Five Below Inc (NASDAQ:FIVE). reported a significant earnings beat for the third quarter of 2024, with earnings per share (EPS) surpassing expectations. The company’s stock showed minimal movement in aftermarket trading, reflecting a cautious but stable investor sentiment.
Key Takeaways
- Five Below's Q3 EPS of $0.42 exceeded the forecast of $0.17.
- Revenue reached $844 million, surpassing the $796 million forecast.
- Stock price remained stable in aftermarket trading, closing at $103.19.
- The company plans to open 228 new stores in 2024.
- Focus on trend-right, high-quality products continues to drive performance.
Company Performance
Five Below's third-quarter results showcased strong financial performance, with sales increasing by 15% to $844 million. The comparable sales growth of 0.6% indicates resilience in a competitive retail environment. The company's performance is bolstered by its focus on trend-right products and efficient store operations. Compared to previous quarters, Five Below has maintained its momentum, aligning with broader positive trends in the retail sector.
Financial Highlights
- Revenue: $844 million, up 15% year-over-year
- Earnings per share: $0.42, compared to $0.26 last year
- Adjusted gross margin: 33.2%, an increase of 290 basis points
- Cash position: $216.6 million, with no debt
Earnings vs. Forecast
Five Below's EPS of $0.42 significantly outperformed the forecasted $0.17, marking a surprise percentage of approximately 147%. This beat is notable compared to previous quarters, where the company has consistently met or slightly exceeded expectations.
Market Reaction
The company's stock showed a slight decrease of 0.01% in aftermarket trading, closing at $103.19. This stability reflects a cautious investor sentiment despite the strong earnings report. The stock remains within its 52-week range, suggesting confidence in its long-term prospects.
Company Outlook
Looking ahead, Five Below anticipates a 5-7% increase in Q4 sales, despite expecting a comparable sales decline of 3-5%. The company plans to open 228 new stores in 2024 and is addressing potential tariff challenges proactively.
Executive Commentary
Tom Bellios, Executive Chairman, emphasized, "We are getting back to our core, focusing on the customer and what they want." Interim CEO Ken Bull added, "When we do trend-right product, high quality, extreme value focused towards kids, we win." These statements highlight the company's strategic focus on product quality and customer satisfaction.
Q&A
During the earnings call, analysts inquired about potential tariff impacts, given that 60% of Five Below's products are sourced from China. The company also discussed its labor investment strategy and efforts to improve store collaboration and efficiency.
Risks and Challenges
- Tariff impacts: With a significant portion of products sourced from China, tariffs could affect costs.
- Market saturation: The rapid expansion plan poses risks of overextension.
- Supply chain issues: Global disruptions could impact inventory and delivery.
- Macroeconomic pressures: Economic downturns could affect consumer spending.
- Competition: The retail sector remains highly competitive, necessitating continuous innovation.
Full transcript - Five Below Inc (FIVE) Q3 2025:
Conference Operator: Please note that this event is being recorded.
: I would
Conference Operator: now like to turn the conference over to Christiana Pels, Investor Relations. Please go ahead.
Christiana Pels, Investor Relations, 5 Below: Thank you, Nick. Good afternoon, everyone, and thanks for joining us today for 5 Below's Q3 2024 Financial Results Conference Call. On today's call are Tom Bellios, Executive Chairman and Founder and Ken Bull, Interim Chief Executive Officer and Chief Operating Officer and Christy Chipman, Chief Financial Officer and Treasurer. After management has made their formal remarks, we will open the call to questions. 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 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. 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. In this presentation, we will refer to our SG and A expenses. For us, SG and A means selling, general and administrative expenses, including payroll and other compensation, marketing and advertising expense, depreciation and amortization expense and other selling and administrative expenses.
Additionally, we will be discussing certain non GAAP financial measures. A reconciliation of these items to U. S. GAAP are included in today's press release. If you do not have a copy of today's press release, you may obtain 1 by visiting the Investor Relations page of our website at 5below.com.
I will now turn the call over to Tom.
Tom Bellios, Executive Chairman and Founder, 5 Below: Thank you, Christiana, and thank you all for joining us today to discuss our Q3 results and business update. We are very pleased with the progress we've made since our second quarter call. The entire 5 Below organization has come together with a refreshed mindset and a focus that is already making an impact. Jen and I have asked a lot of our team. It's been a heavy lift since the Q2.
And I have been so impressed to witness firsthand what we are capable of achieving with this shift. I want to thank our teams across the entire company for their commitment, hard work and execution as we position 5 Below for the opportunities that lie ahead of us. Before I discuss the organizational refocus underway, I want to say how excited we are to announce Winnie Park as our new CEO. The breadth of Winnie's leadership experience across specialty and value retail, especially her merchandising expertise, global sourcing, consumer acumen, and importantly, how she values people and champions organizational culture, all make her uniquely suited for the role. In addition, she brings a deep understanding of the power at the intersection of trend and value.
As you saw in our press release, I am delighted that Ken is continuing in his role as COO. And on behalf of the Board and the entire 5 Below team, I want to thank him for stepping in as Interim CEO. Ken's expertise and deep knowledge of our business was integral in setting a refocus in motion and will continue to be as we execute on our strategic priorities. In my role as Executive Chairman, I'm excited to work alongside Winnie and Ken. We now have a powerful combination of skills and experience that positions us well to realize our full potential.
In the 3 short months since we last spoke, we've made meaningful strides to refocus the organization and are operating with a sense of urgency to address the areas of the business we outlined on our last call product, value and store experience. While we are off to an encouraging start, we have a ways to go to deliver the performance that we believe this company is capable of. Our vision for 5 remains the same, to be the best destination for teens and preteens and the YES! Store for parents. We are getting back to our core, focusing on the customer and what they want.
Work is underway to edit our assortment, leverage our scale and deliver newness and trend right high quality product at an amazing value, while at the same time improving store experience and optimizing our cost structure. We have a long runway of growth with significant white space available to us. And we are working to ensure we are properly positioned to capitalize on this opportunity. I've always been passionate about working back from the customer and maintaining an unwavering commitment delivering on the 5 below promise of extreme value, trend right product and a fun store experience. I'm excited about our future and I'm confident in our team's ability to achieve the vision we've put before them.
And with that, I will now hand it over to Ken. Ken?
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Thanks, Tom, and good afternoon, everyone. I'll make some comments on the Q3 results and then share progress updates on our key focus areas of product and value and store experience. Then Christy will discuss more details on our results and outlook for the rest of the year. But before I get into results, I want to add how excited I am to welcome Winnie to the team. Her customer centric experience, team oriented leadership style and deep focus on people, both customers and crew, make her a great fit.
I look forward to partnering with Winnie to unlock our full potential and drive the next phase of 5 Below's growth. I also want to take a moment to acknowledge and recognize the incredible contribution of all our teams. It has been a very busy 5 months and what they have accomplished has been and is significant. Now on to our results. Sales in the 3rd quarter increased 15 percent to $844,000,000 with a comp increase of 0.6 percent.
Adjusted EPS was $0.42 These results were ahead of our guidance. Overall, we saw improved sales across a broader group of worlds and categories compared to the 2nd quarter. Our operational Q2. Our operational execution across all areas of the business also improved and drove a better customer experience. We were very encouraged to see this overall improvement in the business, including across key comp metrics.
At the same time, we acknowledge we still have work to do to achieve our vision and deliver consistently positive comp results. For new stores, much like our performance in comp sales, performance here also exceeded our expectations. We opened a record 82 stores during the Q3, delivering growth of 18% versus last year's Q3 store count. These new stores were located across 31 states, including our 44th state of Wyoming. Four stores in 4 states made our top 25 summer or fall brand opening list of all time.
Regarding performance by worlds, the Tech, Seasonal, Style and Candy Worlds, which together represented over half of our business in the 3rd quarter delivered the sales outperformance. We were encouraged to see the positive results from the initiatives we took to add newness and deliver value, especially in our beauty, Halloween, tech and games and toys categories. Our license business was also strong across several departments with both newer trends and existing trends such as Sanrio as we help celebrate Hello Kitty's 50th birthday. Within our 5 Beyond assortment, items that represented extreme value and were trend right resonated with our customers. Now on to our key focus areas.
Starting with product and value, we are renewing our commitment to being the Yes! Store kids and parents. Flexibility, relevancy, nimbleness and speed are key to 5 Below's merchandising success and we are focused on leaning into these core capabilities. One of our key differentiators has always been the ability to quickly identify trends and capitalize on them. With the teams back together in the office, we have seen positive momentum towards greater innovation and speed, driven by improved collaboration and communication across multiple groups, including merchandising, product development, sourcing, planning, allocation and visual merchandising.
We believe our merchant teams are now better organized and equipped to quickly capitalize on trends and innovate. They have a renewed focus on sourcing truly amazing trend right items that deliver quality, value and wow for our customers. Work is underway to drive broader and more consistent category and world performance with an improved key item approach, better SKU rationalization and productivity and sharper value. As we said last quarter, this will take some time and we currently expect to begin to see the impact of these changes in the Q2 next year. Regarding 5 Beyond, we believe it continues to provide us an opportunity to deliver a highly edited assortment of great trend right products at incredible value.
We will apply the same core teen and pre teen customer filter and focus as we do with the 5 Below product when creating this assortment, and we will optimize presentation in our stores. On to store experience. Our store experience is also a key differentiator for 5 Below. We aim to be the cool store for kids and the destination for fun treasure hunt experience. We have invested in our stores by increasing labor and streamlining operations to enhance the experience for both our customers and crew.
We added more labor into the stores this year beginning in August and have begun creating work efficiencies and reducing tasks for our crew. As an example, to improve crew efficiency and store service levels, especially in the high volume holiday quarter, part of our investment has associates manning our self checkout areas and available to assist. The actions we have taken to date have reenergized the store teams and enabled them to focus and engage more with our customers to deliver a better customer experience. Now turning to the Q4. While it is very early, the holiday season is off to a solid start with the Black Friday weekend coming in on plan.
Our stores are filled with gifts and stocking stuffers from cozy apparel to toys and games to seasonal decor. We are leaning into value even more this holiday season with $1, $2 $3 items. As pleased as we were with our Q3 outperformance and solid start to holiday with our Black Friday weekend results, it is important to acknowledge the expected impact on our 4th quarter results of the 5 fewer shopping days between Thanksgiving and Christmas. We last had this calendar in 2019 and have used that experience to build our 4th quarter plan this year. As we look ahead, we are pleased with the changes and improvements we have been able to implement in a short period and are excited about the opportunities for the future.
We have a long runway of growth ahead and encouraging early results from the work that is underway to improve performance and results. Before I close, I want to make a few comments on the topic of potential tariffs. First, tariffs are not new to Five Below. We successfully solved for tariffs in the late 2018 2019 timeframe through a combination of vendor collaboration, product reengineering and assortment changes, moving product sourcing to other countries and ultimately pricing increases, primarily in our tech world. We expect to utilize these tools and tactics again.
What's different today is that not only do we have a playbook, having successfully navigated this before, we also have 5 beyond established, as well as our India Global Sourcing Office, which will help to optimize our vendor base overseas. That said, work is already underway with our many vendor partners and our overseas sourcing teams to mitigate the impact of potential tariffs. In closing, we are fortunate to have talented and energized teams in place across the organization. We have begun to reset the mindset of our company and have implemented meaningful change that our teams have wholeheartedly embraced. I could not be prouder of and more confident in the entire 5 Below team to drive the vision Tom and I have laid out.
And with that, I'll hand it over to Kristie to discuss our results and outlook in more detail. Kristie?
Christiana Pels, Investor Relations, 5 Below: Thanks, Ken, and good afternoon, everyone. I would like to add my welcome to Winnie. I look forward to working with her to create value for our shareholders. I will begin my remarks with a review of our Q3 results and then discuss our outlook. My comments will refer to results on an adjusted basis.
Please refer to our earnings press release for GAAP results and all reconciliations. Total (EPA:TTEF) sales in the Q3 of 2024 increased 14.6% to $843,700,000 from $736,400,000 in the Q3 last year. Comparable sales increased 0.6%, driven by an increase in comp ticket of 1.2%, partially offset by a decrease in comp transactions of 0.6%. As Ken mentioned, the teams did a great job executing against the initiatives we put in place to improve sales. While it's still early in our reset, we were encouraged to see an improvement in the 3rd quarter compared to the 1st and second quarters across key sales metrics, including transactions and average ticket.
In the Q3, we opened 82 new stores compared to 74 new stores opened in the Q3 last year. We ended the quarter with 17 49 stores, an increase of 2 68 stores or approximately 18% over last year. New stores also benefited from the actions taken to improve the business, resulting in new store productivity that exceeded our expectations and our guidance for the Q3. Adjusted gross profit for the Q3 of 2024 was $280,100,000 an increase of 25.7 percent. Adjusted gross margin increased by approximately 290 basis points to 33.2%, driven primarily by lapping the approximate 180 basis point shrink true up from last year's Q3, the timing of certain product margin benefits, including freight and efficiencies in distribution.
These benefits were partially offset by fixed cost deleverage. As a percentage of sales, adjusted SG and A for the Q3 of 2024 increased approximately 180 basis points to 29.9% versus last year's Q3. This was driven primarily by increases in store payroll, including investments in labor hours and wages, as well as fixed cost deleverage, partially offset by leverage from cost management initiatives. As a result, adjusted operating income was $27,600,000 and adjusted operating margin was 3.3% versus 2.2% last year. Versus guidance, our adjusted operating margin results were better than expected, primarily due to the favorable fixed cost deleverage that was lower due to the sales fees.
Adjusted net income for the Q3 was $23,300,000 versus net income of $14,600,000 last year. Adjusted earnings per diluted share for the 3rd quarter was $0.42 compared to last year's earnings per diluted share of $0.26 We ended the quarter with $216,600,000 in cash, cash equivalents and investments and no debt. Inventory at the end of the Q3 was $818,000,000 as compared to $763,000,000 at the end of the Q3 last year. Average inventory on a per store basis decreased approximately 9% versus the Q3 last year, primarily due to our ongoing strategy to normalize inventory levels. The inventory balance at the end of the quarter includes an approximate $21,000,000 incremental reserve for unproductive inventory as we implement our new merchandising strategy that Ken discussed.
Our 3rd quarter ending inventory has us well positioned to deliver against our 4th quarter sales guidance and we expect to end the year with average inventory per store lower than last year. Turning now to our guidance. Our press release outlines our sales, new stores and earnings guidance for Q4 and full year 2024, so I'll focus my commentary on additional details or drivers for that guidance. I will refer to fiscal year 2023 on a 52 week basis and the Q4 of 2023 on a 13 week basis and to fiscal year 2024 on an adjusted basis that excludes the impact of non recurring or non cash items as outlined in our earnings press release. As a reminder, the extra week in fiscal 2023 added approximately $48,000,000 in sales and approximately $0.15 in earnings per share to the Q4 year.
For the Q4 of 2024, on a 13 week year over year adjusted basis, we expect the following: Total sales are expected to increase between 5% to approximately 7%, with a comp decline in the range of negative 5% to negative 3%. As a reminder, this is a unique holiday season due to the calendar with 5 fewer shopping days between Thanksgiving and Christmas, similar to the 2019 holiday season. Adjusted gross margin at the midpoint is expected to decrease by approximately 90 basis points, as the 100 basis point benefit of lapping the shrink true up from the Q4 last year is more than offset by fixed cost deleverage on the negative comp and the timing of certain product costs, including freight. Adjusted SG and A as a percentage of sales at the midpoint is expected to be approximately 120 basis points higher than the prior year. This is driven by fixed cost deleverage on the negative comp and investments in store hours and wages, partially offset by lower incentive compensation.
This results in an adjusted operating margin decline at the midpoint of approximately 2 10 basis points compared with the prior year's 4th quarter. Moving on to the full year, total sales are expected to increase between approximately 9% to approximately 10% with a comp decline of approximately 3%. Adjusted gross margin at the midpoint is expected to decrease approximately 20 basis points due to fixed cost deleverage on the negative comp that is partially offset by lower inbound freight from the first half of the year, lapping last year's shrink reserve true up as well as DC efficiencies. Adjusted SG and A as a percentage of sales at the midpoint is approximately 150 basis points higher than last year. Fixed cost deleverage on the negative comp and investments in store hours and wages are only partially offset by lower incentive compensation.
As a result, adjusted operating margin is expected to be approximately 9% or 170 basis points lower than the prior year. Net interest income is forecasted to be approximately $14,000,000 for the year end. We expect a full effective tax rate for 2024 of approximately 0.25%. With respect to growth CapEx, we now plan to spend approximately $340,000,000 excluding the impact of tenant allowances. This reflects the opening of 2 28 new stores, converting about 180 store locations to the 5 Xeon format, the completion of expansions in our distribution centers in Georgia and Arizona and investments in systems and infrastructure.
We expect to end the year with 1771 stores. For all other details related to our results and guidance, please refer to our earnings press release. To wrap up, the work to return 5 Below to realize its full potential is well underway and we are pleased with the early signs of progress. We have a large opportunity ahead to meaningfully improve our comp trajectory as we implement our merchandise and experience strategies and continue our growth. The entire 5 Below team is focused on executing against our plans and we are beginning to see positive results and improvements, which provides us confidence in the opportunities that lie ahead.
I want to thank our teams for leaning in during these last several months as we reset for the future. And with that, I would like to turn the call back over to the operator for the question and answer session.
: Thank you.
Conference Operator: We will now begin the question and answer session. And our first question today will come from John Heinbockel with Guggenheim Securities. Please go ahead.
John Heinbockel, Analyst, Guggenheim Securities: Hey, Ken. The one question is a broad one, but when you think about what you want to do with product, right, as you go forward, maybe touch on how you think about sort of allocation by world, kind of recapturing that extreme value, right? How do you think about the SKU assortment, right? Do you want to noticeably cut back certain areas? And then price point, right?
I don't know if you talk about $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000,000 $1,000,000,000 But just sort of touch on the key things you think recapture that extreme value orientation?
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Yes. Thanks, John. As you know and as we've said, the key focus areas and the couple of key focus areas are around product and value. You mentioned the world and it's one of the things that we want to get back to is a more kind of consistent and broad performance across the world. And I think you we saw that in the Q3, which was good to see across more than just a few worlds and we increased that.
And that's ultimately our goal is to deliver on more consistent performance there. It's always been and it always will be around trend right product, high quality, extreme value, all focused towards and targeting kids. And I think that's the piece that we're going to get back to from a focus perspective for the teams in the merchandising areas. The other piece around the SKUs, we did say we were going to and we will start to go through a SKU rationalization and we're also going to be looking at SKU productivity, which should drive less SKUs. That work is more on a go forward basis.
Like we would expect to see some improvement there as we get into the middle of next year. Now that being said, for the inventory that we own, and Christy had mentioned it, we've got a reserve that we put in place against existing products. So that will help us get there too. But the go forward is a meaningful reduction in our SKUs as we move forward and we'll probably see that into next year. I think you also mentioned the price points, the 1 to 3.
It was an area in the holiday that we emphasized. If you're in our stores, you'll see that especially when you walk in. It's always been a key part of our business. And even when you look at the $5 and less price points, I mean, they still represent probably 85% of the units out there for us. So that's always going to be an ongoing focus for us as we move forward.
That's important for us, especially for the kids. And then Tom, I don't know if you have anything you want to add to that. Yeah, no, I think
Tom Bellios, Executive Chairman and Founder, 5 Below: you covered it. John, one thing I would say, as we look at on some of the learnings, as we've looked at all the worlds, it's also fair to say that without getting into a lot of specifics, we see a real opportunity ahead to reset some of the areas. And in those areas, we can obviously expect to see a much greater SKU reduction to enable businesses that we need as a company to find way to look at businesses that perhaps need a certain degree almost a reinvention and ability to reduce SKUs in a meaningful way to allow for newness to come in. Just to add on Ken's comment on price points, there's no question about it. You're starting to see it.
You can expect to see more a greater emphasis on 5 Below even within that range narrowing the price points. While at the same time, we think there is an opportunity in 5 Beyond, but to be very selective and to make sure that the filter, the same filter of extreme value, trend right product is what we are focusing on. So more to come.
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Yes. Thanks, John.
Conference Operator: And your next question today will come from Chuck Grom with Gordon Haskett. Please go ahead.
Chuck Grom, Analyst, Gordon Haskett: Good afternoon. Thanks a lot. Congrats on the progress. I was wondering if you guys could just talk a little bit about the benefits of everyone being back in the office. On the outside looking in, it's hard to see, but clearly that was missing and clearly it looks like it's helping.
So can you talk about that? And also, as we look out over the next couple of years, how are you thinking about store growth? New store productivity was better this quarter, but it's still a little bit below where you guys have historically trended. So just how should we think about store growth next year and the years out? Thank you.
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Yes. Thanks, Chuck. Yes, we it was important for us to get everybody back to the office and that's been I think it's been a few months now. You can see and feel the difference because this business is all about collaboration and innovation. And really the only way to get there is that's tough to do in a hybrid environment, it's tough to do virtually, it's tough to do online.
So you can see throughout the organization, especially in those key areas around products. So merchandising, planning, allocation, visual merchandising. In fact, we reinstituted the pods, the physical pods where these teams are working together because that's what it's all about. It's a team approach. So you're right, we have seen the benefits of that in a real short period of time, and I think that's going to continue for us.
Around store growth, we mentioned to you, I think, on the last call, we called out for next year a range of 150 to 180 stores. As that stands now based on what we're looking at, it's probably closer to the lower end of that range. We've had and we mentioned before, we've been extremely selective with our sites, and I think that's going to continue. And some of our landlords have had delays in some of the properties, and so that's kind of pushed that number. So we're looking right now to be at the low end of that range.
With regards to anything else related to 2025, I mean, we'll obviously update everyone on our Q4 call as we normally do. But that's kind of how we look at the growth going forward. We'll have more to talk about it even in further future years on our Q4 call. Thanks, Chuck.
Conference Operator: And your next question today will come from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.
Jeremy Hamblin, Analyst, Craig Hallum Capital Group: Thanks. Congrats to Winnie and congrats to the whole team on the improved results. I wanted to come back to just understanding when you look at Q4, you're off to a solid start, solid Black Friday period. But what do you think maybe you missed out on if you could have had a do over on where your product assortment was? What do you think the missed opportunity is in Q4, whether that's licensing opportunities with kind of some exciting things like Milana, Wicked, etcetera?
But what do you feel like you would have leaned into a bit more that could have drove business better? And then just as a reminder, can you outline for us Ken or Christy what the compressed season impact was in 2019? I think I recall it was like several 100 basis points to comp.
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Yes. Okay. Thanks, Jeremy. I'll take the last part of that question first. We had the benefit this time in a shortened season to be able to have a year that's more comparable and that's as you call that that's 2019.
And we use that cadence and modeling experience to be able to determine expectations for this Q4. I believe if you go back and you look at the transition from say Q3 of 2019 into Q4, I think we did probably about a 3 comp in Q3 of 2019 and about a minus 2 comp in the Q4. So you had about a 500 basis point differential in comp. It's pretty similar to what we've done here in terms of where we landed in the Q3 and what we're guiding to in the Q4. So as we said in our prepared remarks, we use that as kind of a guide for us.
In terms of the Q4 and potential opportunities, I think the first thing I want to just reinforce, we're really happy with what the teams have done in a real short period of time. They had a chance to make an impact on Q3, Little bit easier to do that for the Q3, just given the nature of the quarter. It's a smaller quarter. It's got small season in there Halloween and you just have the ability on an item by item approach to have the impact there. It's much more difficult to do that in Q4 just because of the size of the quarter and the nature of our business.
It turns from self purchase in Q3 to more of a gifting approach in Q4. And as you know, myself and Tom, we're never pleased, they're never happy. We're always looking for better. So yes, there's definitely opportunities out there. But I got to tell you, the team has done a really good job in preparing us for the holiday season from a product standpoint and also from an execution standpoint across the organization.
So whether it was the stores and what they've done to get the experience there for us or even the operating teams,
Chuck Grom, Analyst, Gordon Haskett: the planning teams, the allocation teams have done a fantastic job.
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: So they're So there's a lot here that we continue to learn. I
: think Tom mentioned
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: that in his remarks too, that we're going to use those things and that's just going to be more opportunity as we go forward. So thanks, Jeremy.
Conference Operator: Your next question today will come from Karen Short with Melius Research. Please go ahead.
Christiana Pels, Investor Relations, 5 Below: Hi, thanks very much. Just a couple of questions. Well, I'll leave it to one, but maybe lumped into a few. That's on CMO replacement, if there are any. And then I'm curious what you think the optimal number of SKUs are for the stores?
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Yes. So I'll thanks, Karen. We'll I'll have Tom answer on the CMO and I'll take
Tom Bellios, Executive Chairman and Founder, 5 Below: a response on the SKUs. I think our team in merchandise as it is today, we are very pleased with. We have Annie Consulman who leads the team there. We have 7 we've mentioned this before, we have 7 DMMs, 6 of whom have a tremendous amount of experience, anywhere between 6 to 15 years. We have a great team at the merchandising organization, very pleased with all the work that they're doing and we're confident in their ability to really drive this business forward at this point.
And I do believe and with Winnie coming on board and you look at how level of experience around the side of marketing and merchandising and product and newness, my involvement which has been a bit, but I think the team is in place, ready and we are very, very happy with the team.
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Yes. And then Karen, just on the SKU optimization, as we said, that is good. That's a focus for us now. We'll see results of that going forward. I mean, we've quoted before that we could see up to say a 20% reduction in SKUs.
And again, that takes a little bit of time to get into play there. But the key there is when we say SKU optimization, it's really rationalization and productivity. I mean, that's where the focus is going to be. And we have an opportunity in some of these in the future seasons to be able to do that work. So we'll look across the world.
And I think you heard Tom mentioned also, there's probably certain worlds that there's a little bit more of that that's going to take place for us. What that does for us is it opens up the opportunities for newness. Newness is really critical to the business, especially when you talk about trend and excitement for the customer. So that will give us the ability to really focus more on newness as we go forward. So just a little bit of clarity around the SKU optimization.
Thanks, Karen.
Conference Operator: And your next question today will come from Michael Lasser with UBS. Please go ahead.
: Good evening. Thank you so much for taking my question. How much of the improvement from the second quarter to the third quarter was driven by the actions that Five Below has taken versus just the external environment improved over that time? And if it has been as a result of the actions, especially adding more value, how do you reconcile the need to increase value using price as a lever versus using price as a lever to offset the tariff risk that you're going to face in 2025, Kevin? Thank you.
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Yes. Thanks, Michael. Yes, there was definitely a benefit from an external perspective. I think you saw across the retail sector that traffic improved, especially when you look at the middle of Q2, probably around that July timeframe. And as we entered Q3 and then exited Q3, there was it looks like a continuous improvement in traffic.
I think the benefit for us was that we capitalized on that traffic, right? And that was the key. And again, it was from a product perspective, you saw the broader performance across the categories there. It was we had the ability to introduce newness. We had the ability to introduce trend.
We pushed value. We had also embedded in there, we haven't really spoken about, we had a successful Halloween season. I mean seasonal business are traffic drivers for us too and I think the team did an outstanding job in pulling that all together and the customer responded really well to that. But again, it was throughout other categories when we look at our style categories. And there was the other piece that we did.
Again, I mentioned from an operational execution standpoint, the teams did a great job. We invested in labor in the stores, the stores delivered for us, and the teams from a product perspective, we flowed the product much better than we did in the Q2. We had an excellent seasonal transition going into Halloween. And if you were in our stores, you saw much better in stocks. So it was really a combination of all those things, right?
It's hard to kind of pinpoint the amounts. So it's all of that combined. I think your other question was around maybe value and how it relates to mitigating tariffs. The one thing that when we say value by the way, it's not just price. It's trend, it's high quality and it's price.
So it's a combination of all of those. And that's really that what the customers feel and see when they come into the store. So it's not just about the price point because if it is we're in the wrong business, right. We start with great product. And then from a tariff perspective, we'll see where tariffs go.
As I mentioned, it's still a big uncertainty and it's still a big potential. We have levers that we can pull. Price is the last one for us at the end of the day. And the other piece that's going to benefit us and it's part of the mindset shift that Tom had mentioned and that we spent a good amount of time working on is better leveraging on our scale. I think that drives more value for us that we can translate back to the customer.
So we'll also have the ability to do that better than we have before. And again, if prices need to go up, I think on a relative basis compared to other retailers, because it's going to be across the board with other retailers, I think we're still going to be in a great position there. So thanks for the question, Michael.
Conference Operator: And your next question today will come from Scot Ciccarelli with Truist. Please go ahead.
Scot Ciccarelli, Analyst, Truist: Good afternoon, guys. So you guys have pointed to excessive weakness with your lower income consumers as a primary sales headwind. I know you've had your hands full, but do you have a feel for what customer cohorts drove the sequential improvements in traffic? Was it concentrated with lower income consumers or was it kind of across the board?
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Yes, thanks, Scott. No, we saw a consistent performance across the various income demographics. So consistent with what we've seen historically, when we go back in the business, we saw that recently. So that was good to see. Thanks, Scott.
Conference Operator: And your next question today will come from Simeon Gutman with Morgan Stanley (NYSE:MS). Please go ahead. Mr. Gutman, your line may be muted. And moving on to our next question from Edward Kelly with Wells Fargo (NYSE:WFC).
Please go ahead.
Edward Kelly, Analyst, Wells Fargo: Hi, good afternoon, everyone.
Christiana Pels, Investor Relations, 5 Below: Ken and Christy, I wanted
Edward Kelly, Analyst, Wells Fargo: to ask you about just a couple of things as we think about next year from a margin standpoint because there is some uncertainty on our end. So if I think about shrink, you turn on self checkout again. So you get any shrink benefit next year? Labor, you've invested in labor in the back half by, I think, 20 basis points, it seems to be working. So is that like how much of a headwind is that next year?
Can you quantify incentive comp? I'm just curious because we think about next year, it looks like there will be some margin headwinds that we need to consider. And I don't know to what extent you can help us in thinking about that at the moment.
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Yes. Thanks, Ed. I know, it's just we try as we always do to be as transparent as we can, especially on kind of go forward outlook and help you guys with the modeling. I will tell you, we are focused on 2024 right now, right? And we've got a huge season still ahead of us and that's where our energies are focused on.
And as we normally do, we'll provide a complete update and guidance around the future on our Q4 call. The other piece too that we have to throw in there, we talked about the potential of tariffs. So any discussion we would have would not be considering the impact of those. But as I think Christy mentioned this on the prior call, from a modeling perspective, we are up against incentive compensation headwinds. Excluding the incentive compensation headwinds, just to give you an idea, we would expect to start leveraging at a 3% comp.
That's the way we're looking at it now. And again, we still have work to be done. We want to get through this holiday season. But we'll provide more information in the Q4. And again, keep in mind, this is all on an adjusted basis when you're comparing the year.
So keep that in mind too based on those adjustments that we flow through this year and comparing those to next year. So that's all on an adjusted basis. Thanks, Ed.
Conference Operator: And your next question today will come from Matthew Boss with JPMorgan. Please go ahead.
0: Great, thanks. So Ken, maybe just on 3Q comps versus plan, if you could elaborate on the contribution you saw from the newness and value initiatives this quarter. Maybe if you could speak to comps in November, help us to think about it relative to the guide. And just if you could rank further initiatives and the incremental initiatives that you cited that would be there by the Q2 of next year, if that would help. One quick one for Christy.
Just the $21,000,000 inventory write off, if you could just walk through what line items that impacted, that would be helpful.
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Okay. Thanks, Matt. On the Q3 comps, we really saw in that improvement between where we guided and where we landed. We really saw it pretty broadly from a performance standpoint. In general, the teams had a chance to chase some product.
It did help to have an impact for the season, which was great. It was around newness and trend and value. And again, whether I called out style, we called out tech, which also benefited from better in stocks, which was good to see. So those and then Halloween. Halloween across the board did really well for us and that was not just in the seasonal category, but within other categories to perform well.
So it was really kind of coming from all of those. And again, I mentioned beauty too is another area that we were able to impact. In terms of the November comps, we normally don't speak to intra quarter activity or anything this early. You have to keep in mind, the comps are somewhat not totally relative, especially because of the shift in the Black Friday weekend and the lesser days. But again, as I said, we had a solid Black Friday weekend.
We feel really good about where we are versus where we placed our guidance. So we feel like we're in good shape. And then I guess Yes,
Christiana Pels, Investor Relations, 5 Below: I mean, as it relates to our inventory, basically, we made an adjustment within gross profit as a reserve for unproductive inventory. So lowering our overall inventory balance to that $818,000,000 that we quoted, but it's within gross profit. And again, everything I talked about was on an adjusted basis. There's a reconciliation in our press release for you to look at to see it well laid out for you. Thanks.
Conference Operator: And your next question today will come from Seth Sigman with Barclays (LON:BARC). Please go ahead.
Edward Kelly, Analyst, Wells Fargo: Hey, everyone. Thanks for taking the question. I wanted to just go back to labor investments and changes you made to the labor model this quarter. Can you just give us a feel for how that helped the performance and I guess how you're thinking about the need for further labor investments from here? Thanks.
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Yes. Thanks Seth. The labor piece of it really came in one of the focus areas for us is around experience. And we had mentioned that on our Q2 call that we realized that we did not invest enough in labor and it was reflective in the stores, whether it was the service levels, whether it was the in stock level. So I think Christy mentioned that we had an incremental investment in the Q3.
We felt it paid off for us. I mentioned how we successfully transitioned in the seasons in the quarter, whether it was going into Halloween or the start of holiday, which came at the very end of Q3. So that was good to see. And it's not just the labor investments. I don't want you to think that it's just about throwing hours at the stores.
It's also around workload efficiency. We've done a handful of things that have helped the stores. We've removed non value tasks and we're going to continue to look at that. So that frees them up to focus on the more important things to do in the store. So we're excited about what we saw there.
And I think Christy has mentioned that we're going to continue that investment. I don't know if you want to expand on the amount of that we had in the Q3. Sure. Yes.
Christiana Pels, Investor Relations, 5 Below: Yes. And we increased average store hours by about 5 percent. So the impact was about 50 basis points within the quarter. And then as you look into next quarter, we expect it to be about half of that. So you got someone asked earlier, it's about 20 basis points for the full year impact.
We'll continue to look at that, particularly in the first half of next year as we continue to invest in what our stores need to deliver on that store experience.
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Yes. And just to add to that, too, the one other thing, Seth, that we did in the quarter, I think it was in my prepared remarks, was around the self checkout, where we updated that where we have somebody there that's manning that self checkout area. It creates accrual efficiency for us. It creates a better service level for the customer. And we think that's going to help us too as we move forward.
So that's been pretty positive for us versus where we were before with that area of the store. Thanks, Seth.
Conference Operator: And your next question today will come from Kate McShane with Goldman Sachs. Please go ahead.
Christiana Pels, Investor Relations, 5 Below: Hi, good afternoon. Thanks for taking our question. Ken, I know you said on the last call that you had thought some of the competition had been catching up a little bit during your period of softer execution. Just based on what happened with the Q3 and the successes and turnaround you had during that time, how would you characterize your competitive positioning today?
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Thanks, Kate. I think what you're seeing is this is when we talk about work is underway and the beginning of some results and the learnings, I think all of that is what we're seeing in Q3. We were not there in our results in Q2. Again, I know it sounds repetitive, but to get back to trend right product, it's high quality, extreme value, focused towards kids and there's newness. When we do that we win and that's what we saw in certain categories in the Q3.
Now again we still have a ways to go with doing this, but that's really the thing that when we talk about a mindset shift and what we're doing within the organization, that's what we'll continue to see as we move forward in terms of the more opportunities for us there. So more to come, Kate. Thanks.
Conference Operator: And your next question today will come from Brian Nagel with Oppenheimer. Please go ahead.
John Heinbockel, Analyst, Guggenheim Securities: Hi, good afternoon. Nice quarter. Congratulations.
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Thanks, Brian.
John Heinbockel, Analyst, Guggenheim Securities: The question I have, just looking at the comp sales upside in the Q3 and given the significant turnaround from what we saw earlier in the year, maybe you can just discuss more the cadence through the period. We're hearing a lot of other retailers and brands out there that consumers are showing up for big events and low in between. Is that did you see that too? And was the upside really driven to these key events? Was it more consistent through the quarter?
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Yes, thanks, Brian. Yes, we would kind of mirror what you're hearing from the sector. I think the quarter started off probably a little bit more similar with how we exited the 2nd quarter. And we internally saw improvement as we move through the quarter, probably in the middle of the quarter on through the end of the quarter. The key there, though, is that we are able to capitalize on it this time.
And when we talk about the different areas of the business, the beauty area, the tech area, Halloween and seasonal, and yes, the customer came out and they were shopping Halloween, we had a great assortment for them across newness, across value and across various worlds. So it all kind of came together, but there was that cadence that you saw it improving as we went through the quarter. Thanks, Brian.
Conference Operator: And your next question today will come from Michael Montani with Evercore ISI. Please go ahead.
1: Hey, thanks for taking the question. I just wanted to ask about tariffs and I guess it's probably a 3 parter, but could you remind us basically what was the percentage increase that you saw back in 20 eighteentwenty 19 on the goods that you're selling, was it around 35 percent? I guess part 2 would be either as a letter grade or percentage, what amount of the corresponding headwind do you feel like you're able to offset net net given your actions and then vendor leverage? And then I guess the final part is, can you just remind us today and level set what percent of the sourcing is being imported from China directly as well as indirectly?
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Thanks, Michael. You're right, that was a multipart question. But I'll see what I can do there. From a tariff perspective, when you look at the increases going back to 2018 and 2019, if you recall, there was a lot that happened by the way. They started off and it took a while for them to get into place and the categories that were going to be tariffed and all that.
It started off probably at the 10% level and then it moved 15%, 20%, 25%. I think it pretty much peaked at 25% relative to it was primarily in our tech and room areas that we were hit with that. I talked about the mitigating opportunities that we have and the biggest one out there for us and it was the majority of what we were able to work with was the vendor partnership assistance, collaboration, whatever you want to say there. That got us up to a certain percentage. And then when the percentages got too high, the vendors kind of pushed back.
And that's what drove us to breaking the $5 price point, especially in the tech area. And you did have the right percentage related to our total product, whether it's directly or indirectly imported. We're close to that 60% level coming out of China. I do want to emphasize though, again, first of all, all the tariffs, it's still a potential. We don't know where that's going to go.
It's a total uncertainty. There's 3 or 4 things around tariffs that are going to benefit us. We do have a playbook. We've been through this before. We've got 5 beyond there if we need it, which is well established with the customer because recall we were testing that back in 'eighteen and 'nineteen.
So we had to see if that made any sense. We have a sourcing office over in India that's going to be able to help us. So we have boots on the ground to help us whether it's with existing vendors within their countries or shifting countries and vendors. And then the other piece we can't understate, again, we go back to the mindset shift and we talked about this in the Q2 that we need to leverage our vendors much better. And we're already working on that, so that's going to help us too as we go through.
And actually, regardless of where this goes with tariffs and the uncertainty you heard in my prepared remarks, we already have activities and actions and communications underway with our vendor partners and working with our overseas office already looking to set up strategies to mitigate these. So thanks, Michael.
Conference Operator: And your next question today will come from Simeon Gutman with Morgan Stanley. Please go ahead.
2: Thanks. Sorry about before. Nice progress. I want to ask about the sequential improvement again. Can you if you look at the age of stores, the cohorts and then new markets versus mature, was it uniform?
And then I guess the average means there's probably some stores that are probably low single even maybe mid single digit at this point. Is there any rhyme or reason for that? If they are, is that immature, mature? Or are those stores maybe that have more of a 5 Beyond offering?
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Yes, thanks Simeon. Yes, a lot of detail there. And again, we don't want to get too much into the intra quarter. I can tell you on listen, first of all, throughout the chain, you always have the pluses and minuses, right, for various reasons, by the way, whether it's something with a store, whether it's an event, an anniversary, weather, whatever it may be. And let's not forget cannibalization, right, because we know that's happening in a controlled environment and we can plan for that and that's always in our guidance assuming some level of that.
But I got to tell you, it's been relatively consistent across stores. You heard that just wasn't positive performance in our comp stores, but also in our newer stores where we exceeded our new store productivity and what we had expected. So we were pleased with what the performance that we saw during the quarter. And again, as I mentioned for another caller, we did see improvement and it was across the chain as we kind of worked through Q3. Thanks, Simeon.
Conference Operator: We'll conclude our question and answer session. I would like to turn the conference back over to Ken Bull for any closing remarks.
Ken Bull, Interim CEO and Chief Operating Officer, 5 Below: Okay. Thank you guys all for joining us today. We wish you all a happy holiday season and we look forward to seeing you in our stores. Thanks everybody.
Conference Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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