benefited from higher interest rates and a larger average cash balance versus last year. Our effective tax rate for the third quarter of 2023 was 25.4% compared to 24.6% in the third quarter of 2022. Net income for the third quarter of 2022 was $14.6 million versus net income of $16.1 million last year. Earnings per diluted share for the third quarter was $0.26 compared to last year's earnings per diluted share of $0.29. During the quarter, we repurchased approximately 500,000 shares at an average price of $158.63, for a total of approximately $80 million.

We ended the third quarter with $163 million in cash, cash equivalents and investments and no debt, including nothing outstanding on our $225 million line of credit. Inventory at the end of the third quarter was $763 million as compared to $702 million at the end of the third quarter last year. On an average per-store basis, inventory decreased 5.1% year-on-year. As last year, we strategically ordered inventory earlier to ensure strong in-stock position. We are pleased with the level and quality of our inventory going into this holiday season. Now on to guidance for the fourth quarter and full year. My remarks on full year guidance will refer to the 53-week year unless otherwise noted. Our guidance does not include any potential future impact from share-based accounting or share repurchases.

As Joel mentioned, we are pleased with our November results and start to the fourth quarter. For the fourth quarter of 2023, net sales are expected to be in the range of $1.32 billion to $1.35 billion, an increase of 17.6% to 20.2%. Comp sales for the quarter are anticipated to increase between 2% and 3%. And we are on track to open over 60 stores before the end of the quarter as 43 have already opened in November. We expect an operating margin of 20.5% to 20.8% in the fourth quarter of 2023. The approximate 50 basis points of leverage at the midpoint is due to the anticipated freight benefits, partially offset by the shrink headwind as well as lapping benefits from lower incentive comp and certain cost management strategies we put in place last year.

As it relates to shrink, we are working on many initiatives throughout the organization to help mitigate the anticipated increase we have forecasted, and we will update you on the progress of these efforts at year-end. The estimated effective tax rate is expected to be approximately 26%. Net income is expected to be in the range of $201 million to $211 million, representing a growth rate of approximately 17.3% to 23.2% over 2022. Diluted earnings per share for the fourth quarter of fiscal 2023 is expected to be $3.64 to $3.80 versus $3.07 in diluted earnings per share in the fourth quarter of fiscal 2022, with the share repurchases in the third quarter contributing approximately $0.03. For the full year of fiscal 2023, we are increasing the low end of our expected sales by $40 million to $3.54 billion and are reiterating the high end of expected sales at $3.57 billion, representing a sales increase in the range of 15.1% to 16%.

Comp sales are expected to increase approximately 2.5%, which implies a 17.8% compound annual growth rate, or CAGR on total sales for the four-year period since 2019. We are still expecting operating margin of 11.1% at the midpoint, compared with 11.2% in 2022. The effective tax rate for the year is expected to be approximately 25.5%. Net income is expected to be in the range of $300 million to $310 million, representing a growth rate of approximately 14.7% to 18.5% over 2022. Diluted earnings per share are expected to be in the range of $5.40 to $5.56, implying year-over-year growth of 15.1% to 18.6%. On a 52-week comparative basis, growth for diluted earnings per share is implied to be 13.4% to 16.8%. Our fully diluted share count estimate for the year is 55.6 million shares, reflecting a lower share count as a result of the shares we repurchased in September.

The benefit related to the share repurchases completed in the third quarter is approximately $0.03 for the full year. With respect to CapEx, we still plan to spend in total approximately $335 million in gross CapEx, excluding the impact of tenant allowances. This reflects the opening of over 200 new stores, converting over 400 store locations to the Five Beyond format commencing expansions to our distribution centers in Georgia and Arizona and investing in technology. In summary, we delivered a better-than-expected third quarter, and while we have over two-third of the holiday shopping season ahead of us, we are pleased with the beginning of the fourth quarter. In this uncertain macro environment, we continue to see strong transaction growth from both new and returning customers and new store performance is in line with our expectations, demonstrating continued relevancy of the brand and our Triple-Double strategy.

We will remain disciplined in the deployment of capital and in managing expenses while we continue to use our strong balance sheet to fuel the growth that is in front of us. For all other details related to our results and guidance, please refer to our earnings press release. And with that, I would like to turn the call back over to the operator for the question-and-answer session. Operator?

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