Release Date: August 28, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sales in the second quarter increased by 9.4% to $830 million.
- Five Below Inc (FIVE, Financial) opened 62 new stores across 22 states in the second quarter.
- The company ended the quarter with $328 million in cash, cash equivalents, and investments, and no debt.
- The company is committed to refocusing on its core customers and enhancing value, improving the shopping experience, and streamlining operations.
- Five Below Inc (FIVE) plans to moderate store growth for 2025, allowing for better execution and more selective real estate locations.
Negative Points
- Comparable sales were down 5.7%, driven by a decrease in comp transactions and comp ticket.
- Gross margin decreased by approximately 220 basis points to 32.7%, primarily due to deleverage of fixed costs and higher year-over-year shrink accrual.
- Operating income for the quarter decreased to $41.5 million from $58.6 million in the second quarter of 2023.
- Net income for the second quarter of 2024 was $33.0 million, down from $46.8 million last year.
- The company acknowledged that it had lost focus on its core customers and over-expanded its product assortment, leading to operational challenges.
Q & A Highlights
Q: It sounds like you believe a lot of the problems here are self-inflicted. Can you talk more about what you think is fixable and why there aren't more structural challenges? Also, what's the right margin for the business when the dust settles?
A: We do not believe this is a structural issue. The problems are fixable, and we have identified strategies that delivered results but had longer-term consequences. We need to refocus on our core customers and deliver an edited assortment of trend products at extreme value. Regarding competition, we have always faced it and succeeded. We need to push the lead again. As for margins, we are making modest investments in labor and value, aiming to maintain a stable product margin profile. (Kenneth Bull, Interim President and CEO & COO)
Q: How much change or influence can you see for the product around the holiday season based on new strategic actions?
A: Given lead times, most holiday products have already been purchased, but we can chase some items. Improvement in the business will be seen when newness and value are added to our assortment, likely starting in spring/summer. (Kenneth Bull, Interim President and CEO & COO)
Q: Do you need to make any organizational changes to get the speed and newness in merchandising? Has the perception of the brand changed from what it was two or three years ago?
A: We have gone through a merchandising organization transformation to get back to our roots. Customer surveys indicate a need for more value, which we define as a combination of trend, quality, and price. We will focus on marketing to pull customers back in after improving the product. (Kenneth Bull, Interim President and CEO & COO)
Q: Can you elaborate on customer behaviors and comp trends exiting the quarter and what you've seen in August? Also, speak to the reduction in store growth for 2025.
A: Lower-income demographics underperformed, while higher-income demographics outperformed, indicating a need for better value. Traffic has improved in August, likely due to back-to-school. We are moderating store growth to focus on execution and will provide more details at the end of the year. (Kenneth Bull, Interim President and CEO & COO)
Q: How did you land on the 150-180 store growth number for 2025, and did you consider cutting deeper to focus on operations?
A: We did a deep dive on all deals and decided to be selective with real estate locations. The primary reason for moderating store growth is to focus on executing our initiatives without taxing the organization. (Kenneth Bull, Interim President and CEO & COO)
Q: Can you quantify the impact of investments in labor and value this year and next year? Also, what are the expenses impacting the P&L this year that will change next year?
A: Labor investments will be modest in the near term and will build next year. Pricing actions will be margin neutral. We expect to partially offset labor investments with cost optimization savings. About half of the $25 million in adjustments this year will be repeated next year. (Kenneth Bull, Interim President and CEO & COO; Kristy Chipman, CFO & Treasurer)
Q: Why did the business slow so quickly from positive low-single digits to negative mid-single digits? Will focusing on lower price points lead to ASP compression?
A: The slowdown was due to a culmination of macro pressures and an underperformance in seasonal products. We will reintroduce key price points like $1, $3, and $5, but the focus will be on value, which includes trend and quality, not just price. (Kenneth Bull, Interim President and CEO & COO)
Q: How has the Five Beyond strategy performed, and has it contributed to any challenges? What changes should we expect in that assortment?
A: We believe in the Five Beyond opportunity but need to apply the same focus and discipline as the rest of the business. The performance has been consistent, with sales penetration in the mid-single digits. We will relook at the Five Beyond prototype for better presentation. (Kenneth Bull, Interim President and CEO & COO; Thomas Vellios, Interim Executive Chairman)
Q: How would you characterize the environment in terms of trend, and how does it relate to conversion issues?
A: Trends drive newness, which is crucial for our customers. We need to focus on newness and key items that drive traffic and conversion. The ability to bring newness constantly into our stores is a trend in itself. (Kenneth Bull, Interim President and CEO & COO; Thomas Vellios, Interim Executive Chairman)
Q: Are you reassessing assisted self-checkout as part of this restructuring effort?
A: We are looking at simplifying store tasks, including self-checkout. We will likely move back to an associate-monitored process, which should work better overall. We are also looking at systems and efficiencies to save time and repurpose it for critical work. (Kenneth Bull, Interim President and CEO & COO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
