Five Below, Inc. (FIVE) CEO Joel Anderson Presents at 2022 ICR Conference (Transcript)

Five Below, Inc. (NASDAQ:FIVE) 2022 ICR Conference January 10, 2022 10:00 AM ET

Company Participants

Joel Anderson - President & Chief Executive Officer

Kenneth Bull - Chief Financial Officer

Conference Call Participants

Simeon Gutman - Morgan Stanley

Simeon Gutman

Hi, everyone. This is Simeon Gutman, Morgan Stanley's Hardline, Broadline and Food Retail analyst. And it's my pleasure to be hosting or moderating this fireside chat with Five Below at the Virtual ICR conference. We're pleased to be joined by President and CEO, Joel Anderson; and CFO and Treasurer, Ken Bull. I'm going to start with a handful of questions.

So first, good morning, everyone. Thanks for joining us.

I saw the press release this morning. Congratulations on a great result. Can you walk us through some of the key drivers and how you were able to navigate through the supply chain?

Joel Anderson

Good morning, Simeon, and good morning, everybody. I love to do that Simeon. I wish we were in person, but certainly understand the circumstances. And it's good to be gathered here for ICR again. Look, it was a great quarter, holiday season for us, Simeon.

And you asked about supply chain specifically, and then I'll talk about some of the drivers.

As far as supply chain goes, we actually did -- the team did a really good job. It was certainly less speared than expected as far as it relates to Five Below. We've been working all year on bringing product in early, and that certainly paid off. That did arrive late, but we were able to quickly get it out of our distribution centers and into the stores and produced a great holiday season on top of last year's fantastic holiday season.

As far as drivers go, as you know, we have the Eight Worlds. And it was a broad-based strength across the Eight Worlds. Specifically, trends were really hot. Squishmallows and our sensory product, poppers, really were probably the biggest drivers of the product during the quarter. But we saw lots of strength in games and toys, things like slime lickers, and like always our merchants did a great job of identifying trends, finding them quickly and getting them in our stores and made for a great holiday season for our customers.

The other thing I'd mention is we've talked a lot about ACO. That is something that now is in over 60% of our chain and that really helped with not only flowthrough but social distancing and really made it efficient way -- if we were short on staff or something we could really still keep all our registries open. So the progress we made over the last 5 years of investments in people, systems and infrastructure are really coming to pay off and it delivered a great quarter for us.

Simeon Gutman

Thanks for that, Joel. Can you -- when you look back, was there any meaningful pull-forward of holiday demand either within Q4 or even including Q3?

Joel Anderson

Yes. Look, I mean, the quarter started off, Simeon, really strong. And that was in our plans. It's hard to say whether that's a pull forward, but clearly, the customer was out shopping early. And we tend to look at the whole holiday season in totality.

And obviously, a 7.6% comp on top of last year's 10.1% -- our best 2-year stack since we went public, tells you that it was a really strong quarter overall. And so you know what, we certainly saw a great start in November, but we saw strength in December as well right up to the end. So look, our customers are out. They're shopping.

I think the pressure environment, when you're in the supply chain situation really bodes well for us as there's a high substitution effect. But overall, great quarter, and whether it was pull forward or not, we saw strength throughout the quarter.

Simeon Gutman

So it's a good transition. You brought us through December. I think a lot of people have January on their mind. Can you talk about any early reads on comping the big stimulus in January? And I guess the other way to look at it is how are underlying trends or sales playing out in January even after factoring in the seasonality by month?

Joel Anderson

Yes. I mean, look, January last year was over 30% comp. And as you know, it had almost a 400 basis point impact on our overall quarterly LY and January usually only moves the quarter tens of basis points. So clearly, we're up against that stimulus from last year right now. But overall, we -- as you can tell by our guidance, we're still planning to come in at the high end of our original guidance.

So we plan for the stimulus impact. It's a onetime event. We've got another week to 2 weeks to go, and it's kind of right in line with how we planned it from the beginning.

Simeon Gutman

Fair enough. I'll move from sales to freight for a minute. Can you talk about port congestion? Is it easing? Any updates, positive or negative on getting inventory as you move into January?

And then I have a second part of that, but I'll wait for the first response.

Kenneth Bull

Yes. Simeon on freight and supply chain. I think you heard Joel mention also, we are just really pleased with how the team navigated through this really difficult supply chain environment. They were extremely planful and they were also very proactive and that really helped us out in terms of getting the product that we needed for the holiday season. We also were able to leverage -- and this is another benefit of scale and continuing to grow, leverage the great relationships that we have with our vendors.

So they partnered with us through this holiday season to make it successful.

Another thing I'll throw out to you, and we mentioned it on the Q3 call, the team was, again, proactive in getting out ahead of locking up capacity and rates from a longer-term perspective. So we sit today, having the majority of our inbound container rates and capacity locked up. And for a longer term, we normally go for a 1-year term, and we locked up for even longer than that.

You mentioned the port congestion. In terms of the ports where we bring the majority of our goods in, primarily on the Eastern Seaboard and in the Gulf, we're not seeing any material changes in terms of congestion issues there. There are increasing or there is increasing congestion that's been noted recently in the L.A. and Long Beach ports. But again, it's a small amount that we import through the West Coast there through those ports.

And then in terms of inventories and in-stocks, I'm sure everybody's heard retailers were challenged this season to get product in. I mean we did see some lateness in some of our deliveries, and it may have led to certain out of stocks. But again, to Joel's point, we ended up hitting records, right, a record 2-year comp. So overall, we were really pleased with the inventory position that we were in.

And the other thing that I'll throw out -- and we talk about this normally in terms of sales, but even in terms of freight and supply chain, you go back to our model and you go back to the 8 Worlds and the treasure hunt nature. And that provides us a lot of flexibility from an inventory level, too, because when you get into the holiday season, the store almost becomes a gift-giving store, last-minute gifts and there is -- kind of lends itself to substitution. So if we were out of a product in one area, the customer almost doesn't even notice it because we have so much to offer for the holiday season. And again, I think the teams did a -- really did a great job in terms of navigating through this holiday season, the supply chain teams.

Simeon Gutman

Is there anything you wish you did differently?

Kenneth Bull

Actually, looking back on it and given the success, I'd have to say no. Again, I think it's all about people at the end of the day, and I think the teams -- and this has been going on for a while, by the way. So it's not just for holiday. But even when we go back to the beginning of the year when we started to see challenges and how the team, as I mentioned before, was very planful and very proactive in terms of what they've done. So I think they checked the box on a lot of those positive actions and strategies that they put into place earlier in the year that helped us throughout this entire year.

So I'd have to say no. I think the team did a great job, and I don't think there's anything I would have changed for this holiday season.

Joel Anderson

Yes, I would agree with you Ken. And Simeon I echo those remarks, but it's more about looking forward and the fact that we're in great shape entering '22 from a supply chain perspective says not only did the team made great short-term decisions, but we made some really positive long-term decisions that should set us up nicely here for '22 and beyond from a supply chain perspective.

Kenneth Bull

Yes. And Simeon, just to add to that, what Joel, what you're mentioning, the -- it doesn't end, right? This is a dynamic environment that just continues on, and we talked about this earlier in terms of accelerating receipts. So the team has been working now for a while on spring receipts to make sure they get in here and we're in a good position to start the year off strong. So this is really, to Joel's point, this is ongoing in terms of the work that's being done by the teams.

Simeon Gutman

And maybe to put a ball on the supply chain, maybe 2 small follow-ups. First, any of the product that was delayed, is that any of that related to holiday such that there's risk of markdown? And second of all, can you mention you're locked in from a supply chain or from a freight perspective. Do you think then we're worse -- we're past the worst as far as the incremental expenses that you were incurring in 2021?

Joel Anderson

Let me take the first part, and then, Ken, you can touch on it from expense. From a liability standpoint, Simeon, honestly, not only was stuff delayed, but the flip side of it, it was delayed because we prioritized. And the areas we really prioritized was seasonal stuff that had a short life cycle to it. And so our seasonal product, for the most part, got in here on time and we had great sell-through.

So anything that came in late was -- in some ways, it was purposeful. It was the stuff that we knew had longer shelf lives. And even if it got in here late, it would be a good product for '22. So really no inventory liabilities that we see. In fact, our inventory is in probably some of the best shape it's been in since I got here.

And Ken, do you want to touch on expenses?

Kenneth Bull

Yes. In terms of -- Simeon, in terms of expense and rates, as I mentioned, we were able to lock in the majority of the rates and capacity going forward. It is going to be higher than what we experienced earlier in the year. So we probably have 2 to 3 quarters then we're going to have to anniversary that in '22. I can tell you, I think it's a very favorable rate in terms of what I'm seeing out there in the marketplace, and also my indications of how long this is going to last.

So once we get towards the back half of the year, we're going to be, again, anniversarying those higher rates. So I think we might have a little bit of impact in the first part of the year, but then that'll even itself out in the back half of the year.

Simeon Gutman

Okay. Great. Moving on to inflation and pricing. What's your thought process around inflationary pressures coming in? How are you passing on pricing in the construct of your pricing algorithm?

And are you seeing any resistance in any place?

Kenneth Bull

Yes. With regards to inflation, Simeon, we've -- and we've said this before, we think we're uniquely positioned to be able to mitigate and manage inflation. And there's a couple of things I just wanted to go through. We look at scale, we look at innovation. You mentioned pricing, and we also look at value.

So I'll give you some of the examples out there of how we're able to manage through this. Almost everyone is getting hit. We just talked about freight, right? That's an inflationary area. Costs are going up, also wages.

When you look at freight for us, we've invested, and Joel mentioned earlier, the investments that we've made in people and systems and infrastructure, that includes the distribution network that we've been working on for the past few years. So now that we have that in place, what that translates to is to lower stem miles between the distribution centers and the stores. And that then reduces our cost per trip in terms of deliveries. So that's a great thing for us going forward to help to manage increasing costs.

Also from an innovation standpoint, we talked about this, I think, on the third quarter call, where we started a small -- started our own kind of small fleet out there, and we tested that during the holiday season. Very favorable response to that. So that's something we could work on to as we move forward. If you look at wages, wages is another area where costs are going up.

Again, another thing that Joel had mentioned early here was our implementation of assisted self-checkout. And that's -- the customer has responded really well to that. A couple of things go on there. One, we do have the ability to reduce payroll hours. But more importantly, we have the chance to repurpose the associates hours and what they're doing in their activities. And we turn it from working behind the cash wrap, where you're really focused on just trying to check the customer out to now giving a chance to engage with the customer on the way out. So it really kind of completes that experience. But again, from an inflationary standpoint, we do have the ability to reduce hours there.

You mentioned pricing. We've always said we do everything we can to keep our prices low and to maximize value. And the customer has given us the ability to increase prices. We can go back to 2019 in tariffs. And on existing products, especially in the tech area, we moved our prices over $5, in between $5 and $6.

And that's continued to do really well. It's also a big component of our sales. So that's worked out well for us. And then we've got Five Beyond, which is really the new assortment of product with even higher value. It's in about 30% of the chain. And there's actually a couple of things going on there.

We've got that WOW Wall that's in every store, and we've got the Five Beyond prototype that's again in about 30% of the chain. And again, the customer has responded really well to that. So we think we've got opportunity there. So when you put it all together, as I mentioned to start, I do think we are pretty much uniquely positioned to be able to counter any kind of inflation out there.

And the other piece I'll throw and we said this for a while, we really do well in good economic times when there's a lot of traffic out there. And then we also do well in tough economic times when value becomes even more important because that's the area that we play in. So we feel good about our ability, again, to manage through inflation.

Simeon Gutman

Can we spend an extra minute on Five Beyond? You now have a bunch more data points through the holiday and you mentioned it's in 30% of your stores. How are the permanent sections doing? Any more details you can share, quantify uplift sales or margin? And then how are the permanent sections comparing to the temporary ones in terms of materiality?

Joel Anderson

Yes. Let me take that, Simeon. Look, we're very excited about the results we're seeing from Five Beyond. And let me just give you a few nuggets of information to kind of help you understand it.

Before I do that, I also want to say, look, we've got a lot of analysis to do. Holidays is only 10 days behind us. And so expect on our March call, that we'll share with everybody where we're going with it. But we plan to expand Five Beyond further. We're -- it will be our prototype of '22. So there's no negatives. It's all positives, and I'll give you a couple of examples.

One, we tested the $25 price point this year -- this holiday season. So if you recall, last year, the highest price point we tested was $15. This year, it was $25. It was only a couple of products, but the results were very positive, and we really saw no pushback from the customer.

So while it isn't meaningful in the overall results, it's a good sign that, during the holiday season, when we can deliver value, the price point is not where the pushback is from the customer. So we had a 6-foot basketball hoop that was -- received very positive as an example, at $25, seen elsewhere well over $50. So that's 1, price point.

The second point of information is that customers that bought five beyond products spent about 2.5x our average during holiday. And if you recall last year, that number was about 2x. And now some of that's because we brought in some higher price points, I'm sure, but those are all the analysis, and we got to kind of parse our way through all the status, Simeon. But everything we're seeing is very positive and we like the direction we're heading with Five Beyond and so you should expect more from us when we'll take you through the specific details at the results in March.

Simeon Gutman

Thanks for that. I'm going to maybe transition to more medium to long term and stick with something, Joel, you said, and I'll take a swing at this, but any preliminary thoughts on the growth algo for '22? Should the baseline be normal, low-single-digit comps, high teens EBIT/EPS growth, and what you're planning for? So I'll leave it at that, but anything around the long-term algo of the business.

Kenneth Bull

Yes, Simeon, I mean, as we normally do, we'll provide some more detail around that on our fourth quarter call. We get a chance to get through the finishing up '21. But I can tell you, on the operating margin front, we do have a little bit more investment to go. We have another distribution center that we're bringing on board that will come on in the first half of 2022. And as I mentioned, we have to wrap up fiscal '21 here.

But preliminarily, we expect margins to be relatively in line with where we're going to land in '21. So we feel good about that. And keep in mind, that's on top of -- we've got record sales and earnings this year. So what we're really saying is we do believe that's somewhat of a baseline that we'll be able to move off of and longer term, definitely lever on that.

We -- as you know, we continue to be -- we're a high-growth retailer, right? So that means high increases and high growth in sales. It's still going to be primarily driven by new stores and then also high growth from a bottom line perspective, whether it be EBIT or EPS. And that's really going to be through our operating performance and then the leverage that we're going to be able to get, based on the investments that we've made over the years, again, in people, systems and infrastructure.

Simeon Gutman

Thanks for that preview. Long-term store target used to be 2,000, now it's 2.5 plus. Somewhat anticipating an update to this at some point this year or in 2022, I guess. So any thoughts on that? Why isn't that 3,000 or 4,000?

Joel Anderson

Yes. Simeon, let me take that one. Look, the last time we updated it, we only had about 500 stores. We've just entered California. Obviously, what you've seen us do since then is we've successfully penetrated California now. We continue to penetrate more urban, more rural. And so yes, we do expect to update that number, and we expect it to go higher.

As you asked me about -- questions about Five Beyond, I said we're going to give you more in March. Ken's talked about more in March. Now I'm telling you March. So what I am pleased to announce today that we got a lot of really good news to unveil to yourself and the rest of the analyst community about the long-term prospects of Five Below. And so we're going to do this spring, our first Five Below Analyst Day since going public and take that as a sign that we are really excited and have a lot of news to share with everybody.

And we felt we needed a dedicated venue to kind of walk everybody through the long-term prospects of where we're going. And at that same meeting, we'll also do the long-term store growth. But yes, you should expect it to increase as we've got more data points now than we had before.

I don't know, Ken, anything to add to that?

Kenneth Bull

No, I think you hit it. I guess, Simeon, again, that March kind of year-end for us, there'll be a lot of information that we're going to be providing, especially around the future of the business.

Simeon Gutman

Yes. Well, it's somewhat preempt maybe this other question regarding the free cash flow power of the business. The cash has all been reinvested back into this business. When does that change? Any plans for buyback alongside this growth in the future?

Kenneth Bull

Yes. And I mean, listen, we've got an industry-leading new store economic model. And as you know, we can continue to grow at a fast pace without needing to borrow and throwing off the cash, to your point. So obviously, reinvesting in the business is going to be the top priority from a capital allocation standpoint. We still have a little bit left to go in terms of the -- I mentioned the bringing on another distribution center.

But -- and you also mentioned buybacks. I mean we've continued to look at buybacks opportunistically. So that's going -- that will be part of the equation for us from a capital allocation standpoint.

We have a repurchase plan that's out there right now that goes through the beginning of 2024. So we have room to be able to do that. And from a capital allocation standpoint, it's something that's very dynamic for us given our high growth -- It's something we -- Joel and I continue to look at, we look at every year. And who knows? I mean there's other things that could be included in there, too.

You've got M&A, potentially something around maybe a dividend. We consider all those types of things when we look at capital allocation at the beginning of the year. We'll go through that again this year and continue with that plan.

Simeon Gutman

Great. Well, maybe to close out, given we have about 2 minutes, last question around getting to know your customer tokenization. You mentioned that you're trying to get to know them a little bit more granularly. Any other investments or initiatives that are related to that? What should we hear?

And I don't know if that's again preempting the March meeting.

Joel Anderson

No. Look, I think I'll give you a couple of insights. Clearly, tokenization will have more data for you at the March meeting of Q4, it will be our first quarter of that fully implemented across the chain. And recall for everyone, we now got data on about 75% of our customer. But some of the new things now that you should expect as we, again, continue to engage with our customer more, we expect to roll out ship from store in '22. We expect to roll out BOPIS in 2022 and then, clearly, as we learn more from tokenization, that will inform us on where we go with like a loyalty program or something like that.

But as you can tell, we're getting closer to our customers. We're learning more about them. And as that engagement goes up, it just drives more sales and more traffic, and we just continue to grow. And really pleased with Q4 and excited to get everyone together for an extended period of time and really share with everybody the long-term story on where Five Below is going, but nothing but great news in front of us.

Simeon Gutman

Okay. Well, thanks for sharing the holiday update and some of the strategic plans for the future. I appreciate your time, Joel and Ken, best of luck finishing out in January and look forward to being in touch.

Joel Anderson

Thanks, Simeon. Great to have you and see you today, and thanks, everyone for jumping on our ICR call this January.

Kenneth Bull

Thanks, everybody.

Question-and-Answer Session

End of Q&A