Five Below, Inc. (NASDAQ:FIVE) Q3 2022 Earnings Call Transcript November 30, 2022
Five Below, Inc. beats earnings expectations. Reported EPS is $0.29, expectations were $0.14.
Operator: Good day, and welcome to the Five Below Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Christiane Pelz, VP of Investor Relations and Treasury. Please go ahead. -- Please go ahead, Christiane.
Christiane Pelz: Thank you, Cole. Good afternoon, everyone and thanks for joining us today for Five Below's third quarter 2022 financial results conference call. On today's call, are Joel Anderson, President and Chief Executive Officer and Ken Bull, 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 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.
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.
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Joel Anderson: Thank you, Christiane, and thanks everyone for joining us for our third quarter 2022 earnings call. We delivered a third quarter that substantially beat our guidance against a difficult macroenvironment, especially given the comparison to last year's extremely strong sales. We are playing offense, staying nimble and controlling what we can, all the while keeping our customer promise of delivering value at the center of our decision making. We are also executing on our long-term growth initiative that underpin our triple double plan, of which store growth is key and we are pleased that the conversions to our new Five Beyond store format are being met with a very positive customer response. All of this helped drive total sales growth of 6% to $645 million, a comparable sales decrease of 2.7% and earnings per share of $0.29, which were all ahead of our guidance for the third quarter.
The sales beat was driven by both ticket and transactions results, improving throughout the quarter. We opened 40 new stores across the country in the third quarter, finishing the quarter with 102 stores opened year-to-date. Three of these new stores ranked in the top 25 fall grand openings of all time and two of them were in our new states of North Dakota and South Dakota. We were also very excited to open our third Manhattan location in Times Square. In addition, we have already converted approximately 250 stores this year to the new Five Beyond prototype. We are very pleased with the pace and execution of this rollout as well as the customer response, which is driving higher sales and traffic to these stores. This past year, we continue to focus on our strategic initiatives of product experience and supply chain, which were key to our performance and were important enablers of our past long term targets.
Next year, we will outline our strategic pillars that will enable our Triple-Double goals. On product, the trends we mentioned last quarter continued, with our version of consumables or needs-based products resonating with customers. The candy world once again outperformed, featuring novelty candy like Slime Liquors, Snacks from great brands like Hershey and Rochelle, as well as our salty business featuring the One Chip Challenge and Talkies. In games and toys, our Swiss model products remain popular. We connected with our customers with Squish Sunday events and recently launched our exclusive Five Below Only collection of squish models. Newer trends like Anime, Funko and Hello Kitty grew and we sourced more licensed product, including items such as Disney's, Lilo & Stitch and Marvel Action figures, all at extreme value.
In addition, Halloween was more normalized as tricker treating and other Halloween rituals recovered from the pandemic impacted 2020 and 2021 years. We were pleased with our performance and our seasonal offerings were well received. Five Beyond, as I mentioned earlier, continues to be a growth driver for us, with more stores offering the full assortment in the back of the store. We have added about 200 items to the converted Five Beyond stores. Finally, I'd like to add that we took advantage of close-out opportunities and one-time special buys in the marketplace and now have additional extreme values across products of many categories. Our goal, especially this holiday inflation induced season, is to drive even more value for our customers and we will continue to selectively pursue opportunistic buys that will drive traffic and attract new customers to Five Below.
As it relates to our strategic initiative of experience, we are focused on connecting with our customers and delivering an even better shopping experience for them. We already spoke about the successful rollout of the latest prototype featuring the Five Beyond store within a store in the back of the store, which includes the re-imagined tech and room worlds. We continued to see customers who purchased Five Beyond products, spend about twice as much as those who did not, which bodes well for continued increases in store productivity. With approximately 20% of our chain in the new Five Beyond format that we unveiled earlier this year, we are on track and marching toward our goal for over 80% of the chain to be in this format by 2025. With respect to marketing for the third quarter, we invested heavily in digital, specifically in paid search and social media.
We increased our marketing spend year-over-year, focusing more on the second half of the quarter, leading into the key holiday selling season. We tested various strategies and believe our efforts were effective in driving sales. Our marketing and digital design teams did a great job communicating our value message to customers, whether digitally or in store. In addition, with increasing knowledge about our customers, gained through tokenization, we are leveraging data to target both new and existing customers more effectively. For e-commerce, we enhanced our offering by rolling out buy online, pick up in store, chain wide in September. The initial results are promising and we look forward to our customers discovering the convenience that bopis orders during this busy holiday season.
With respect to supply chain, we are proactively managing our operations and navigating dynamic conditions. We continue to look for ways to control our destiny. As an example, we strategically accelerated inventory receipts to ensure a great in-stock position for the holiday season. We remain nimble in this ever changing environment and I am extremely pleased with the positive results the team has delivered. Regarding our distribution infrastructure, we completed our five no network with the summer opening of the Indianapolis ship center. We now have the capability to reach approximately 90% of our stores within two days and the network is expected to provide efficiencies and keep our stores well stocked. Peter Town, New Jersey, our first large ship center has been fully built out with the ability now to service approximately 500 stores.
The other for ship centers will be expanded over the coming years to support our continued growth. Now, on to the all-important holiday season. We are pleased with the start of Q4, including Black Friday weekend. Our stores are stocked and ready with an amazing assortment of value products that promises to delight our customers, from branded games and toys to pet beds and from holiday decor and license keys to bluetooth speakers, we have something for everyone to complete their shopping lists. In addition to our Five Below stocking stuffers and gifts, we are also excited for Five Beyond to provide new and extreme value products in different categories, which further reinforces our position as a must-stop holiday gifting destination. For example, this holiday season, we are featuring a folding light-up scooter with LED wheels for only $20.
We are also really excited to have sourced Kylie and Kendall crossover bags for only $5, exclusive to Five Below. And to highlight these amazing values, earlier this month, we kicked off our save the holidays marketing campaign, utilizing social media, paid search, TV and key partners like Kelly Clarkson, to attract new and existing audiences. In our stores, we've hired thousands of associates to keep our shelves filled and help customers with their holiday shopping needs. We also plan to further elevate our customers' journey with approximately 70% of our stores offering assisted checkout, which improves throughput and the customer experience during the busy holiday shopping season. We can't wait to see everyone in our stores and online at fivebelow.com.
So in summary, we made great progress on several initiatives in the third quarter and are in a great position for the fourth quarter. We believe with the steps taken, including accelerating inventory receipts, expanding our value assortment, increasing marketing, adding BOPIS and growing the number of self-checkouts in stores, we are well-positioned for our customers as they adjust to an inflation holiday season and look even more for value. Last quarter, we said that Five Below becomes a needs-based retailer during the holiday season, and we are beginning to see that play out with improved transactions. We offer the extreme value our customers need to help alleviate macro pressures while providing a fun shopping experience to let go and have fun.
Our customers know they can count on Five Below for amazing, affordable gifts and stocking stuffers to celebrate the season and we won't disappoint. With that, I'll turn it over to Ken to review the financials in more detail. Ken?
Ken Bull: 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 were pleased to exceed the third quarter guidance we provided. Our sales for the third quarter of 2022 increased 6.2% to $645 million from $607.6 million reported in the third quarter of 2021. On a 3-year compound annual growth rate basis, sales growth for the third quarter was approximately 20%. Comparable sales decreased by 2.7% with a comp ticket decrease of 1.8% and a comp transaction decrease of 0.9%. Our average ticket remains strong, increasing over 20% in the third quarter as compared to the corresponding pre-pandemic period in 2019, which is in line with the results we have seen since we reopened stores in mid-2020.
We were pleased that our comps on a 1-year basis and a three-year geometric stack basis increased post-August with improvements in both transaction and ticket. We opened 40 new stores across 20 states in the third quarter compared to 52 new stores opened in the third quarter last year. We ended the quarter with 1,292 stores, an increase of 119 stores or approximately 10% versus 1,173 stores at the end of the third quarter last year. Gross profit for the third quarter of 2022 increased 2.7% to $207.8 million versus $202.4 million in the third quarter of 2021. Gross margin decreased by approximately 110 basis points to 32.2%, driven primarily by occupancy deleverage on the negative comp. As a percentage of sales, SG&A for the third quarter of 2022 increased approximately 270 basis points to 29%.
SG&A expenses as a percent of sales were higher than last year driven primarily by fixed cost deleverage, higher store expenses and increased marketing expense, all offset in part by cost management strategies initiated this year and lower incentive compensation. As a result, operating income decreased 50.7% to $20.9 million versus $42.4 million in the third quarter last year, with operating margin deleveraging year-over-year by approximately 375 basis points. These results were better than our expectations due primarily to the sales beat. Our effective tax rate for the third quarter of 2022 was 24.6% compared to 24% in the third quarter of 2021. Net income for the third quarter of 2022 was $16.1 million versus net income of $24.2 million last year.
Earnings per diluted share for the third quarter were $0.29 compared to last year's earnings per diluted share of $0.43. We ended the third quarter with $117 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 $702 million as compared to $521 million at the end of the third quarter last year. In line with our expectations, average inventory on a per store basis increased approximately 22% versus the third quarter last year. Approximately half of this increase came from unit growth as we accelerated inventory receipts to ensure better in-stock positions for the holiday period. We continue to expect the growth in average year-over-year inventory per store to moderate significantly by the end of the fourth quarter.
Now on to guidance of fourth quarter and fiscal year. We are pleased with the start to the fourth quarter, including Black Friday weekend results. We expect fourth quarter sales to be in a range of $1.085 billion to $1.110 billion based on opening approximately 48 new stores in the quarter, with comparable sales in the range of negative 1% to positive 1% versus last year's fourth quarter comparable sales increase of $0.034. As Joel said, we feel great about our holiday assortment and expect to benefit from a better in-stock position in Q4, more targeted and effective marketing and an expanded Five Beyond assortment in more stores. At the midpoint of our guidance, we expect year-over-year operating margin improvement in the fourth quarter of approximately 150 basis points, driven by leverage in both gross margin and SG&A expenses.
Lower incentive compensation and additional cost management strategies are expected to more than offset deleverage on fixed costs and higher than originally planned marketing spend. Our effective tax rate for the fourth quarter is planned at approximately 25%, which excludes the impact of share-based accounting for any share repurchases. Net income is expected to be in the range of $164 million to $173 million with diluted EPS expected to be in the range of $2.93 to $3.09. For the full year, we expect sales in the range of $3.38 billion to $3.63 billion or an increase of 6.7% to 7.6% versus fiscal year 2021. We expect comparable sales in the range of negative 3% to negative 2%, and EPS in the range of $4.55 to $4.71, which is an 8.1% to 4.8% reduction versus last year.
These full year projections assume opening 150 new stores and completing approximately 250 conversions to the new Five Beyond store format. For fiscal 2022, we are planning to spend approximately $235 million in gross capital expenditures, excluding the impact of tenant allowances. This reflects the opening of our new ship center in Indianapolis, opening new stores and executing conversions and investing in systems and infrastructure. In conclusion, we had a better-than-expected third quarter and are off to a good start for the fourth quarter. It remains a dynamic economic environment. However, Five Below is a resilient retailer. Our teams continue to move quickly to adjust to changing customer preferences, and I want to thank them for their ongoing commitment and dedication.
The combination of our long runway for growth, industry-leading new store economic model and strong balance sheet, combined with disciplined cost management sets us apart and positions us to weather economic uncertainty, all while continuing to deliver on our strategic priorities to capitalize on the significant growth opportunity that lies ahead. With that, I'll turn it back over to the operator to begin Q&A. Operator?
Operator: And today, it'll come from Kathy Burns with JPMorgan.
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