Good day, and welcome to the Five Below Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Christiane Pelz, Vice President of Investor Relations. Please go ahead.

Thank you, Gary. Good afternoon, everyone and thanks for joining us today for Five Below's fourth quarter 2022 financial results conference call. On today's call, are Joel Anderson, President and Chief Executive Officer; and Ken Bull, Chief Operating Officer and 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.

Thank you, Christiane, and thanks everyone for joining us on our fourth quarter 2022 earnings call. As we stated at the ICR conference in January, we were pleased with our holiday performance, which was at the high end of our guidance despite the impact of snowstorms leading up to Christmas. The season played out as we had expected with an improved inventory position and more targeted digital marketing, helping fuel sales as our Save the Holidays campaign resonated with customers looking for value. Results for both the holiday period and the quarter overall were driven by transactions, our proxy for traffic, which demonstrates the effectiveness of the value and wow we delivered, especially important in this inflationary environment. We finished the quarter with a strong January resulting in total fourth quarter sales of $1.1 billion for growth of 13%, a comparable sales increase of 1.9% and earnings per share of $30.7. Needs based items continue to be popular as demonstrated by outperformance in our candy, seasonal, and create worlds. Our customer is clearly looking for value and convenience and the flexibility of our model allows us to quickly respond and bring them the products they want. We started 2022 knowing it was going to be a challenging year, giving the extraordinarily strong stimulus influence results of fiscal 2021, but we did not expect inflation to be as high as it was and across so many key areas. Five Below is a resilient retailer and we quickly pivoted and adjusted to the new operating environment. I could not be prouder of how the organization rallied to deliver sales over $3 billion and 11.2% operating profit margin for the year despite these headwinds, and I want to thank them for the their commitment to executing with excellence. Now let me summarize the…

Thanks Joel, and good afternoon everyone. Before I provide my review of the fourth quarter and year, I wanted to let you all know how excited I am for my new role. As COO, it will give me the opportunity to drive continued success of Five Below as we execute the triple double vision. We've achieved incredible growth and success in the 17 plus years I've been with the company and looking forward, there is a large runway for expansion and an opportunity to increase productivity and to drive the brand to new heights. My new role allows us to sharpen leadership focus and narrow span of control as we execute the initiatives that underpin the triple double vision. Specifically, I'm now responsible for the inventory optimization pillar and have oversight of merchandise planning and allocation data and analytics strategy, communications, and legal teams. I will continue with CFO until we appoint my successor, who I am confident will benefit from the talent and strong discipline of our current financial organization. Now on to the financial discussion. I will review the fourth quarter and fiscal 2022 results and then discuss full year and first quarter fiscal 2023 guidance. Our sales in the fourth quarter of 2022 were $1.12 billion, up 13% from the fourth quarter of 2021 and above the high end of our guidance range. We ended the quarter with 1,340 stores a year-over-year increase of 150 stores or 12.6%. We also converted nearly 250 stores to the new Five Beyond format since our Investor Day at the end of March, and we continue to be pleased with the performance of our new and converted stores. Comparable sales increased 1.9% for the fourth quarter of 2022, also above the high end of our guidance range and against a 3.4%…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Simeon Gutman with Morgan Stanley. Please go ahead.

Hi, good afternoon everyone. I wanted to focus on the 1% to 4% comp guidance range. Can you talk -- can you share with us if it's balanced between price and units? Does it lean more heavily one side or the other? I don't know if you can compare it to what 2022 looked like and if you're seeing any sensitivity to higher price items at the store.

In terms of the second part of that, Simeon, we're really not seeing any sensitivity higher to lower priced items. It's been pretty balanced. We continue to be pleased with the Five Beyond rollout. And that penetration continues to increase and there really hasn't been any pushback. So, that's been really good. And then on the other end of it, we really pushed the $1 item holiday and that was successful as well. So I think the customer appreciated the balance between both. As far as the, the guide goes, from 1% to 4%, it's -- the sensitivity isn't any more towards price versus transactions at all. And I think it's more, Simeon, about -- if you just take it the midpoint that indicates slight leverage over last year, which is actually about 50 basis points lower than what we had originally said at ICR. And I think the upper end reflects continuation of the trends we're seeing today. But I think in this environment today, I think it's prudent that we continue at a wider range as we deal with unknowns, like the banking issue most recently.

The next question is from Matthew Boss with JPMorgan. Please go ahead.

Great. Thanks and congrats on a nice quarter.

Thanks.

So, Joel, can you speak to recent performance from your new store cohorts and maybe elaborate on the flexibility across your eight worlds to maneuver the assortment between need-based versus discretionary purchases. And then Ken, on the cost structure and your ability to find continued efficiencies in the model, should we think of three comps as the right level of comp needed to leverage SG&A or could you actually pivot and lever on a lower level of comp if needed?

Yeah. Look, I think that the flexibility, Matt, is not limited in just consumables. I think we've been demonstrating that for many, many years. In the past we've tended to talk about trends, whether it be spinners or squishmallows or poppers, anything like that. And those constantly show up in different categories and the customer knows like, hey, I should go to Five Below because they'll probably have that trend. In the last 12 months, we've really seen it be all about consumables. And in our world that's candy snack, HBA, travel and the merchants did a great job of -- as that area was picking up, we increased our assortment, kept ourselves full, and that's just what we do no matter what the trend might be. The new cohort, look, all signs have been very positive. The fact that we've accelerated the number of conversions up to 400 this year is just a great example that we're not seeing any signs that what we shared at the Investor Day shouldn't continue regarding the comp profile of mid-single digits for conversions. And then, Ken, you want to talk leverage?

On the leverage, yeah. Matt, your question around the comp and the leverage, the comp point for leverage. You're right. Historically, we've talked about 3%. There's been a lot of noise over the last few years, so it's hard to really kind of decipher based on the most recent activity. But Joel mentioned it before, if you just look at 2023 now, again, there's a few things going on this year that are not normalized, right? We're getting back to a -- more normalized incentive compensation, and we're lapping some of these one-time cost management strategies. But even with that, you'll notice that like a 2.5% comp, which is the midpoint of our range that we guided to, we are getting slight leverage. I think the bigger part of that is as we move forward, our expectations are that we should see greater leverage as we've moved forward into out years, and potentially at a 3% or lower comp as we start to leverage on those investments we've made over the years, like distribution and corporate overhead in areas like that. So, I do think we have the ability to lever at a lower than a 3% comp, or slightly lower than a 3% comp.

Thanks Matt.

Thanks Matt.

The next question is from Seth Sigman with Barclays. Please go ahead.

Hey, everybody. Thanks for taking the question and Ken, congrats to you. Hey, I just wanted to follow up on the composition of comps. With transactions driving the comps now, it's obviously quite different than we're seeing with a lot of other retailers. Also, interesting, given some of the inherent ticket drivers in your business, can you just give us a little bit more context on what is driving transactions, and then perhaps what are some of the offsets to that? Thank you.

Yeah. I think the two biggest ones for us is, I mentioned my prepared remarks everything we've done around data and analytics. We have a much better robust tokenization that we haven't had in past years. So, we really utilize that for marketing and that proved well to drive transactions. And then secondly, the new cohort that Matt was talking about, as we continue on these conversions, we're immediately seeing a lift in sales, and it's primarily through transactions. So, those are two areas that are really driving transactions and it clearly came through in Q4 for us. Thanks Seth.

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

So, Joel, two related questions. Number one, what would you say Michael's two or three priorities are, right, product wise for 2023? And then I know the tech world has been a pretty big drag for the last -- I don't know, 12 to 15 months. What's your prognosis on that, right, in terms of what you can do to improve that or just maybe that category getting better naturally?

Yeah. Well, listen, Michael's got a couple priorities. One, it's really all been around our version of consumables. The focus on all the teams to -- in some cases, grow the space dedicated to consumables, improve the in stock associated with consumables, has been area number one of his focus. The second one has been around Five Beyond. And we have learned a lot as in our journey on Five Beyond, what types of items sell, what don't sell, what kind of quantities to buy and et cetera, et cetera. So that is an area where he's really leaned in to make a big, big difference on that. And then the third one is really just about the $1 to $2, $1 to $3 product. In this recessionary time, this time of high inflation, if we can continue to really focus on that low price point and deliver value, that's the third area. So that's where he's focusing. And then the tech world, we are already starting to see it improve. And some of it's probably lapping softness. But it has been an area that has been soft as you just called out, John. And I think you're going to see in our refresh coming up here in a month, some new product, much more focused on trend and novelty, and that's really starting to resonate well with the customer. And they brought in some new product that we haven't carried before. So, I think when you see the reset coming up here, you'll be surprised and as Michael always does, we adapt when something's not doing so well. Thanks John.

The next question is from Chuck Grom with Gordon Haskett. Please go ahead.

Hey, thanks. Congrats, Ken. Just a couple quick ones for me. A year ago you guys guided fiscal 2022 to an E PS range of I think $5.20 to $5.70. You subsequently had a lower a couple times and eventually did the $4.69 that you're reporting today. So, I guess, I'm curious that history played any role in and how you guys guided 2023? And then more near term, Ken, can you remind us why you're expecting 75 basis points of margin compression here in the first quarter on a pretty healthy comp?

Yeah. You want to take the first one?

Yeah. I mean, look, Chuck, it obviously weighed in. We wanted to keep the range wide. I think on one hand it does feel like 2023 we're going into the first year where we're controlling a lot of our destiny and kind of getting back to what Five Below does. I mean, if you think about it, we've been stuck at in the last four years at averaging 150 new stores opening. So, it's a big jump now to 200. It's kind of signal or it should signal to you all that we can control that side of it. But at the other side of it, it's not lost on us. There's still macro uncertainty out there and we wanted to be prudent enough to really widen that lower end. But I think in all cases what we -- the message we are trying to get to all of you is, we have the negative comps behind us, and now it's back to growth, growth both in terms of new stores and growth in terms of the existing stores. And that'll come via the conversions. It'll come through our merchants and what they do. And then the third one area will be our marketing continues to get better. Then Ken?

Yes, and then Chuck, on deleverage and the operating margin for the first quarter, it's about 70 basis points. It's primarily driven by increased marketing. If you recall, we really had dialed that back really throughout 2021 and even into the beginning of 2022. We really didn't see those increases until the back half of last year. So, we're up against that, but that's the key driver of that deleverage in Q1.

All right. Thanks.

The next question is from Scot Ciccarelli with Truist. Please go ahead.

Hey, guys. Scott Ciccarelli. I guess I have a follow-up question on ticket versus transactions. Can you help square for us the rollout of Five Beyond where you're obviously selling higher ticket items versus the decline in average ticket you experienced in four Q? Is that some sort of signal that maybe Five Beyond is not generating the traction, I guess I would've expected at this point?

No. I'm not sure I would expect that at all. We continue to see ticket increase, what about $0.10 a year or so?

Yeah. On an overall basis. Yeah. Yeah.

Yeah. But -- you go ahead.

Yeah. And Scott, Five Beyond is a small portion of that increases. Other things that are driving that, obviously, customer preference, we had some strategic price increases and things like that. I think on an overall basis, when you look inside ticket, we see the increases in AUR, but really the -- any type -- if there's any reduction in ticket, it's coming from UPT, which I don't think is dissimilar from what you're private probably hearing from other retailers. And that's kind of the pressure that consumers are under now given increasing prices tougher an environment for them. And so you see those tickets either staying the same on an overall basis or going down. So, if AUR is going up, you're seeing declines from UPT. We're pretty much similar to that over the last few quarters, and I think we've spoken about it that we've seen with our customer.

Yeah. And as I said on the previous question, we wouldn't be accelerating our conversions into the Five Beyond prototype if we were seeing any concerns whatsoever. Thanks Scott.

The next question is from Michael Lasser with UBS. Please go ahead.

Good evening. Thanks a lot for taking my question. It's a two-parter on the guidance. Number one, given that you did 200 models last year, 400 models this year, and you're getting a mid single digit comp lift from those remodels. So, you'll have essentially touched somewhere between a third and a half of the chain, presumably given you call it 150 to 200 basis points of comp contribution in 2023. So, is it reasonable to think outside of that you'd be comping -- your guidance implies that you'll be comping more like maybe downwind to two? And my follow-up question in that regard is if indeed you do have a negative comp, the macro proofs to be more precarious than what you thought, how low can your comp be? And you still hit the low end of your EPS guidance for this year. Thank you very much.

Yeah. And that first part of that, Michael, I think that I wouldn't -- I still wouldn't put a negative. And I think it's more like to say we would've probably been closer to a low single digit comp guide, which is traditionally where we've always been. Maybe with the uncertainty we would've went zero to three. And I think your range of about a hundred basis points, 150 might be a little high. I think that would be if they're at the absolute high of the mid single digits that we gave you before, but that wasn't contemplated in the guide. So, if you take a hundred base points guide for the conversions and traditional guide of low single digits, I think that's why you see us up more at four instead of one to three or zero to three.

Yeah. And then Michael, your question around relating EPS with the lowest comp, I mean, the guy that we provided, that's where we feel right at a one comp, that's where we'd land at the low end of the EPS. The one thing I'll add to what Joel mentioned, at the low end, we're assuming some type of kind of intensifying difficult environment for the consumer. If that were to happen, we would -- there would probably be a negative impact on both stores and the results of conversions and existing stores. So, it could be a scenario where you do get lists, but just not as much as you expect based on the environment. But you never know where that's going to land at the end of the day, but that's kind of where -- or what we were thinking about when we provided that guidance.

Thanks Michael.

The next question is from Edward Kelly with Wells Fargo. Please go ahead.

Yeah. Hi, guys. Good afternoon. My question is on store growth. Joel, you mentioned that getting back to sort of like the run rate that, that you would sort of hope to. But if I take a step back and look at store growth this year, probably about 15%, I guess. Can you just talk about the process changes that you're making? And then as we look forward, can you ramp the number of stores that you're opening, such that you're looking at least this level of square footage growth or more? Only because I think at the Investor Day, in the end, right, you plan probably for, I think for better growth there. Thank you.

No, it's a great question, Ed. And it is about 15% growth. I think, there's two things. One, we need to, and are planning to get back to a more 50-50 first half, second half. So, I think 2023 is the last of the years of like getting the engine back going. And you saw it last year too. We were more heavily backend weighted. And so, this year as we've gotten back to 200, you go back to what we said at the Investor Day being more in the -- I think we said 500 to 600 in 2024 and 2025, that's still on track. You add the two years together, and we see no reason the number doesn't continue to go upward from here. Landlord delays are really starting to diminish. Supply chain issues are diminishing. And it also, -- I mean, we haven't had any disruption in the retail industry for three years. And there's been several announced bankruptcies that's all a positive for us to start to get going again. That clearly wasn't there before. And that was a big major hold up for us from that perspective. So, I feel really good about us getting back to that run rate again.

And I think Ed, you had a question around the process, the real estate.

Yeah. I mean, look, we've -- the process, we've streamlined it in several different ways to build, to execute more leases in a faster timeline, more per month. We're expanding the types of centers we're going into. I talked about that a little bit in my prepared remarks. We've been so heavily weighted to suburban power centers. We've got many more urban in the mix, more rural. We're to do more grocery anchored centers. We opened some of our first outlet stores last year and we'll continue to test new venues. Thanks Ed.

The next question is from Kate McShane with Goldman Sachs. Please go ahead.

Hi. Thanks for taking our question. We wondered if you could maybe quantify some of the share gains you saw during the quarter. And if you think some of the closeouts you were able to take advantage of helped you during the quarter as well.

Yeah. I mean, closeouts were good, but they weren't overly material to our overall performance. I think some of the stuff we did around trends was much more important. I called out squish models as an example. The Kylie and Kendall bags were phenomenal, did great. We are though optimistic, or opportunistic on closeouts, but honestly, Kate, they weren't a big piece of penetration for the quarter from that perspective. I think our share gains more came from the conversions and marketing. Those really were where we saw the two biggest drivers for the quarter. Thanks Kate.

The next question is from David Bellinger with Roth MKM. Please go ahead.

Hey, thanks for the question and Ken, congrats. Can you guys talk about potentially the longer term opportunity you have within the collectibles category? We came across some in-store events around Pokemon trading cards over some weekend. So, should we expect more of that and could these events or further expansion and collectibles open Five Below up to some type of new set of customers, maybe an older set of customers with more spending power? Thank you.

Yeah. Look -- it's a great question. I'm glad you guys noticed. It means you're out in the stores. I always love that. Prior to the pandemic, we did a lot of events in our stores and the events just kind of disappeared for three years. But it -- at the end of the day, it's really about creating experiences and the collectibles creates a great experience in our stores. Kids were having funs trading them, and just gathering -- it's kind of back happening again. Ear piercing's another good one that's attracted. It -- excuse surprisingly male, which we did not expect or when we originally thought about that. But I think it's -- because our store is such a safe zone for boys and girls and we saw -- we've seen a lot of boys in there doing ear piercing. So, any one of those is just another thing about celebrating the rituals and milestones are growing up and creating experiences and collectibles have been a good one. And I think you'll continue to see more of those for sure.

The next question is from Karen Short with Credit Suisse. Please go ahead.

Hey, thanks very much and congrats on a good quarter. Two questions just combined. So, would you just be able to give a little bit of cadence on puts and takes on gross margin as we progress throughout the year? And then on CapEx as a percent of sales, is this -- with your guidance for 2023, is that kind of the right run rate to think about going forward?

Thanks Karen. In terms of the -- you asked for, I believe gross margin cadence as we go through. On a year-over-year basis, don't -- first quarter don't really see any type of material move either way. It looks like relatively flat. And then it should continue to grow as we move through the year. Gross margin really driven by those lower freight costs that we're seeing versus last year. Because if you remember, we did have high freight costs and the team's done a great job in terms of renegotiating newer contracts. So, you'll see growth in growth in gross margin as we move through the year by quarter. And then CapEx as a percent of sales, you do see the growth year-over-year 2023 versus 2022, a lot of that's driven by the increase in the number of new stores, right? 50 more stores opening in 2023 and also about 150 more conversions, which is driving that. I would expect that to be relatively similar as we move forward into out years. I mean, more to come on that, probably less in 2024 from a DC perspective. There's a little bit of that going on in 2023 as we expand Georgia and Arizona. But I think you could expect to see either consistent with what we're looking at in 2023 or maybe even a little bit less as a percent of sales as we move forward into 2024.

Yeah. I'd expect it to tick down.

Drop, yeah.

Yeah. All right. Hey, thanks Karen.

The next question is from Michael Montani with Evercore ISI. Please go ahead.

Hey, thanks for taking the question. Just wanted to ask on marketing spend. If you could give some additional color, where you see that coming in for the full year in terms of bps of headwind? And then also, incentive comp. Where was that in CY 2022? So, we know kind of what you have to cycle. And then lastly, if you could share any ocean freight bps of tailwind based on current spot.

Gotcha. So, Michael, on the marketing, on a full year basis, we're probably up -- you're talking, 10, 15 basis points here on an overall basis. Some shifts there in some of the quarters, but that's on an overall basis. And then from an incentive comp perspective, we mentioned that as we kind of move through some of these quarters and the way we book incentive comp, and keeping in mind that last year being 2022 was a obviously a lower amount of incentive comp, this year's more normalized. That's probably about tens of basis points in SG&A of deleverage that we're up against on a full year basis.

All right. Thank you.

The next question is from Krisztina Katai with Deutsche Bank. Please go ahead.

Hi, good afternoon. Thanks for taking the question and my congratulations as well to you, Ken. So, you talked about increased focus on data and analytics, and you are ramping back up marketing again. So, can you just talk about leveraging the data to even adjust your marketing tactically if you have to? And just overall, how are you measuring the effectiveness, whether it is bringing you a new consumer or driving greater transactions with existing consumers?

Yeah. Hey, great question. And Krisztina, recall for everybody, last year was the first year we put tokenization in, so it's the first time we've actually been able to track at the customer level. And so, now with this year, we'll start to -- year-over-year statistics on it. And as far as the marketing goes, we're actually looking at both, can we bring in new customers and can we get existing customers to not lapse or to purchase more frequently. And I think it depends whether we're talking about a new store or we're talking about an existing store, or we're talking about a converted store in terms of which tactic we're more after. But we now have the data and this will be the first year. We'll have year-over-year data on it. And so, we'll only get smarter as we get through this year and then into the following year. Hopefully that gives you some insight. Thanks Krisztina.

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

Thank you, operator. And thank you everybody for joining us this afternoon. Like I said at the beginning, we are really pleased with our results and are excited to get back to growing and get back to being a high growth retailer, playing offense like we always do, being nimble to trends and what's changing. And what, we'll stay focused on value and I look forward to seeing you all and speaking again after Memorial Day on our Q1 call. Thank you and have a great day.

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