Edited Transcript of FIVE.OQ earnings conference call or presentation 9-Jun-20 8:30pm GMT

Philadelphia Jul 4, 2020 (Thomson StreetEvents) — Edited Transcript of Five Below Inc earnings conference call or presentation Tuesday, June 9, 2020 at 8:30:00pm GMT

Five Below, Inc. – VP of IR

* Joel D. Anderson

Five Below, Inc. – President, CEO & Director

* Kenneth R. Bull

Five Below, Inc. – CFO & Treasurer

Oppenheimer & Co. Inc., Research Division – MD & Senior Analyst

* Charles P. Grom

Telsey Advisory Group LLC – Senior MD, Assistant Director of Research & Senior Research Analyst

* Judah C. Frommer

UBS Investment Bank, Research Division – MD and Equity Research Analyst of Consumer Hardlines

Good day, and welcome to the Five Below First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Christiane Pelz, VP of Investor Relations. Please go ahead.

Christiane Pelz, Five Below, Inc. – VP of IR [2]

Thank you, Chad. Good afternoon, everyone, and thanks for joining us today for Five Below’s first quarter 2020 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.

Joel D. Anderson, Five Below, Inc. – President, CEO & Director [3]

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Thank you, Christiane, and thanks, everyone, for joining us for our first quarter earnings call. Before we get started, I want to share how deeply saddened I am by the events of the past weeks. We, as a company, simply do not tolerate racism, and we want to proactively be a part of the solution. We are taking time to listen and learn how we can do just that.

Since the day, Tom and David founded Five Below in 2002, we have been a store of the community. Today, in honor of George Floyd and all other victims of racial discrimination, we closed our stores in Houston, as we did in Minneapolis last Thursday and in Fayetteville last Saturday.

During this unprecedented period, which began with COVID-19, we adapted swiftly and we have done so with the safety and well-being of our customers and crew top of mind.

As I look back at Q1 and what has taken place since our last earnings call, there are 5 key themes that define our actions. Number one, health and safety. Without a question, the health and safety of our customers and crew has been and remains our #1 priority. With this in mind, we closed chain-wide on March 20, and we reopened — and as we reopen, we have implemented strict health and sanitation protocols consistent with CDC and other guidance at our stores, ship centers and offices.

Number two, financial strength. We entered this period with a strong debt-free balance sheet and a business that self funds its growth while generating cash. In a closed store environment, we moved quickly to address costs and capital outlays as well as increasing our line of credit, all in order to further bolster our liquidity. We had to make some difficult but necessary decisions to do this. And as we reopen, we retain the financial discipline that has always been characteristic to how we operate.

Number three, flexibility and adaptability. I’ve been nothing short of amazed by the resilience and flexibility demonstrated by our teams across the entire organization as they navigated the challenges presented by the pandemic. Our business model, with its 8 worlds and historical ability to rapidly flex in response to trends is inherently agile, but it is our people, will enable and embody that agility and I could not be more proud to lead this amazing team.

Number four, unwavering commitment to value. Delivering WOW product at incredible value to the customer is core to our DNA. We know how important this promise of value is to our customers, especially today, and we are more committed than ever to delivering value day in and day out.

Number five, positioned for growth. Even as we move swiftly to navigate the current environment, we simultaneously made progress on key strategies focused on experience, product and supply chain to support the significant growth that lies ahead for Five Below. While we had to play defense for a period of time in Q1, we quickly got back to playing offense and positioned ourselves for growing again.

Speaking of growth, as we sit here today, we are reopening our eighth wave of stores. Let me share what we did to enable a smooth reopening process. Prior to our initial wave of reopenings that began on April 21, we spent several weeks preparing our stores, including retaining our store managers to help with this process. During the closure period, we also developed an alternative service with curbside pickup, which was available at stores were allowed by local and state mandates.

We also enhanced our e-commerce channel, reallocating resources to meet the high demand during this time. Above all, however, we listened to our crew and our customers as we operated with these limited curbside capabilities and ramped up our e-commerce operations.

As of today, we’ve reopened approximately 90% of our stores. George Hill and his operations team have seamlessly executed this reopening process with amazing speed, and we are pleased with what we are seeing in terms of sales performance.

Comparable sales for our reopened stores, including our e-commerce business, are tracking up approximately 8% for the second quarter-to-date, with comp contribution split about evenly between the 2 channels. While we are very encouraged by the strong early performance as stores have reopened, our enthusiasm is tempered by the acknowledgment that significant stimulus dollars began to hit bank accounts in mid-April, and there’s likely some level of pent-up demand that is also being reflected in our current performance.

In addition, we have experienced some store disruption related to the protests that impacted sales during the last 2 weeks. Given the still substantial uncertainty around the impact of this pandemic in the coming months, we are preparing for a range of possible scenarios and have contingency plans in place for each as we look to the remainder of the year and into 2021.

Now turning back to the first quarter. With all of our stores closed for most of the second half of the quarter, which included the all-important Easter selling season, total sales were down 45% over last year, and we had a loss per share of $0.91. As we had mentioned previously, we were very pleased that the business was tracking to a 2.9% comp increase prior to the pandemic announcement on March 11.

During the closure period, our e-commerce business was very strong, with record daily sales which we fulfill out of Pedricktown and the newly acquired Cincinnati operations of Hollar.com. While we were very pleased to see our e-commerce sales grow over 4x versus last year’s first quarter, this level of growth has moderated as stores have reopened. We still expect e-comm penetration to remain in the low single-digit range in relation to our overall sales for 2020.

In addition, to help mitigate the impact of the closed stores, we made several difficult decisions to cut costs and limit cash outlays as we focused on maintaining our financial health, flexibility and liquidity, as Ken will discuss in a more detail in a moment. We want to extend our appreciation to all those impacted by these actions for leaning in during this extraordinarily difficult time.

Regarding capital expenditures, several projects were delayed given the environment, including the openings of our Texas and Midwest distribution centers and our new store opening plans. We now expect our Texas DC to open late in the second quarter and to begin the building of our Midwest DC in 2021, with the expectation for it to open in 2022. The West DC remains on track to open in the second half of 2021.

As it relates to our store plans, as we have communicated, we now expect to open 100 to 120 stores in 2020, representing 11% to 13% growth over 2019. This compares to our previous plan for approximately 180 store openings.

New stores remain our most significant growth opportunity, and we continue to see a 2,500-plus store potential in the United States. We hope to return to a more normalized growth trajectory and new store opening program in 2021.

Five Below has always stood for incredible value. With a WOW factor in a bright, clean and fun treasure hunt store experience, for tweens, teens and beyond. Our founders originally referred to us as the « yes! » store, because of the affordability of our merchandise assortment, which allows parents to say yes to their children. This commitment to value is stronger than ever today. And in tougher economic times, we believe this will resonate even more with new and existing customers alike.

With respect to merchandise, we have quickly pivoted our focus to enhance our offering of essential goods, consumables and everyday items such as health care and personal care that we know our customers looking for today. We’ve allocated more space to items such as hand sanitizers and wipes as well as masks and added new home essentials, including kitchen and bath product to our assortment. We also sourced some great new tech items to help customers work from home.

We are pleased to be there for our customers and add some aspect of fun to their lives by continuing to provide cool toys, fun teas, snacks and fitness items as many continue to exercise at home.

For summer, we have new inflatables for the pool and are adding home related to core items and games to create more fun-at-home opportunities for our customers. Overall, we continue to source amazing value products and are taking advantage of opportunity buys in the market across several major product brands.

On marketing for Q1, since the stores were closed, we canceled the airing of our planned TV commercial as well as the distribution of our easter flyer. For Q2, we are substantially shifting our program to focus on digital advertising rather than TV or print circulars. The benefit of digital advertising is it allows us far more flexibility and localization to target at the store level using ZIP code data, and it can be turned on and off very quickly.

Our social media accounts have been trending with the[#Home with Five Below], offering customers ideas for activities during the shelter-at-home period and beyond. This week, we will officially launch our Kick Start the Fun (sic) [Kick Start the Fun Again!] campaign focused on fun, value, assortment and safety of our stores.

In addition, with the surge in e-commerce, we are working on digital marketing strategies to retain both new and existing customers to drive traffic and sales across all channels. These are unprecedented times, and we are navigating them with our customers and team members at the center of our decision making.

Strategically, we remain focused on 3 areas: experience, product and supply chain. Within experience, the health and safety of our team members and customers remain our top priority. We are also focused on keeping the shopping experience fresh and exciting for our customers, which is why we created a zone and most of our new stores and remodels called five beyond. The tech and room worlds be located in the back of the store and will feature a limited selection of new amazing value items priced above $6, along with the current items in those worlds.

On product, as I discussed, we are working hard to provide our customers with essential needs while still adding in a element of fun for the family during this time. With inherent flexibility of the Five Below model with its 8 worlds that span over 15 departments, we have the unique ability and organizational agility to make quick assortment changes in order to stay relevant and consistently deliver WOW and incredible value to our customers.

In addition, on the supply chain front, we’re working on several strategic initiatives to support our future growth. I already mentioned our distribution center openings. Another important initiative is the integration of our e-commerce site with Hollar.com’s, which is expected to be completed later this summer. Once the integration is complete, the Hollar.com URL as well as the app will automatically become fivebelow.com.

In summary, we are focused on successfully managing the business throughout this turbulent time while simultaneously executing on our strategic initiatives, which will drive our long-term success.

We entered the pandemic in an extremely healthy position with a resilient business model, robust sales growth, no debt and substantial cash reserves. And we believe we are emerging from these times in a strong, if not stronger, competitive position, once again, focused on growth and playing offense.

I want to thank all of our teams for their commitment during this time. We are excited to be welcoming our customers back into our stores once again and look forward to surprising and delighting them, delivering some much-needed respite and smiles with our amazing assortment and incredible values in a safe, fun and exciting store environment.

With that, I will turn it over to Ken to provide more details on the financials. Ken?

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Kenneth R. Bull, Five Below, Inc. – CFO & Treasurer [4]

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Thanks, Joel, and good afternoon, everyone. I will begin my remarks with a review of our first quarter results and then discuss the second quarter.

As a reminder, all of our stores were closed beginning on March 20 and through the key Easter selling period with only a small number of stores reopening late in the first quarter on April 21. While e-com sales were strong in Q1, with sales over 4x higher versus last year’s first quarter, it still represents a low single-digit percentage of our total sales.

In addition, we cut costs as quickly as we could in order to conserve cash. One of the early actions we took was to furlough the majority of our store and distribution center associates. Our Wowtown team and field leadership also took temporary pay cuts to help offset the impact of lost sales. Additionally, we managed our working capital by canceling merchandise orders and delaying vendor payments.

We also reduced our plan for growth capital expenditures for 2020. With the majority of stores now reopened, we believe we are in a solid position on all fronts from associate engagement to inventory, liquidity and future real estate opportunities.

Our sales in the first quarter of 2020 were $200.9 million, down 44.9% from $364.8 million reported in the first quarter of 2019. We opened 20 net new stores during the quarter compared to 39 new stores opened in the first quarter of 2019. We ended the quarter with 920 stores, an increase of 131 stores or 16.6% versus 789 stores at the end of the first quarter of 2019.

With the reduction in comp store operating days of approximately 47% due to the temporary store closures in Q1 and the loss of the key Easter selling days, comparable sales decreased by 51.8%, with the positive contribution of e-commerce, only a small offset. Through March 11, the day COVID-19 was declared a pandemic, our comps were up 2.9% for the quarter-to-date period.

Turning to gross profit. Approximately 25% of our cost of goods sold are fixed, with occupancy being the largest fixed component, followed by certain distribution center operating costs and the expenses related to our buying teams. Given the store closures and the impact it had on our sales results as well as the associated deleverage of our fixed costs, gross profit decreased approximately $100 million from the first quarter of 2019 to $20.5 million. And gross margin finished at 10.2% compared to 32.9% in the first quarter last year.

SG&A expense of $92.7 million for the first quarter of 2020 decreased by 3% over last year’s first quarter versus our original plan for SG&A growth of approximately 20%. As a percent of sales, SG&A increased to 46.1% from 26.2% last year. Although we moved quickly to reduce costs in a closed store environment, the significant decline in sales drove the deleverage of the fixed portion of SG&A expenses. The actions we took to reduce expenses, which began later in the quarter, included furloughing hourly store associates, reducing marketing spend, temporarily reducing executive leadership compensation and delaying annual salary increases and overall hiring.

In addition to these actions, we reversed certain previously recorded expenses related to stock-based incentive compensation. As a result, we reported an operating loss of $72.2 million versus operating income of $24.5 million in the first quarter of 2019.

Due to the operating loss, a tax benefit of $21.5 million was recorded in the first quarter. Our effective tax rate for the first quarter of 2020 was 29.8% on a pretax loss of $72.1 million compared to a tax rate of 1.9% on pretax income of $26.2 million in the first quarter of 2019. The effective tax rate this year also includes the income tax accounting impact of the CARES Act, which allows for the expected net loss for tax purposes for 2020 to be applied to taxable income generated since 2015.

We currently expect our effective tax rate for fiscal 2020 to be approximately 25%. Net loss for the first quarter of 2020 was $50.6 million versus net income of $25.7 million last year. Loss per diluted share for the first quarter was $0.91 compared to last year’s earnings per diluted share of $0.46, driven primarily by the factors I just described. Last year’s first quarter had a share-based accounting benefit of approximately $0.11 compared to approximately $0.02 this year.

We ended the first quarter with $139 million in cash, cash equivalents and investments and no debt, including nothing outstanding on our $225 million line of credit. We repurchased approximately 137,000 of our shares at a cost of $12.7 million during the first quarter. To date, under our $100 million repurchase authorization that was approved in March 2018, we have repurchased approximately 496,000 of our shares at a total cost of $51.5 million.

Inventory at the end of the first quarter was $368 million as compared to $268 million at the end of the first quarter last year. Average inventory on a per-store basis increased 17.4% versus the first quarter last year due to the temporary closure of our stores and the receipt of certain merchandise orders, primarily direct imports that left overseas ports prior to our store closures. We managed inventory carefully once stores closed, including canceling and delaying orders. Due to the timing of the store closures, we marked down excess seasonal Easter merchandise, specifically candy.

In addition, we have tightened our purchase plans and allowed for capacity and liquidity in our open-to-buy plans for compelling product opportunities. We believe we are in a very good position with our inventory levels and expect our year-over-year growth at the end of Q2 to be in a more normalized range.

Now looking ahead, we are not providing guidance due to the continued uncertainty, but we have forecasted and are prepared for a variety of scenarios. And we are confident in our ability to successfully navigate each one. As Joel mentioned, we are very pleased with the customer response as our stores reopen. Comparable sales for reopened stores in e-commerce are tracking up approximately 8% for the second quarter to date with e-commerce contributing about half of the comp increase. We do not expect e-commerce to continue to perform at this level as stores reopen.

In the stores, we are seeing higher average tickets, partially offset by lower transactions as we believe customers are currently consolidating trips. While there may be temporary tailwinds influencing these results, including the government stimulus program and potential pent-up demand, we are encouraged by this early performance in the reopening phase and will continue to carefully monitor results.

On to real estate and stores. We are continuing our growth program, and we are planning to open 100 to 120 net new stores in 2020, expecting to end the year with 1,000 to 1,020 stores or unit growth of 11% to 13%. While majority of these new stores are being opened in existing markets, we will be entering new markets like Sacramento and the new states of Colorado and Nevada later this quarter, bringing the number of states that we operate in to 38.

Our current plans for 2021 are to return to a unit growth rate in the high teens as we are seeing some great opportunities. With respect to gross CapEx, which excludes tenant allowances, we now plan to spend in total for 2020 approximately $200 million as compared to our pre COVID-19 estimate of $270 million. This reflects the planned investments in the new Texas and West distribution centers, new stores and remodels and investments in systems and infrastructure.

In conclusion, I want to reiterate the gratitude Joel expressed to our entire team for rising to the challenges presented by the pandemic. We maneuvered through what we hope will be the worst of the disruption and are far better prepared and positioned from an operational and financial standpoint for whatever challenges the remaining weeks and months may bring.

Agility, flexibility and innovation along with extremely disciplined cost and capital management are inherent to our model and how we have always operated, and these qualities will continue to serve us well as we react to and navigate through what we expect will be a shifting operating environment.

And with that, I would like to turn the call back over to the operator to open up the lines for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Matthew Boss of JPMorgan.

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Matthew Robert Boss, JP Morgan Chase & Co, Research Division – MD and Senior Analyst [2]

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And congrats on the strong start, guys. Joel, maybe to start on the positive high single-digit comps since reopening stores, maybe just higher level, have you seen a fairly consistent trend since the initial first reopenings? And maybe any areas of relative strength to call out across your worlds?

And just third, you talked about the stronger potential exits post-crisis competitively, where do you see opportunity as we think about consolidation and the bankruptcies laterally that we’re seeing across brick-and-mortar retail?

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [3]

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Say that last part there, Matt. Where do we see…

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Matthew Robert Boss, JP Morgan Chase & Co, Research Division – MD and Senior Analyst [4]

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Just on opportunities to come out of this as a stronger model and take market share?

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [5]

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Yes. Yes. No, look, actually, what I would tell you is, I think in my prepared remarks, Matt, I said we’re in the middle of our eighth wave of opening. And what that means is we opened state-by-state as regulations changed. And we saw a pretty consistent opening across geographies. It took about a week, which was consistent in almost every wave to kind of ramp up to this new norm we’re seeing, regardless of what part of the country in. So I think that part was pretty consistent throughout it.

In terms of commentary on categories and that types of things, not surprising just a lot of demand for essentials as well as things that tie in to being at home. The tees business is great. Obviously, the casualization of America working from home makes a big difference. And like we always do at Five Below, we’re kind of fun and snarky with our tees. And I returned back to Wowtown for the first time yesterday as we reopened here in Philly, and I had one of our fun tees on that said I totally miss humans. I mean that’s the kind of fun we have at Five Below.

And then finally, as far as consolidation goes, Matt, it’s really a little too early on that piece of it. But I think, clearly, there’s going to be a geographical opportunity as many retailers go out. And I think that’s going to give us some opportunities to get into some markets that we haven’t been able to get into before. And then I think as we’ve tweaked our assortment, like we do in — every time there’s a trend, we become more and more relevant to the customer. And this is just another example of being relevant. And of course, I think I’d just finish by saying value, value, value that certainly resonated back in ’08. And we came out of ’08 with a really strong ’09. And I think the customer really appreciates our value.

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Operator [6]

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The next question will be from Simeon Gutman with Morgan Stanley.

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Simeon Ari Gutman, Morgan Stanley, Research Division – Executive Director [7]

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Joel, my question is on EBIT margin. You ended last year at around 12% just underneath it. Knowing what we know, realizing it’s still fresh and raw, your store operating costs, I assume, are a little bit higher, your online exposure may be a little bit higher when this is all done. And I don’t know if you’re permanently, if you’re going to get back up to double-digit or 20% store growth or high teens as a normal run rate. But can you talk about how EBIT could get back to the prior level, knowing what you know now or any of these impediments that I mentioned could prevent you, assuming you get back to the same-store level productivity?

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Kenneth R. Bull, Five Below, Inc. – CFO & Treasurer [8]

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Yes. Thanks, Simeon. Again, you’re going out to the future here a little bit in 2021. As you know, we weren’t even really able to provide guidance for ’20 based on the uncertainty ahead of us. But we did mention, to your point, that we do see ourselves continuing to grow the top line from unit growth in that high-teen percentage. And if you kind of look back on the years when we don’t have unusual events, significant investments and things like that where we do have comps, say, in that 3% range, we do expect to see some slight leverage from an operating margin perspective. But obviously, coming off of 2020, we would expect to see meaningful deleverage this year, given the significant loss of sales in the first half of the year and the reduced operating days and meaningful improvement on that as we move into 2021.

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Operator [9]

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The next question will come from David Buckley with Bank of America.

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David Loughran Buckley, BofA Merrill Lynch, Research Division – Analyst [10]

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Given the current economic environment, there’s likely an opportunity to attract more new customers, just given the increased focus on value offerings. Can you talk about what you’re doing to attract those consumers? And then just any color on recovery by store location that you can share?

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [11]

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Yes. Thanks, David. Well, clearly, we already saw that on e-commerce. But having said that, e-comm is still a very small piece of our business. The biggest change you’re seeing from us, and it was — if you go back to my prepared remarks, as I was talking about our marketing plans for Q2, obviously, we’ve really accelerated our shift into digital with no print in Q1 or Q2. The biggest benefit of that is it really gives us the flexibility to zero in on ZIP Codes, take advantage of markets where we’re seeing customers come more rapidly and that’s probably the single biggest area that we’re going to continue to focus in terms of our shift in marketing. We’re seeing that as a really great way to attract and keep new customers as customers are out there watching their pocket book more than ever, we come across very strong when it relates to value. And that’s the biggest reason we pivoted there.

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Kenneth R. Bull, Five Below, Inc. – CFO & Treasurer [12]

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And then, David, I think the second part of your question around the recovery by store location, you had…

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [13]

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Yes, David, are you talking about as it relates to the protests or just store reopenings?

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David Loughran Buckley, BofA Merrill Lynch, Research Division – Analyst [14]

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No. More just reopening, urban, suburban, semi rural, just any…

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [15]

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I should say, like I was saying to Matt, we’ve been opening by waves. Those waves tend to be by state. Our states are full of both, urban as well as suburban, rural stores and really not seeing any material difference by type of store as well as we’re not seeing a material difference by geography. But the only consistent thing we’re seeing is it takes about a week to ramp them up as customers discover that we’ve reopened, but really not much difference.

Now the big — the remaining 10% that we haven’t opened, not surprising is largely here in the Tri-state areas, New York, New Jersey, but we’ve got line of sight now pretty much on the entire country reopening here within the next 2 weeks. And we don’t expect those stores to open much different. In fact, we’re just hearing great feedback from customers. They’re just excited to have us open. It’s unprecedented. Every parents got their kids home. They’re looking for us to help them kind of provide solutions and have a fun store environment. So we’re seeing great results regardless the type. Thanks, David.

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Operator [16]

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Next question comes from John Heinbockel with Guggenheim.

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John Edward Heinbockel, Guggenheim Securities, LLC, Research Division – Analyst [17]

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A couple of things. Learnings from curbside so far, your ability to accelerate omnichannel, whether it be curbside or direct-to-home by holiday. And then operational changes, right, when you get into Holiday December, right, and maybe social distancing still being in place, what changes do you think you need to do and how digital plays into that?

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [18]

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Yes. Look, I think the real learnings from curbside is it just showed us how fast we can really move when pressed. Obviously, we didn’t have really any BOPIS capabilities going into this. So our curbside offering was pretty scrappy and — but hand it to the team, they really put it together quickly and it resonated with the customer.

Now keep in mind, John, we made the acquisition of the Hollar assets back before this pandemic even happened. So we knew we had to get into the e-commerce and omnichannel space with a little bit more effort than we had been putting in, now that we have our store infrastructure stabilized. And so combined with what we learned during the pandemic, plus picking up the resources of Hollar, it’s really just going to allow us to accelerate.

We’ve got 2 distribution centers now instead of 1. We’re looking at the capabilities of accelerating BOPIS quicker than we originally planned. And the customer is spending time on our website. And they’re learning about our new product, which will only benefit the stores seeing the essentials we now carry. So the 2 all tied together, and we’re going as we can, John.

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Operator [19]

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(Operator Instructions) The next question comes from Chuck Grom with Gordon Haskett.

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Charles P. Grom, Gordon Haskett Research Advisors – MD & Senior Analyst of Retail [20]

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Congrats guys on the start to 2Q. My question is with regards to the product and the ability to grow overseas to secure that product. So I guess I’m curious how much Michael’s been able to go overseas, identify trends and secure all the items? And how that bodes for the back half of the year and 2021?

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [21]

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Yes. Thanks, Chuck. Just as I was kind of talking about digital capabilities with John Heinbockel there a second ago, Chuck, I think the same applies to kind of ways of working for our whole corporate staff here at Wowtown. And while Michael hasn’t been able to go over there physically during this time period, the technology afford to do us vis-à-vis the Zooms and the teams networks has really worked well. And our buying teams have kept very connected to Asia and India and some of the other countries we’re in. And I would tell you that we’ve moved and reacted very, very quick on that, and it really hasn’t been a problem.

I think now you’re going to add, there’s clearly going to be some closeout opportunities out there. And like we have in the past, we’ll be nimble and take advantage of those as well, but we’re feeling really good. If you go back to my prepared remarks, it’s why I spent some time talking about shifting from — we obviously had to play defense for a good 4- to 6-week period there to really shut things down and react to the stores being closed. But Michael and all the [merchants, the buyer] has done a great job, pivoting 180 degrees and getting back to playing offense, and we’re just doing it all virtually. And products starting to flow back into the stores, and we’re starting the engine back up again. It feels great to see the sales. Thanks, Chuck.

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Operator [22]

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The next question comes from Karen Short with Barclays.

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Karen Fiona Short, Barclays Bank PLC, Research Division – Research Analyst [23]

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One clarification, and the bigger picture. Just on — in terms of the stores, the reopening stores, I know there are 8 waves, but are you still at an exit rate of that 8% in terms of the quarter-to-date? I just want to clarify that.

But then my bigger picture question is, you have talked about closeouts and opportunistic buys. Wondering how to think about that in terms of sales mix, percent of sales going into kind of the fall back-to-school and/or how you’re pivoting on that to make that more of a focus?

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [24]

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Yes. Thanks, Karen. Yes, I mean, look, on one hand, look, we’re always trying to be really transparent with all of you. And this is a very unusual quarter. Year-to-date, you can’t put a lot of faith and focus just on comp sales. And look, it’s part of the reason we’re not giving you an outlook, and it’s not because we don’t want to, there’s just so many possible scenarios. But the short answer is, yes, as I said, all of those waves are kind of seeing a consistent trend there.

But you got to remember, Karen, I mean, some of those waves are only a week or 2 old. So it’s really — you’re asking me to speculate on something, I just — it’s unprecedented, right? I don’t have a history here on the plus side, you certainly got the pent-up and you got the stimulus. On the negative side, there’s been a lot of distractions the last 2 weeks with the protests. So it kind of goes both ways, and there’s just so much noise in that number, Karen. But as I shared with a couple of the other questions, the consistency is there geographically, the consistency is there by type of store.

And then I think in terms of trying to comment on a percentage of sales, the closeouts or that will be — it’s really opportunistic driven. We’ve moved away from being a closeout company a long time ago when we got to such a size that we’re at, that you have to plan for the business. And Michael’s teams got a great plan for the back half of the year. We’re layering in the five beyond product. I mean, as I said in my comments, we’re starting to play offense again. And the closeouts were just — they’re going to be opportunistic. They got to fit in. They got to screen value, and they got to resonate with our customer. And so that’s where we’ll really use those, and it’s plus or minus in terms of what the percent is. It’s more about how do they fit in and drive value. Thanks, Karen.

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Operator [25]

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The next question will come from Judah Frommer with Crédit Suisse.

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Judah C. Frommer, Crédit Suisse AG, Research Division – Senior Analyst [26]

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First, just wanted to follow-up on kind of the margin recovery opportunity here. Is there anything you’re doing different in terms of store operations, obviously, you furloughed a lot of your workers, you kept the store managers in place, but any thoughts around bringing back less labor to the store as traffic is depressed right now and maybe working around that going forward?

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [27]

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Yes. Great question. I think, look, we had to make a lot of decisions through this. I think one of the best decisions we made was not to furlough our store managers. They are the heart and soul of each community we run in, and they’ve been there throughout the entire thing and it’s been — the best part about keeping them as we’ve been able to get these stores back open quicker. If you’ll notice, we are running on reduced hours and still running positive comps. And that — what that is allowing us to do is to run with less hours. So there is a labor benefit there, but we’ll continue to pivot as the traffic comes. Once this engine is back up and going like it is now, the model is pretty flexible. And with shortened hours, that certainly afforded us some real opportunity to run on less hours. But for the most part, the less labor is working out just fine. And what we’re seeing is less transactions, but a higher ticket. It’s turned out really good.

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Judah C. Frommer, Crédit Suisse AG, Research Division – Senior Analyst [28]

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And then just following up on the real estate plan for next year. Just the thought process behind kind of going back to high-teens square footage growth off of a lower 2020 base and not kind of making up for the 2020 stores that didn’t open in 2020 or maybe pushing above 20% growth for that year?

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [29]

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Yes. Look, there’s going to be some great opportunities, Judah, out there for real estate. And it’s really too early for us to speculate on the 2021 number. I think what Ken was referring to is more of a multiyear run rate. And just as I think 2020 was real anomaly, the biggest variable left in 2021 is honestly, the landlords. They’re not back up and running yet. So as they paused on construction, as they don’t understand what the turnover is going to be of other retailers, it’s a little hard to speculate on ’21. But I would say there’s probably more upside than there is downside to the 2021 number. But I — what we’re trying to share, as we always know, is give you guys a much more longer-range outlook on store openings as it still remains our biggest driver of growth. Thanks, Judah.

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Operator [30]

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Our next question comes from Paul Lejuez with Citi Research.

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Paul Lawrence Lejuez, Citigroup Inc, Research Division – MD and Senior Analyst [31]

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Joel, you said it takes about a week for stores to ramp back up. I’m curious, maybe you could talk about the kind of Wave 1, Wave 2 stores. And since those are the ones that have been opened the longest, what have you seen kind of since then? And have you reached a point in those stores where traffic is actually up where transactions are actually positive as you’ve kind of moved along? And curious if you’ve had any issues in any of the delays of stores, in terms of the number of people that can be [lead in] just has tried to adhere to any social distancing capacity requirements?

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [32]

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Yes. Thanks, Paul. I know this is hard to swallow but — or believe. But honestly, the difference between the wave 1 and 2 and the waves 5 and 6 from a traffic perspective really aren’t that different. And so I mean, obviously, what we’re seeing from the customer is a consolidation of trips. They’re coming in less frequently, but they’re buying more when they’re in there. What we don’t know and we just need more time is how many new customers we’re going to pick up. We have seen that on our e-commerce channel, where we’re able to know exactly who the customer is. But we’re really seeing incredible consistency from wave to wave as we continue to open that up. Paul, there’s a second part to that?

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Paul Lawrence Lejuez, Citigroup Inc, Research Division – MD and Senior Analyst [33]

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Second part was just you had any constraints in terms of letting people into the stores…

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [34]

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Yes. Yes. No. No. No. Look, the teams have done a great job. And I think the benefit of less people but bigger baskets is kind of helped on that, but we have not ran into any constraints at all. And store is doing a great job. If you’ve been in one of our stores, they’re all marked. And — but we’ve been able to adhere to kind of all the guidelines out there and doing well.

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Operator [35]

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The next question will come from Chandni Luthra with Goldman Sachs.

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Chandni Luthra, Goldman Sachs Group Inc., Research Division – Associate [36]

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I wanted to talk to you about your supply chain. In terms of the disruption that we’ve obviously seen this year and then in more recent years from tariffs, are you envisioning any permanent changes to your global supply chain? Any plans to diversify?

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [37]

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Yes. Thanks. Look, we — in terms of supply chain goes, clearly, last year’s tariff multi phases of that really put a lot of pressure on the supply chain, forced us to get into many different countries. And so if anything, we sit here today, in a much more flexible position than we’ve been in years past. And so — but overall, we’re not really forecasting any major disruption to our supply chain, even through the height of this pandemic, the supply chain has really continued to work. And so we feel we’re in a good spot. Thank you.

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Operator [38]

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Next question comes from Michael Lasser with UBS.

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Michael Lasser, UBS Investment Bank, Research Division – MD and Equity Research Analyst of Consumer Hardlines [39]

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Joel, you mentioned that half of your 8% comp quarter-to-date is coming from your e-commerce channel, that would imply that the channel is growing 200% to 300%, given the low single digit penetration. Why do you think the channel has not flowed quarter-to-date even as you reopened stores? Is it due in part to having assortment of masks, hand sanitizer and other, I think, you referred to it as essential items? Would you say that that’s as big as a trend you might have witnessed in the past like fidget spinners, Silly Bandz or looms? And then how are you buying for the holiday? Do you expect to buy up year-over-year for the holiday, as you see it now because I think you have to put those orders in the next few days?

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [40]

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Just on the penetration it has started to slow. But you have to remember, which is, Michael, you have the e-comm for the full quarter but the comp we’re giving you is for the stores that have reopened. So some of those stores are only in there. So as every week go by, more stores get added into the comp mix. And so e-comm then becomes a lesser and lesser piece of the total. But at the height, it was over 400% increase, and we are starting to see that moderate a little bit. But we need more time to kind of understand that what it will ultimately moderate to.

And as far as holiday goes, Michael, I really — I don’t want to speculate too soon on that. As Ken said, we’ve got several scenarios we’re looking at. Michael still has a good 60 days here to finish up buying, and we’re really — we needed a longer read here before we finalize. But they turn it around pretty quick, and I think we’re going to be ready for all scenarios coming at us. More to come. Thanks, Michael.

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Michael Lasser, UBS Investment Bank, Research Division – MD and Equity Research Analyst of Consumer Hardlines [41]

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Just — so let me just clarify about the essential…

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [42]

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Yes. No, we’ve added a lot of essentials. I think it’s making a big impact. It’s what the customer wants. No different than when we have a Silly Bandz trend or a spinner trend. Michael’s team pivots quick, and we added into the assortment. And you look on our website, you’ll see a big piece of it. Thanks, Michael.

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Operator [43]

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The next question is from Edward Kelly with Wells Fargo.

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Edward Joseph Kelly, Wells Fargo Securities, LLC, Research Division – Senior Analyst [44]

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Joel, I wanted to ask you about the marketing side. Maybe can you talk a little bit more about the shift in strategy here? And then as it relates to TV, what’s the outlook for the back half of the year, especially into holiday? Has that changed? And then as we look out into ’21 on things like national TV advertising, is this something that’s still in the cards potentially sort of like post-election period?

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [45]

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Yes. Look, as I explained the marketing, we really have pivoted to digital. It’s working really well for us. Our Kick Start the Fun (sic) [Kick Start the Fun Again!] campaign will start this Friday. I think especially with this being an election year, going to national TV, this isn’t probably the year to do it. Rates are going to be up a lot. There’s going to be a lot of bidding for it. And honestly, right now, what we’re liking is digital and the response we’re seeing, a good case in point. We were planning to start it today with the memorial service being today, that didn’t feel like the right time to start. And we were able to adjust it really quickly to Friday.

And so it just — it gives us a lot more flexibility, and we’ll be able to kind of move into markets that either need extra marketing or we’re seeing good trends. But right now, the focus on fun and customers are really resonating with that and having something to do is kind of the word we’re hearing out there and staying relevant is really important. Thanks, Ed.

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Operator [46]

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Next question will come from Paul Trussell with Deutsche Bank.

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Paul Trussell, Deutsche Bank AG, Research Division – Research Analyst [47]

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Yes. Wanted to ask about customer response, both in the pre-COVID period as well as in recent weeks to your tech items above $5 as well as the five beyond items maybe give us an update on what you’re seeing in regards to that as a percent of the mix and how you’re kind of buying for them going forward? And then second would just be any update on Nerd Street Gamers? p

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [48]

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Honestly, Paul, you’re probably not going to like my answer because I just don’t have a lot of data to give you, given how much we’ve been closed. Had it been a normal quarter, we’d have 2 new Nerd Street locations open right now. We obviously had to pause those, and now we’re looking at more at the end of second quarter to get those open. So there’s one. There’s no answer.

And the same with five beyond. The majority of those stores we were putting them in, and why we know more got those in there, Paul. And we had to close the stores down. So I don’t have a pre and post to kind of understand the penetration. So bear with us a little bit on that one, but we really need another quarter to kind of come back at it and understand the difference in penetrations. More to come.

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Operator [49]

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The next question is from Brian Nagel with Oppenheimer.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division – MD & Senior Analyst [50]

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So just I guess a follow-up really to some of the other questions, but you had mentioned in your prepared comments, and I’m understanding that it’s been a short amount of time. It’s a dynamic environment that — and you had the stimulus benefits, maybe pent-up demand, so things may not prove sustainable. But I guess from the question I have is, as you look at how consumers are initially shopping at your stores, and in particular, the products they’re buying, you know your business well. You know your consumer as well. Is there anything there to suggest that there’s an element of unsustainability or something odd in those trends?

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [51]

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Yes. Thanks, Brian. Look, there’s nothing there to suggest that’s odd. But at the same time, we’ve never, in our history, seen such a significant shift to less transactions, much, much bigger basket. I mean, unprecedented shift. And so on one hand, I could say, yes, this is the new normal. It’s going to stay that way. And on the other hand, I can easily say to you, it’s going to go back to smaller basket size, more transactions. We just, honestly, Brian, need more time.

But what I can tell you is the customers coming in, they’re talking about the value, they’re excited to see us open and they’re buying across the box. So those are all good and great signs, and we just need is more time to kind of tell you whether — how these trends are going to be over a long period of time. But everything we’ve seen so far has been great. Thanks, Brian.

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Operator [52]

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The next question will come from Jeremy Hamblin with Craig-Hallum.

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Jeremy Scott Hamblin, Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst [53]

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I wanted to just follow-up here on the customer information in terms of how model has changed, you’ve had more digital engagement, clearly. But wanted to just get some clarification on customer data collection, whether it’s mobile numbers, email addresses, et cetera, that you’ve been able to gain during this time? Could you give a better sense of what the year-over-year growth of that is? How much — how many inactive customers you’ve had? But any additional clarity and whether or not the environment that we’re in right now is inhibiting your ability to collect some of that information?

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [54]

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Yes. Thanks, Jeremy. Look, I’m not — I don’t want to get into the specifics of the number, just — A, because the number is so small. and you remember, we don’t have a loyalty program. So we can’t tie it to the stores. What I will tell you is that the overwhelming majority of online transactions that took place over the last 60 days here, were new customers to our online channel. I can’t differentiate for you whether they’re new to five below or they’re just new to the online channel, but a significant majority, way closer to 100% than 50% are new to the five below channel. And that’s great. We’ll take the customer any way they can go. And with us being closed, it really forced us to pivot and grow that channel. But as far as doing cohort analysis and all that, this is way too early to kind of be — kind of talking about those results publicly, but we’re pleased with the new customers. Thanks, Jeremy.

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Operator [55]

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Our next question is from Michael Montani with Evercore ISI.

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Michael David Montani, Evercore ISI Institutional Equities, Research Division – MD [56]

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First off, just from a modeling perspective, I wanted to see if you could give some additional color about what percentage of the 20 percentage point drop-off in gross margin was more related to kind of markdowns versus just natural deleverage given the store closures? And then on the SG&A front, I know you guys had ratcheted back expenses to be down 3% for the quarter. Do we anticipate that SG&A dollars would be down once again in 2Q even as you open up given efficiency gains?

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Kenneth R. Bull, Five Below, Inc. – CFO & Treasurer [57]

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Sure. Thanks, Michael. On the gross margin portion, I think you asked about the lower of cost to market, the inventory write-downs there, a small percentage of the deleverage for the quarter, really the overwhelming percentage is probably close to 80% of the delever that took place in gross margin year-over-year was due to the fixed costs included in cost of goods sold things like occupancy, the fixed components in the distribution center operating model and buying costs. So real — the key driver, and that write-down was really a small portion of the overall deleverage.

With respect to SG&A, similar of what we saw in the first quarter. Again, the fixed cost deleverage as we kind of move forward into the rest of the year, we move into Q2, given the estimated loss in operating days in Q2, I expect that to be less than what we have seen in Q1. We do expect significant operating margin deleverage again. And a portion of that, obviously, is going to be in the fixed cost components in SG&A. And then if you really roll it forward for the full year when you look at operating margin, again, would expect meaningful deleverage on an overall basis with that significant loss of sales in the first half of the year and then also the reduction in new stores.

We reduced — our original estimate was 180 new stores for the year. And as you heard, we’ve reduced that down to a range of 100 to 120. So that — the combination of those 2 things will drive the fixed cost deleverage for the full year also, which I expect to be meaningful and then split between cost of goods sold and SG&A.

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Operator [58]

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The next question will come from Joe Feldman with Telsey Advisory Group.

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Joseph Isaac Feldman, Telsey Advisory Group LLC – Senior MD, Assistant Director of Research & Senior Research Analyst [59]

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I also wanted to follow-up kind of been asked around this a couple of times. But with regard to the various waves, say, wave 1, 2, 3, are the earliest waves comping — still comping at a high single-digit rate quarter-to-date? Or is that like they comp at that rate for a week or 2 and then it starts to normalize back down in the 3% or 4% or something? I’m just trying to get a better understanding of kind of how that’s — we should think about the flow going forward?

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [60]

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Well, as I’ve said, they’re all comping relatively at the same rate. Remember that about half of that comp though is e-commerce comp that’s in there. And so I think, Joe, it’s a little too early for us to speculate on what the rest of the quarter is going to look like due to those puts and takes in terms of whether it’s pent-up demand or stimulus checking. We just — we honestly need more time. But as of right now, really all the waves are comping the same. And we feel really good, getting the stores back open on it, but I don’t want to try and speculate on what’s going to happen on it because this is just unprecedented. We’ve never experienced something like this, where we’ve been shut down like this as long. Thanks, Joe.

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Operator [61]

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The next question comes from Scot Ciccarelli with RBC Capital Markets.

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Beth Reed Pricoli, RBC Capital Markets, Research Division – Assistant VP [62]

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It’s Beth Reed on for Scott. Just given that comps are down 50% in 1Q, just curious how you guys are thinking about the capacity you’ll need in 1Q ’21 to generate what would be like 100% plus comp to get back to your historical store productivity levels? Just any thoughts you have around about the ability of your stores to handle that kind of volume?

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [63]

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Well, if I understood the question right, our stores are already back to historical volume. I mean, that’s the — and when they’re comping positive, that’s relative to last year. So as we reopen stores, they’re back to the historical volume.

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Kenneth R. Bull, Five Below, Inc. – CFO & Treasurer [64]

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Yes. And Beth, let me say it a different way, what drove the significant negative comp in Q1 was really the reduction in operating days, right? It was the store closures. And then next year, the assumption would be that the chain would be open for the full quarter. So on an average, whether it’s a weekly basis or a daily basis, obviously, you get a much — a pretty significant increase in overall volume for the first quarter next year.

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Joel D. Anderson, Five Below, Inc. – President, CEO & Director [65]

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Remember that the decline also includes the new stores that didn’t open this year. So but stores are back to their historical volume and have no challenges there. I believe that’s our last call.

And look, I’ll just wrap up and say, hey, thanks for joining us today. And a couple of concluding comments. Look, hopefully, what you’ve heard from us is that we’re a nimble organization, the business model is very flexible. And Ken and I couldn’t be more pleased with how quickly we’re able to adjust to this new environment. We continue to innovate, and our focus is — will always be on making the store experience even more amazing. Value, value, value, that’s what we’ve been talking about. And we’re still on a path to build out and support infrastructure that supports 2,500-plus stores here in the U.S. And I’d be remiss if I didn’t end by just saying thank you so much to all our associates and their dedication during this unprecedented time, especially our store and distribution associates who, and many of them have worked throughout this pandemic, and they’ve made Five Below so special to our customers. We look forward to speaking to all of you again after the summer. Stay well and be safe. Thanks, everybody. Have a great night.

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Operator [66]

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And thank you, sir. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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