Five Below(FIVE)2024-12-04 23:51Financial Data and Key Metrics - Total sales in Q3 2024 increased by 14.6% to $843.7 million, compared to $736.4 million in Q3 2023 [38] - Comparable sales increased by 0.6%, driven by a 1.2% increase in comp ticket, partially offset by a 0.6% decrease in comp transactions [39] - Adjusted gross profit increased by 25.7% to $280.1 million, with adjusted gross margin rising by 290 basis points to 33.2% [41] - Adjusted SG&A as a percentage of sales increased by 180 basis points to 29.9%, primarily due to higher store payroll and fixed cost deleverage [42] - Adjusted operating income was $27.6 million, with an adjusted operating margin of 3.3%, up from 2.2% in the prior year [42] - Adjusted EPS for Q3 2024 was $0.42, compared to $0.26 in Q3 2023 [43] Business Line Performance - The tech, seasonal, style, and candy worlds, representing over half of the business, delivered strong sales performance in Q3 [23] - The beauty, Halloween, tech, and games and toys categories showed positive results from initiatives to add newness and deliver value [24] - The license business was strong across several departments, including newer trends like Sanrio [24] - Five Beyond assortment items, representing extreme value and trend-right products, resonated well with customers [24] Market Performance - The company opened a record 82 new stores in Q3, achieving 18% growth compared to the previous year [22] - New stores were located across 31 states, including Wyoming, with four stores in five states making the top 25 summer or fall brand opening list [23] - New store productivity exceeded expectations, contributing to overall growth [40] Company Strategy and Industry Competition - The company is refocusing on product, value, and store experience, aiming to be the best destination for teens and pre-teens [15] - Five Below is leveraging its scale to deliver trend-right, high-quality products at extreme value, while improving store experience and optimizing cost structure [15] - The company is working on SKU rationalization and productivity, with a focus on reducing SKUs and improving category performance [27] - Five Beyond continues to provide an opportunity to deliver a highly edited assortment of trend-right products at incredible value [28] - The company is investing in labor and streamlining operations to enhance the customer and crew experience [29] Management Commentary on Operating Environment and Future Outlook - Management is optimistic about the early signs of progress and the long runway of growth ahead [33] - The company is prepared to mitigate the impact of potential tariffs through vendor collaboration, product reengineering, and sourcing optimization [34] - The holiday season is off to a solid start, with Black Friday weekend results on plan, despite five fewer shopping days between Thanksgiving and Christmas [32] - The company expects to see the impact of merchandise and experience strategy improvements in Q2 2025 [27] Other Important Information - The company ended Q3 with $216.6 million in cash, cash equivalents, and investments, with no debt [44] - Inventory at the end of Q3 was $818 million, with a $21 million incremental reserve for unproductive inventory as part of the new merchandising strategy [45] - The company plans to spend approximately $340 million in growth CapEx, including opening 228 new stores and converting 180 stores to the Five Beyond format [52] Q&A Session Summary Question: Product Allocation and SKU Rationalization - The company is focusing on delivering consistent performance across all worlds, with a renewed emphasis on trend-right, high-quality, extreme-value products targeting kids [59][60] - SKU rationalization and productivity improvements are expected to reduce SKUs, with meaningful reductions anticipated by mid-2025 [61][62] - Price points, particularly $1 to $3 items, remain a key focus, especially during the holiday season [62][63] Question: Benefits of Returning to the Office and Store Growth - The return to the office has improved collaboration and innovation, particularly in merchandising, planning, and allocation [71][72] - Store growth for 2025 is expected to be at the lower end of the 150-180 range, due to selective site selection and landlord delays [74] Question: Q4 Performance and Missed Opportunities - The company used the 2019 holiday season as a benchmark for Q4 2024, expecting a similar 500 basis point differential in comps [81] - While the team has made significant progress, there are still opportunities to improve product assortment and execution in Q4 [82][83] Question: CMO Replacement and Optimal SKU Count - The company is pleased with the current merchandising team and does not plan to replace the CMO [89] - SKU optimization is expected to result in up to a 20% reduction in SKUs, with a focus on rationalization and productivity [91][92] Question: Q3 Improvement Drivers and Tariff Mitigation - The improvement in Q3 was driven by a combination of external factors, such as improved traffic, and internal initiatives, including newness, trend, and value [97][98] - The company plans to mitigate tariff impacts through vendor collaboration, sourcing optimization, and leveraging scale, with price increases as a last resort [103][104] Question: Customer Cohorts and Traffic Improvement - The sequential improvement in traffic was consistent across various income demographics, with no concentration in lower-income consumers [108] Question: Margin Headwinds for 2025 - The company expects to provide more detailed guidance on 2025 margins during the Q4 call, with potential headwinds from labor investments and incentive compensation [114] Question: Q3 Comps and Inventory Write-Off - The Q3 comp improvement was driven by broad performance across categories, including style, tech, and Halloween [119] - The $21 million inventory write-off was recorded within gross profit as a reserve for unproductive inventory [122] Question: Labor Investments and Store Experience - Increased labor investments in Q3, including a 5% increase in average store hours, improved store service levels and in-stock performance [125][128] - The company plans to continue labor investments in 2025, focusing on workload efficiency and store experience [126][128] Question: Competitive Positioning - The company's competitive positioning improved in Q3, driven by a return to trend-right, high-quality, extreme-value products targeting kids [132][133] Question: Q3 Cadence and Key Events - The Q3 comp improvement was consistent with broader retail trends, with customers showing up for key events like Halloween [139][140] Question: Tariff Impact and Sourcing - The company successfully navigated tariffs in 2018-2019, with potential tariff impacts mitigated through vendor collaboration and sourcing optimization [144][145] - Approximately 60% of the company's products are sourced directly or indirectly from China [146] Question: Store Performance by Cohort - The Q3 performance was relatively consistent across store cohorts, with new stores exceeding productivity expectations [155]