Five Below Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
June 1, 2023

There are 14 speakers on the call.

Operator

Good day, and welcome to the 5 Below First Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I'd now like to turn the conference over to Christiana Peltz, CTO of Investor Relations. Please go ahead.

Speaker 1

Thanks, Sarah, and good afternoon, everyone. Thanks for joining us today for 5 Below's Q1 2023 financial results conference call. On today's call are Joel Anderson, President and Chief Executive Officer and Ken Bull, Chief Operating Officer, 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.

Speaker 1

Such forward looking statements are subject to both known and unknown risks 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 Joel.

Speaker 2

Thank you, Christiana, and thanks everyone for joining us for our Q1 2023 earnings call. We were pleased to achieve 1st quarter results in line with our guidance with sales growth of approximately 14% to $726,000,000 And a transaction driven 2.7 comp sales increase. It continued to be a challenging time for consumers with persistent inflation, Lower tax refunds and fewer government sponsored benefits compared to the stimulus fueled periods of the pandemic. However, being an extreme value trend right retailer, we continue to attract and retain more customers and grow Comparable transactions in both converted and non converted stores. Our transaction increase of 3.9% Was the highest since 2017, excluding the stimulus fuel period during the pandemic and is a strong indicator that 5 Below Is a destination customers rely on even in tougher economic times.

Speaker 2

We are a resilient retailer with a flexible model And we continue to play offense, opening new stores and quickly reacting to customer needs to bring them the Wow products that they want at amazing values, while also executing against our strategic pillars to achieve our triple double growth. On product and trends, we saw continued popularity of a broad variety of trends across our worlds in Squish, Hello Kitty, anime, collectibles and our version of consumables, including candy, snacks and beverages in our candy world and also beauty items and accessories in our style world. The new Super Mario movie released in April was a hit And we sold through tees, posters and other items and quickly procured more. It is nice to see licenses emerging again. For Easter, we had great baskets and candy at extreme value that resonated with our customers.

Speaker 2

The broad based results of our worlds Demonstrate the relevancy of our products. All through the quarter, we made progress across our 5 key strategic pillars that underpin our long term triple double vision. As a reminder, we are looking at each of these 5 pillars through the lens of customer relevancy And are unleashing the power of data and analytics to drive results. The first pillar is store expansion. We are expanding our reach to put 5 Below Anywhere, as we said at our Investor Day.

Speaker 2

We now expect In the Q1, we opened 27 new stores across 19 states. 2 of these stores were in the top 25 spring grand openings of all time. With our strong balance sheet, seasoned and nimble teams And focused execution, we acquired several leases from other retailers and bankruptcy, positioning us to Our original 200 store openings goal for this year. These negotiations took time and effort from our real estate, Construction and design, legal and finance teams on top of their already busy jobs and we are very thankful for their commitment in achieving A great result. Moving to our 2nd pillar, store potential.

Speaker 2

We are focused on growing our average unit volume through the addition of 5 Beyond In the back of the store, as well as new products and services such as ear piercing and fun snarky helium balloons. We converted approximately 250 stores into the new prototype in the Q1 alone and are on track to convert over 400 stores To the new 5 Beyond prototype this year to achieve our goal of 5 Beyond everywhere. These conversions continue to drive traffic And we see a large opportunity to grow 5 Beyond from the current single digit penetration of sales today. Our 3rd pillar is product and brand strategy. We've discussed how 5 Below is a merchandise driven organization And how our merchants are relentless about scouring the globe to pursue trends, wow, newness and value.

Speaker 2

In the Q1, We were very pleased to officially incorporate and open our 1st global sourcing office in India. We are very excited to have a presence on the ground to work directly with our factories overseas Together develop and bring to market even more amazing products at disruptive and distorted value for our customers. This was a huge effort by so many people who On brand strategy, our digital marketing investments continue to grow and reach more customers to build our brand awareness, drive customer traffic Position 5 Below as a go to destination for fun. We conducted a successful campaign in Q1 surrounding Easter, While continuing to push evergreen offerings of the brand. In doing this, we have successfully used data and analytics to understand audiences To segment and optimize our digital marketing investments.

Speaker 2

Complementing our paid digital marketing efforts, Our social presence and customer fans are growing in terms of followers' engagement across social media platforms. In addition to influencers creating content and posting about us, celebrities like Walker Hayes and Bethenny Frankel shared the videos about their visits to 5 Below on TikTok. Their post had high viewership and engagement. The 4th pillar is inventory optimization. The focus of this pillar is to further enable the scale required to achieve Our triple double strategy, while continuing to leverage inventory as an asset to drive sales and maximize profits.

Speaker 2

Using technology and data analytics, we are focused on improving inventory forecasting, ordering, replenishment and flow With a goal of increasing turns and improving end to end visibility, we've already implemented a new vendor management platform that increases transparency And enhances real time communications and we are beginning to work on both the new planning system and a replenishment forecasting tool. The 5th pillar is crew innovation, which focuses on the critical pipeline and talent that we need to achieve our triple double. We will hire and train hundreds of thousands of crew members in the next several years in order to serve our customers, lead our teams, ship our product And support our strong growth. As you can see, we have been busy this Q1. In summary, we are pleased with our financial results And operational accomplishments in the Q1 amid a challenging macro backdrop.

Speaker 2

With May actualized, We have a good perspective on Q2, in which we expect to see a continuation of transaction increases. As we look to the remainder of the year, we believe many of the headwinds of the pandemic era that impacted us will begin to emerge as tailwinds. We are accelerating our offensive playground playbook. We are opening 200 plus new stores and completing over 400 conversions. We're executing a focused marketing campaign to bring to life the new 5 Beyond store format And we are capitalizing on an improving supply chain, including favorability in freight costs and continuing to build our strong pipeline of new stores for 2024.

Speaker 2

With that, I will turn it over to Ken to review our financials and our outlook in more detail. Ken?

Speaker 3

Thanks, Joel, and good afternoon, everyone. I will begin my remarks with a review of our Q1 results and then provide guidance for the Q2 and the full year. Our sales for the Q1 of 2023 increased 13.5% The $726,200,000 from $639,600,000 reported in the Q1 of 2022. On a 4 year basis since 2019, total sales for the Q1 this year increased by an approximate 19% compounded annual growth rate. Comparable sales increased by 2.7% with a comp Transaction increase of 3.9%, partially offset by a comp ticket decline of 1.2%.

Speaker 3

We opened 27 new stores across 19 states in the Q1 compared to 35 new stores opened in the Q1 last year and continue to be very pleased with the productivity of our new locations. We ended the quarter with 1367 stores, An increase of 142 stores or approximately 12% versus 12 25 stores at the end of the Q1 of 2022. Gross profit for the Q1 of 2023 increased 13.6 percent to 234 $800,000 versus $206,800,000 in the Q1 of 2022. As expected, Gross margin of 32.3 percent was flat versus the Q1 of 2022. As a percentage of sales, SG and A for the Q1 of 2023 increased approximately 80 basis points to 26.5% versus last year's Q1, driven primarily by a planned increase in marketing expense as well as higher costs in certain store related expenses.

Speaker 3

As a result, operating profit finished at $42,400,000 versus $42,300,000 in the first quarter of 2022, while operating margin decreased approximately 80 basis points to 5.8% as expected. Net interest income was $3,650,000 as compared to a net other expense of $237,000 in the Q1 of 2022 as our investment income benefited from rising interest rates. Our effective tax rate for the Q1 of 2023 was 18.6% compared to 22.3% in the Q1 of 2020 This decrease was due primarily to a higher benefit from share based accounting this year versus last year. Net income for the Q1 of 2023 was $37,500,000 versus net income of $32,700,000 last year. Earnings per diluted share for the Q1 was $0.67 compared to last year's earnings per diluted share of $0.59 Diluted EPS included a share based accounting benefit of approximately $0.06 this year compared to an approximate $0.03 benefit in the Q1 of 2022.

Speaker 3

We ended the Q1 with $424,000,000 in cash, cash equivalents and investments And no debt, including nothing outstanding on our $225,000,000 line of credit. Inventory at the end of the first quarter was $534,000,000 as compared to $504,000,000 at the end of the Q1 last year. Average inventory on a per store basis decreased approximately 5% versus the Q1 last year As we strategically ordered inventory earlier last year to ensure healthy in stock positions. We are pleased with the current level and quality of our inventory going into the summer season and expect to be well positioned for the Q2. Now I'd like to turn to our guidance.

Speaker 3

For the Q2 of 2023, net sales are expected to be in the range of $755,000,000 to $765,000,000 an increase of 12.9% to 14.4%. At the midpoint of this guidance, total sales are expected to show an approximate 16% compounded annual growth rate for the 4 year period since 2019. We plan to open approximately 40 new stores in the Q2 this year As compared to 27 stores opened in the Q2 last year and are assuming a 2nd quarter comp sales increase In the range of 2% to 3%. As a reminder, the slower cadence of opening 1 third of our annual new stores in the first half of this year Was due primarily to permitting and landlord related delays. We expect operating margin of 7.5% to 7.9 percent in the Q2 of 2023 or deleverage of approximately 70 basis points at the midpoint As a shift in marketing spend and more normalized incentive compensation costs this year are only partially offset by lower freight expenses.

Speaker 3

Net interest income is expected to be approximately $4,000,000 for the 2nd quarter And taxes are expected to be approximately 26%, which does not include any potential impact from share based accounting. Diluted earnings per share for the Q2 of fiscal 2023 are expected to be $0.80 to $0.85 versus $0.74 in diluted earnings per share in the Q2 of 2022. Now on to the full year. We are tightening the range of our EPS guidance with the midpoint consistent with our previous guidance, and we still expect that at this midpoint, We would generate slight operating margin expansion. Our total sales for the second half of the year are still expected to grow in the high teens on a 4 year CAGR basis similar to the first half with a comparable sales increase in the second half of the year Currently assumed in a low single digit range.

Speaker 3

Fiscal 2023 includes the 53rd week, Which is expected to add approximately $40,000,000 in sales and approximately $0.08 in EPS. My remarks on full year guidance will refer to the 53 week year unless otherwise noted. For 20 An increase of 13.8% to 16.1%. The comparable sales increase is expected to be in the range of 1% to 3%. We now plan to open over 200 new stores and to end the year with over 15 40 stores or unit growth of approximately 15%.

Speaker 3

For the full year, the slight leverage in operating margin at the midpoint of our guidance is driven by lower freight costs offset in part by lapping lower incentive compensation and certain one time cost management strategies we put in place Last year. With our strong cash balance and healthy free cash flow generation, combined with higher year over year interest rates, We are still assuming a significant increase in net interest income this year. We expect a full year effective tax rate for 2023 of approximately 25%, which currently assumes a higher effective tax rate for the second half of the year of approximately 26% and does not include any potential future impact from share based accounting. Net income is expected to be in the range of $297,000,000 to $319,000,000 representing a growth rate of approximately 13.5% to 22.1% over 2022. Diluted earnings per share are expected to be in the range of $5.31 to 5.71 implying year over year growth of 13.2% to 21.7%.

Speaker 3

On a 52 week comparative basis, Growth for diluted earnings per share is implied to be 11.5% to 20%. This guidance does not include Any potential future impact from share repurchases. With respect to CapEx, we now plan to spend in total Approximately $335,000,000 in gross CapEx excluding the impact of tenant allowances. This reflects the opening of over 200 new stores, including those recently acquired from bankrupt retailers, Converting over 400 store locations, commencing expansions to our distribution centers in Georgia and Arizona And investments in systems and infrastructure. In summary, we delivered 1st quarter results within the range of our outlook and against a difficult macro backdrop.

Speaker 3

As Joel mentioned, we also made important operational progress against key strategic objectives. This once again is a testament to the executional capabilities and focus of our teams and I am extremely grateful for their efforts. 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?

Operator

Thank you. We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster. Our first question comes from Simeon Gutman with Morgan Stanley. Please go ahead.

Speaker 3

Good afternoon. My one question with no extra parts is literally every company across The retail landscape that we follow, whether they're selling to lower income or higher income, guided strain on the consumer, basket pressure, Some weakness. So I'm curious, Joel, if you can give us some insight into your quarter, the cadence of it, seeing if we're over a hump In terms of your customer, and then inside how your customer is sort of handling it in terms of basket and visits, just as a way to Sort of gauge if we can expect the steadiness going forward.

Speaker 2

Yes. Thanks, Simeon. And it's a great question. I don't know that I could say that our customer is over it, but I would say that the indication of Such a strong transaction led quarter for us, probably indicates that like we've seen multiple times, When times are tough for our customers, they have to rebalance their balance sheet, figure out their spending patterns again and 5 Below becomes part of their new routines and so clearly that showed up in transactions. Look, as far as the quarter goes, We were really pleased with Easter and like many called post Easter was a softening.

Speaker 2

So I think we're seeing trends get back to more normal pre pandemic where the customer buys closer to the events. We certainly saw that with Easter. We've seen it with Mother's Day. That trend happened last year with things like Halloween. There's no reason that wouldn't continue to happen.

Speaker 2

We see the end of the month cycle with At the end of the month, the sales get softer, then they really pick up from the beginning of the month. So all that, we've got many, many years of Following that and we're really kind of getting back to trends that we saw closer to last year. Look, we're trend right. We're Stream value, we believe that the last place customers cut out are their kids. And so all that should bode well In tough times as well as in really strong times.

Speaker 2

So quarter was on the soft end of it, but We've definitely seen an improvement here and I think that the peak of the headwinds are behind us. Thanks, Simeon.

Operator

Our next question comes from Scot Ciccarelli with Truist. Please go ahead.

Speaker 4

Hey, guys. Scott Cicekarelli. So I guess my question is, we've had declines in average ticket for several quarters now. Just given the growth in 5 Beyond, I guess the question is at what point would you expect average ticket to shift into positive territory given the current environment? Thanks.

Speaker 2

Thanks, Scott. You've seen declines, but they've been pretty small. And I think it's important to remind everybody post Pandemic, we saw extreme increases in ticket. And so while there's been some declines, they still are Much higher than they were pre pandemic and double digit increases. So it has ticked down.

Speaker 2

I think That's a sign the customer is being very discerning in what they put in their basket. But at the same time, I think where the positivity for 5 Beyond really is proving to play out is on trips. So that shows up in transactions. We're just one more reason to come visit 5 There's another reason. Ken, anything else to add?

Speaker 3

No. I think you hit it on the 5 Beyond, Scott. Early on, we've talked about this, and we're still seeing it. It's really driving an increase in transactions. I think it's somewhat of the newness of the store when the customer comes in and they see that.

Speaker 3

That may change because we're still early in this, but at least out of the gate, we're seeing that increase on the transaction side versus ticket. Thanks, Scott.

Operator

Our next question comes from Matthew Boss with JPMorgan. Please go ahead.

Speaker 5

Great. Thanks and congrats on a nice quarter.

Speaker 2

Thanks, Matt. Thanks, Matt.

Speaker 5

So Joel, could you expand on the broad based performance that you're seeing across worlds and just the drivers And then Ken, with store productivity the best in 2 years. Could you just elaborate on the performance of some of the new builds and speak to the acceleration decisions that you made around new stores and conversion?

Speaker 2

Yes. Look, Matt, the performance was really 7 out of our 8 worlds were Extremely strong, all positive. Really the only world that's running negative comps is tech and I think that's pretty much across the marketplace. But really led by our version of consumables, I mean candy, snack, beverages, HBA, those were the leaders of the quarter. But the fact that 7 out of our 8 worlds were positive, it Shows you that the customer really shopped our entire offering.

Speaker 2

Full store.

Speaker 3

Yes. And then Matt, on the store productivity, you're right. We've seen in some recent quarters back to that kind of 90 plus Productivity performance, which we're happy to see. Joel actually called out this quarter a couple of stores again hit records for spring grand opening performance. And if you look at our guidance, if you do the math around that, we do expect that to continue as we move forward to get back to that 90% productivity as we move through the

Speaker 2

year. All right. Thanks, Matt.

Operator

Our next question comes from David Bellinger with ROTH MKM. Please go ahead.

Speaker 6

Hey, Joel. Thanks for taking the question. On the leases you recently acquired, it looks like you picked up maybe 18 of those from a Home furnishings retailer no longer in operation. And those store sizes look to have a little more square footage than your typical box. Looks like most of them are In excess of 10,000 square feet.

Speaker 6

So is there any thought or testing around maybe a slightly larger store format and including Not just a wider selection of product, but maybe some additional space for 5 Beyond Finance. Thanks.

Speaker 2

Yes. Thanks, David. The majority were picked up from Tuesday morning and whether it's 10,000, 11 It's an immaterial difference to us. We've got plenty of stores out there that have a little extra square footage. But I would tell you about the prototype is we continue to Innovate with our prototype.

Speaker 2

I mean the original 5 Below prototype was only 4000 to 5000 square feet. Then we created the 7 7,500 Square Foot, which was when I got here and we've slowly grown it now close to 10. And the way we've set up 5 Beyond, David, is We can continue to grow 5 Beyond. All we have to do is keep pushing that back wall back. And so it's only limited by our merchants coming up with Rituals and milestones are growing up that they think we can build a classification out of.

Speaker 7

I

Speaker 2

think Pat's a great example, one that we've built over the last few years. But as of this point in time, We are really more focused on these next couple of years of massive conversions to the current prototype that we shared with all of you down in Pembroke in Florida. But it's not to say down the road there is an opportunity to keep growing the prototype. Thanks. Appreciate it, David.

Operator

Our next question comes from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.

Speaker 8

Thanks. This is Jack Cole on for Jeremy. So similar to the first question, we've also heard Widely across retail pressure from shrinkage, but you guys saw your GMs flat year over year as you expected. So just any comments on any impacts you guys saw from shrink in the quarter? And if so, could you quantify it just in terms of bps?

Speaker 2

Yes. Look, shrink is definitely something that's impacted retail. We're no To it, we trued that up last year and it had an impact on our 4th quarter. We are accruing at the higher rates this year and doing things on our part to mitigate shrink. We Change our return policy as an example.

Speaker 2

I don't know Ken anything else on shrink?

Speaker 3

No, I think Jack, as Joe mentioned, we're focusing on preventative measures around shrink. I mean, at this point, we're not experiencing anything materially different than what we saw at the end of last year when we did a lot of our physical inventories. And as Joel mentioned, that higher rate that we came out of last year with has been included in the guidance that we provided for

Speaker 2

So it's all baked into this year's guidance at a higher rate. Yes. Thank you, Jack.

Operator

Our next question comes from Michael Lasser with UBS. Please go ahead.

Speaker 9

Good evening. This is Atul Maheshwari on for Michael Lasser. Thanks a lot for taking our question. We have a question on 5 Beyond. Are you still getting a mid single Digit lift from the 5 Beyond remodels and is there any risk that the lift moderates from here given the macro backdrop?

Speaker 2

Thank you. That lift has been consistent and we're Seeing that continue in the stores that we first converted and in the stores that have just recently converted. So We see that lift almost immediately and it has continued throughout. But that's we're extreme value And the customer loves what they're seeing in 5 Beyond and that mid single digit continues to be the forecast we expect. Thank you.

Operator

The next question comes from John Heinbockel with Guggenheim Securities. Please go ahead.

Speaker 10

Hey, Joel, two quick things. Number 1, the acceleration of the 5 Beyond conversions, can you accelerate it further, Meaning do more than 400 this year and accelerate it next year. And then secondly, your current thoughts on the Tech World reset, How you feel about that and the ability because you called that out, can that now move us back into positive territory in that category?

Speaker 2

Yes. Thanks, John. Great question. Technically, we could accelerate conversions. However, I would tell you the people that do our conversions are also the same team that does our new stores.

Speaker 2

And so, It was purposeful this year that we front end loaded our conversions. As you can tell, our new stores are back end loaded this year. And so that team is really planned to wrap up conversions here by the end of Q2 to really focus on The back half new stores, I mean, this is a record back half opening for us. It's going to be about 1 third, 2 thirds front half to back half. And so that's probably the primary reason we're not accelerating them.

Speaker 2

But we've got a We feel the 400 are getting done. We feel really strong about them and then we'll pick those right back up starting in the beginning of the year. And as far as Tech World goes, Yes. We've seen some improvement from that. We've got an even bigger reset coming Early this fall, I think there's a lot of rumors out of some changes happening with the Apple release that will be positive for us.

Speaker 2

And I think you'll really see the improvements as we get into the second half of Q3 and certainly the all important Q4. Thanks, John.

Operator

Our next question comes from Edward Kelly with Wells Fargo. Please go ahead.

Speaker 11

Hi, guys. Good afternoon. I wanted to ask you about the comp cadence. The Q2 comparison

Operator

Seemed like

Speaker 11

it was going to be your easier comparison of the year on a multiyear basis. Based upon how you're guiding, I think it implies A little bit of acceleration in the back half. So just thoughts around that. And then as we think about holiday generally, Joel, in terms of like product standpoint, things that you're excited about from a holiday perspective, and I know it's early, but Sort of like what you're expecting for the season?

Speaker 2

Yes. Hey, Ed, on the comp, I think the acceleration, I think you've got to really look at it more on the 4 year Geostacks and if you look at the 4 year total sales CAGR, the first half comp It's very similar to the second half comp. And I think what we forecasted for Q2 It's a very in line take the midpoint of that is dead on in line with where we came out of Q1. And then the back half of the year, I'm not really at this point to really talk about trends we're Chasing things that we're really excited about. That's something that we at this point in time, you can appreciate.

Speaker 2

We want to keep that

Operator

Our next question comes from Jason Haas with Bank of America. Please go ahead.

Speaker 7

Hey, good afternoon and thanks for taking my question. Can you talk about how May is running to date versus the 2% to 3% comp guide that you gave for 2Q? And then can you just remind us The compares look like as you move through 2Q, I think May was one of the softer months last year, so did the compares get harder through the quarter?

Speaker 3

Sure. Thanks, Jason. Normally, we don't provide intra quarter activity, but I can tell you that When we prepare our guidance for our current quarter, we consider where we are and then we look forward to see if there's anything Any changes in the business or expectations or anomalies anniversaries from last year. So relatively in line with what we're guiding to in terms of that 2% to 3%. You mentioned the kind of changes in the business last year as we move through the quarter.

Speaker 3

It was relatively consistent, Possibly a slight deceleration last year based on some of the things that were going on around the customer and inflation, but That's kind of what we're thinking now in terms of the guidance for Q2.

Speaker 2

But pretty much all 3 months in Q2 last year were Relatively in line with each other.

Speaker 3

Yes, from a comp perspective. From a comp perspective, yes.

Speaker 2

Thank you, Jason.

Operator

Next question comes from Brian Magill with Oppenheimer. Please go ahead.

Speaker 7

Hi, good afternoon. Nice quarter. Thanks.

Speaker 3

Thank you.

Speaker 7

Thank you. Thank you for taking my question. Just and not to be nitpicking, but as you look at the guidance, we You take the, I guess, the top end of the annual comp guidance down by a point. So what's behind that? Is it something you're seeing now, some new The back half of the year is something more mechanical?

Speaker 3

Yes. Yes, Brian, Yes. When you look at the full year comp guidance, our previous guidance was a 1% to 4% comp. And then we move to a 1% to 3%, so you're right, we brought the high end of that comp down. That really just reflects the expected performance If you look out at the first half of the year, and as I mentioned in my prepared remarks, the second half comps imply a range of Low single digits and somewhat similar to what we had talked about on our first call earlier in the year, That low end for the second half would assume some type of deterioration in the, say, in the macro consumer environment.

Speaker 3

And then the high end would assume

Operator

Next question comes from Kate McShane with Goldman Sachs. Please go ahead.

Speaker 12

Hi, good afternoon. Thanks for taking our question. A lot of our questions have been answered already. But we wondered to the extent Is there any way to quantify maybe a trade down or just what if you had any more higher

Speaker 2

Yes. Hey, thanks, Kate. And I thought since all the questions were answered, you're going Ask how I was doing or something. But I'll answer the trade down question instead. No,

Speaker 1

honestly, we haven't seen

Speaker 2

Anything that is significant on that one, we Continue to see our lower end customer spending more with us, But we are seeing transaction increases across the board, but it's still like our core customer is still Really dependent on us. And I think if anything, they're probably spending more of their Discretionary dollars with us, but nothing significant yet on the trade downside.

Operator

Our next question comes from Karen Short with Credit Suisse. Please go ahead.

Speaker 11

Hi, good afternoon. This is Dan Silverstein on Karen's team. Just two really quick ones. First, on the strong transaction growth, are you able to assess how much of the contribution is from new customers 1st existing customers shopping more frequently. I know you guys have done a lot of work on leveraging customer data.

Speaker 11

So Any comments on your consumer behavior will be helpful. And then really quickly, can you just qualitatively speak

Speaker 2

Look, on the transaction side and then Ken, you can talk about margins. It's actually, Dan, both. We're seeing it both in the form of new customers and existing customers coming in more often. So that's really nice to see Both an improvement in new customers as well as our existing customers visiting us more often. Ken, you want to take?

Speaker 3

And Dan, yes, on the operating margin leverage, I'll just kind of start with in my prepared remarks on the full year. So just we expect slight So the back half of the year will be operating margin leverage that we're going to see. Q4 is going to be, from We're looking at now slightly more operating leverage than Q3. And when you get into the numbers there, The 3rd quarter gross margin leverage is probably going to

Speaker 4

be

Speaker 3

double that of the operating margin leverage for that quarter. And when you get into Q4, again with the freight cost benefit and some of those other things going on, the deleverage around In SG and A, we're probably going to see gross margin leverage in excess of 150 basis points In Q4, and SG and A deleverage probably just a little bit less than 150 basis points.

Speaker 2

All right. Thank you very much.

Operator

Our next question comes from Paul Lejuez with Citi. Please go ahead.

Speaker 12

Hi, guys. This is Kelly on for Paul. How big that business is for you today versus maybe peak or even pre COVID levels? And what is kind of coming down the pipeline that got you excited? And then just to follow-up on The back half guidance, just curious if there's any differences 3Q to 4Q or are we just sort of plugging in that 2 ish

Speaker 2

Look, I think the Kelly, The comment on license, it's really been non existent for 3 years. And And some of that's because movies has been pretty much non existent since COVID. It's still very small. It was really nice to I think Super Mario surprised us, but it still wasn't it didn't have a Material impact on the business, but it does give us hope that some of the movies coming out this year are going to turn into licenses. It's Just an example of another trend that's back as they appear, we'll take advantage of them.

Speaker 2

And Ken, on the back half, Kelly?

Speaker 3

Yes. And Kelly, on the back half, If you're looking at the modeling, from a comp perspective, the way we're seeing it now really in both Q3 and Q4, We're assuming low single digit positive comp for both of those quarters. And then from an operating margin perspective, again, we would expect to see leverage in both Q3 and Q4. And the way we're looking at it now, Q4 is looks like it's achieving slightly more leverage than Q3.

Speaker 2

Very good. Hey, thanks, Kelly. Thanks, Kelly.

Operator

Our next question comes from Steve McManus with DNB Paribas, please go ahead.

Speaker 7

Hey, great. Thanks for taking our question. So So on gross margins, recognize that 5's version of consumables is unique, but is there any mix shift impacts working through the P and L That's worth noting.

Speaker 2

I don't think anything material worth noting. We've seen this shift now for Over a year, and it continues to tick up, but it's not a material shift, Point here, point there. And like we always do, I mean, we chase trends. And so You see one area go up and another area go down, but it's not so significant that it's moving 1,000 basis points or something like that. Thanks, Steve.

Operator

Our next question comes from Chuck Grom with Gordon Haskett, please go ahead.

Speaker 7

Hey, Kate, most of my questions have been answered. So I guess how are you doing Joel? It will be my first one and the second would be, I guess just bigger picture, you guys have been talking about tokenization for a while. I guess at what point do we take that

Speaker 2

No, look, as tokenization is firmly implemented now, I think we are at the point of starting to explore loyalty. Some of that probably just got put on hold because we For 3 years, it's just been COVID and then supply chain and then inflation and the teams have just been so busy dealing with mix Shifts and product changes and all that. But the next logical step, Chuck, is really to Now that we've got some of the base in place to start looking at putting in a loyalty program, I think you got to look at it as 25, not 24. And we'll certainly keep you all updated as we start to put that in place. But The groundwork has been laid and as we continue to see more normalization of our business and we're back to Playing offense, as I called out for several reasons, that's one that is on the pipeline.

Speaker 2

Thanks, Chuck.

Operator

Our next question comes from Christina Ketan with Deutsche Bank. Please go ahead.

Speaker 13

Hi, good afternoon, both of you. Thank you for taking the question. Just a quick follow-up to some of the strength that you're seeing in traffic. Are you doing anything differently, I guess, merchandise or either price point wise? I know you said candy snacks and HBA performed particularly the best, but How do you view the opportunity to further capitalize on a potentially weaker consumer environment now that you're doing a lot more data analytical work?

Speaker 2

Thank you. Yes. Thanks, Christina. Look, the one thing that's been Consistent since the beginning and is something we're really probably even more focused now is really delivering value And specifically in the $1 to $3 range, you walk in our stores now, there's a 16 foot wall that's all a buck. And I think that is really resonating with the customers.

Speaker 2

And so while we talk a lot about the growth opportunity in 5 Beyond on these calls, The core behind 5 Below is not only the $5 Wow product, but right now the customer is resonating with the $1,000,000 $2,000,000 $3 product and certainly candy and snack, we have a larger majority in that price point. But Take a look at the 16 foot wall we got in our stores now that's all priced at $1 and that is value

Operator

This concludes our question and answer session. I would like to turn the conference back over to Joel Anderson for any closing remarks.

Speaker 2

Thank you everybody for joining us today. Let me just close by reiterating what I said earlier in my closing prepared remarks. We truly are accelerating our offensive playbook. I reiterate, we are going to open 200 plus stores new stores this year. We will complete over 400 conversions.

Speaker 2

We will capitalize on an improved supply chain. We already have a strong pipeline of new stores for 2024. And as you've heard today from both Ken and I, Our growth prospects at 5 Below are strong. I hope you all have a great summer and make sure you visit our stores and for all your summer fun. Thanks very much and have a great night.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Five Below Q1 2024
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