Five Below, Inc Q1 FY2021 Earnings Call

Good day, and welcome to the Five Below First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to the Vice President of Investor Relations. Please go ahead.

Thanks, Cole. Good afternoon, everyone, and thank you for joining us today for Five Below's first quarter fiscal 2021 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 Five Below's 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 for our first quarter earnings call. I will review the highlights of our first quarter performance before handing it over to Ken to discuss our financials and outlook in more detail. Then we will open the call up for questions. We've been fully reopened for three consecutive quarters, and on March 20th, we lapped our initial temporary closings from the first quarter of 2020. I remain amazed at the resiliency and flexibility of our customers, vendors, and crew. We thank them all for continuing to support Five Below in this dynamic operating environment. Now, turning to the first quarter, we are extremely pleased to deliver Q1 results that exceeded the guidance we provided on our last earnings call in March. We achieved first-quarter sales of $598 million and earnings per share of $0.88 versus 2019, which is more comparable than 2020; sales grew 64% and earnings per share grew 91%. Sales growth continued to be driven by double-digit ticket growth, while transactions remained slightly negative due to reduced store hours. We saw strength across the business in both existing and new stores, including all-time records for new store performance that I will discuss shortly. This strong performance also played out across channels, with our average sales per store hitting record levels for the first quarter and our nascent but fast-growing digital business posting double-digit growth over last year's first quarter when e-commerce grew four times. New stores have always been the fuel for the Five Below growth engine. And in Q1, we opened 68 new stores, the most we have ever opened in a quarter. Six of these stores across five states made the top 25 list of our all-time spring grand openings. In fact, one of our stores in Lubbock, Texas, set the all-time grand opening record. Considering the reduced store operating hours and decreased grand opening marketing, these results were even more remarkable. We successfully entered our 39th state, Utah, with seven new stores in the Salt Lake City area, where the customer response was very strong. We also opened a store in the new market of Tucson, Arizona, which is one of the stores that finished in the top 25 Spring Grand Openings. We are on track to open between 170 and 180 new stores this year and ended fiscal 2021 with approximately 1,200 stores, leaving us a long runway ahead to reach the 2,500-plus total store potential we believe exists in the United States. Before I speak to the specifics about the first quarter, I want to acknowledge that once again both internal and external factors contributed to our strong performance. Internally, our teams executed well across the organization, delivering WOW for our customers with amazing product at outstanding values, injecting a little fun into their lives when they arguably needed it most. Externally, we also continued to benefit from government stimulus as the third round of stimulus began to hit bank accounts in mid-March. We maintained an unrelenting focus on our strategic initiatives across product, experience, and supply chain in the first quarter. On product, from a merchandising perspective, we continue to work closely with our vendor partners around the world to capture and chase trends for our customers to offer them the products that they've just got to have. We saw broad-based strength across our worlds during the first quarter, especially in the Sports, Tech, Style, Candy, and Room categories. Sports was strong in the games and toys category; Tech benefited from gaming products, including the Bugha items we launched last year. Style was supported by apparel and accessories. Candy recovered nicely after losing most of the Easter season last year when our stores were closed. And finally, Room continued to benefit from the trend of people working and schooling from home. Whether in the $1 to $5 product category or the newer extreme value Five Beyond section, the merchandising team is focused on offering value across categories, using their expertise and experience combined with our growth and benefits of scale. For example, the Room category has evolved incredibly over the last several years and now features regularly sized tables and other furniture to outfit an entire room on a budget. The pet category within the Room segment has grown significantly as we expanded the assortment, especially this past year in response to the pet adoption trend. The merchandising team continues to remain nimble and flexible in sourcing amazing trend-right products by working with our vendor partners, listening to our customers, and spotting trends on social media among other channels. The ability for Five Below to participate in almost any trend through our eight worlds and the flexibility within those worlds is a key distinguishing feature of our model. Our second initiative is focused on the experience for our customers and crew. Experience includes both in-store and digital, and we constantly look for ways to enhance the experience through innovation. In store, we have now successfully pivoted to our new prototype with Five Beyond merchandise included in the Tech and Room worlds in the back of the store. In addition to the 68 new stores, we remodeled about a dozen stores in Q1 into this prototype, and now expect to finish 2021 with about 30% of our stores in the Five Beyond format. Additionally, Associate Assisted Self-checkout or ACO, as we call it, is in most of these stores, and we are adding over 250 ACO stores to be in over 60% of the chain by the end of this year. ACO allows our crew to move from behind the register to the floor to assist our customers with their shopping and checkout process, which makes for a better and faster customer experience. Five Beyond and ACO are just two examples of how fast we are transforming the Five Below concept to make it an even better experience. For digital, which includes marketing as well as e-commerce, we focused on increasing our brand awareness through more targeted marketing, utilizing paid search, and social platforms such as Instagram. Through digital channels, we are able to highlight our amazing value, hot new products, and inspire and delight our customers. Our approach is integrated with our store experience to be visually appealing, bright, and engaging. We believe we are attracting both new customers to Five Below who convert to regular customers as well as developing a deeper connection with current customers. Similarly, for e-commerce, we are growing the number of new customers while also increasing the percentage of repeat customers. In addition, we are continuing our test with Instacart, which is currently operational in a third of our chain. With respect to our third strategic initiative, supply chain, we made significant progress in preparing our next two distribution centers to open. We started inbound shipping to our Arizona DC or ship center, as we refer to our DCs, a few weeks ago and also broke ground on our Indianapolis ship center in mid-April. The Arizona ship center is expected to open later this summer and will include e-commerce fulfillment, which will improve our service to customers in the western states. These ship centers feature a new warehouse management system, which, combined with our demand forecasting platform, will help optimize our inventory levels and allocations. Within our supply chain, consistent with other retailers, we are contending with the ongoing global challenges and rising costs resulting from the pandemic. Our teams are doing a great job navigating these tight supply conditions, whether it's by negotiating our annual contracts early or finding new carriers to help ship our products. In summary, we are very pleased with the results and the progress we made in the first quarter. We are excited to continue to play offense, execute with discipline, and make progress in furthering our strategic initiatives across product, experience, and supply chain. We continue to be nimble and pivot quickly to capture trends, wowing our customers with extreme value products. We believe our product lineup for summer fun offers an awesome selection of outdoor products, including new beach toys and towels as well as sandals and summer apparel; we are sure to have something for everyone. Looking ahead, we are excited to offer a more traditional Five Below back-to-school assortment as well as our seasonal WOW wall with new Five Beyond products. We have sourced truly amazing WOW products for our customers to enjoy and celebrate a return to normal. Our customers have told us they recognize the extreme value we offer through Five Beyond, and we will continue to listen and work back from them to find those must-have, trend-right products at extreme value, all packaged in a fun and amazing shopping experience. With that, I'd like to turn it over to Ken for the financial discussion.

Thanks, Joel, and good afternoon, everyone. I will begin my remarks with a review of our first quarter results and then provide guidance for the second quarter and commentary on the back half of the year. Because our stores were temporarily closed during the first quarter last year, making a year-over-year comparison less meaningful, I will also provide a review of our results versus the first quarter of 2019. We were very pleased with our record first quarter results. Our sales for the first quarter of 2021 increased to $597.8 million from $200.9 million reported in the first quarter last year. Total sales this year grew 64% compared to the first quarter of 2019 on an average store count growth rate of 37%. For the comparable subset of stores that were opened in both the first quarter of 2019 and the first quarter of 2021, sales increased 23%, driven by record first quarter tickets on the heels of a strong demand environment aided by stimulus as well as the success we are seeing with our own merchandising initiatives. Transactions continued to be down given we operated the stores with fewer hours versus our standard pre-COVID operating hours. These ticket and transaction trends are similar to what we have seen since reopening the chain last year. We opened a record 67 net new stores across 28 states in the first quarter compared to 20 net new stores opened in the first quarter last year. We ended the quarter with 1,087 stores, an increase of 167 stores or approximately 18% versus 920 stores at the end of the first quarter of 2020. As Joel mentioned, we entered our 39th state with seven new store openings in the Salt Lake City area of Utah. We were very pleased with the performance of our new stores, especially given the more restrictive shopping environment and extremely limited grand opening marketing. Gross profit for the first quarter of 2021 was $200.9 million versus $20.5 million in the first quarter of 2020. Versus the first quarter of 2019, gross profit increased by 67%, while gross margin increased approximately 70 basis points, driven primarily by occupancy leverage on the strong sales results, which more than offset higher inbound freight costs resulting from the tight supply chain conditions Joel mentioned. SG&A expenses were $137.2 million for the first quarter of 2021 versus $92.7 million in the first quarter of 2020. Compared to the first quarter of 2019, SG&A expenses increased 44%, but decreased approximately 320 basis points as a percent of sales, driven by lower store expenses on the reduced operating hours, reduced marketing expense, and fixed cost leverage. As a result, we reported operating income of $63.7 million for the first quarter of 2021 versus an operating loss of $72.2 million in the first quarter of 2020. Versus the first quarter of 2019, operating income this year increased more than 2.5 times. Net income for the first quarter of 2021 was $49.6 million versus a net loss of $50.6 million last year and net income of $25.7 million in 2019. Earnings per diluted share for the first quarter was $0.88 compared to last year's loss per diluted share of $0.91, and it was a 91% increase versus earnings per diluted share of $0.46 in 2019. We ended the first quarter with $392 million in cash, cash equivalents, and investments and no debt, including nothing outstanding on our $225 million line of credit. Inventory at the end of the first quarter was $327 million, as compared to $368 million at the end of the first quarter last year. Average inventory on a per-store basis decreased approximately 25% versus the first quarter last year, as last year's first quarter inventory was inflated by the temporary store closures. Versus the first quarter of 2019, average inventory per store decreased approximately 12%. Our current inventory levels are in a good position to support the second quarter. And as we look to the second half of the year, we are working to accelerate receipts and add carrier capacity as we navigate a tight supply chain environment. Now looking ahead, we are providing formal guidance for the second quarter of 2021, but not the full year due to the continued uncertainty related to both the ongoing impact of COVID-19 and potential future shifts in consumer spending. However, I will offer directional commentary on how we are viewing the full year. For both the quarter and the full year, I will compare to fiscal 2019 due to the disruption in-store closures caused by COVID-19 last year. We are very pleased with the start to the second quarter. We expect second quarter sales to be in the range of $640 million to $660 million. The midpoint of this range represents an increase of 56% versus sales for the second quarter of 2019 on an average store count growth rate of 36%, given we plan to open approximately 30 stores in the second quarter. We expect significant operating margin leverage versus the second quarter of 2019, driven primarily by SG&A expenses, including a shift in marketing spend into the second half of the year. Our effective tax rate for the second quarter is planned at approximately 25%, which excludes the impact of share-based accounting or any share repurchases. Our practice is to update the tax rate outlook quarterly with actual results when we report earnings. Net income for the second quarter of 2021 is expected to be in the range of $56.9 million to $63.7 million with diluted EPS expected to be in the range of $1.01 to $1.13. This represents a growth rate at the midpoint of more than double the net income and EPS reported for the second quarter of 2019. We are on track to deliver a much stronger first half of fiscal 2021 than we had envisioned when we spoke with you back in March. As I mentioned earlier, due to the continued uncertainty related to both the ongoing impact of COVID-19 and potential future shifts in consumer spending, we are not able to provide full year guidance at this time. Back in March, I discussed the scenario for the year, where a high teens compound annual sales growth rate from 2019 to 2021 would result in operating margins in line with 2019. Given our first quarter results and guidance for the second quarter, a higher two-year sales compound annual growth rate in the low 20s range would result in operating leverage of approximately 30 basis points versus 2019, driven by SG&A leverage. With regards to non-operating results, our minority interest in nursery gamers is still expected to result in a net other expense of approximately $0.06. In addition, we are currently planning an effective tax rate for the back half of 2021 of approximately 25%. For the year, we expect to open 170 to 180 new stores, with approximately 100 new stores opening in the first half of the year, and we expect to complete approximately 30 remodels. We are planning to spend approximately $315 million in gross capital expenditures, excluding the impact of tenant allowances. This reflects opening a new ship center in Arizona, and beginning construction on a new ship center outside Indianapolis, opening new stores and executing remodels, and investing in systems and infrastructure. In conclusion, we had a great first quarter and are off to a strong start for the second quarter. Agility, flexibility, and innovation, along with extremely disciplined cost and capital management and the ongoing growth and scale in the business are all inherent to our model and how we have always operated. And these qualities will continue to serve us well as we navigate a dynamic operating environment. Now, I'll turn it over to Joel for a brief summary before we begin Q&A.

Thanks, Ken. In summary, we are very pleased that the momentum from a strong finish to 2020 continues. And I'm proud of how our teams are executing across the Company. With the inherent flexibility of our eight worlds unique merchandising approach and focus on innovation across product experience and supply chain, we believe we remain in a position of strength to continue growing Five Below and driving sustainable long-term value for all stakeholders. With that, I'd like to turn the call over to the operator for questions.

We will now begin the question-and-answer session. Our first question today will come from Matthew Boss with JPMorgan. Please go ahead.

Great. Thanks, and congrats on another great quarter, guys. So maybe a two-part question. Joel, on top line growth relative to 2019, how would you best rank the Company-specific drivers that you think are contributing to the outperformance? And then maybe for Ken, as we think about success with Five Beyond and the new customer acquisition that you're clearly seeing, any way to speak to productivity and brand awareness that you're seeing in new stores today? And I know you guys have talked about moving to offense. What could it be in terms of the ability to accelerate and take market share coming out of the pandemic?

On top line, it's hard to distinguish between just external and internal factors; obviously, the stimulus is an external one. I think you can tell, though, by our guidance in the second quarter that it wasn't just external factors, and you see the momentum continuing both in April and then now well into the second quarter. Clearly, adding things like Five Beyond makes a difference. The eight worlds give us a lot of flexibility to chase trends in many different categories. I think what you heard me call out five different worlds that really drove, and I think it all adds up to, like we've seen in any times of trends or, in this case, COVID, we picked up a lot of new customers. And those new customers try out Five Below; they like what they see, and then they become regular customers with us, and that keeps some momentum going. So, we feel really good about the internal drivers to our growth. Ken, do you want to?

Yes. And then, Matt, on Five Beyond, I think Joel had already mentioned a little bit of it there. I mean, we're really pleased with what we're seeing and the reactions from the customer. Another example for us to present extreme value to the customer, and we continue to roll that out in our stores. We're going to be at probably about 30% of the chain to have that prototype in by the end of this year. So again, it gives us a chance there to continue to offer that value to the customers, and they continue to respond really well for that. So that is something we see as a great opportunity for us. And again, as you've heard from us before, just another area of innovation for us where we just up the game from an experience standpoint.

What I'm probably most proud of the team is like when we get a new idea, we move fast. And I called out in my prepared remarks, both ACO and Five Beyond. Those were essentially nonexistent a couple of years ago, and ACO is now in 60% of the chain, and Five Beyond is in 30% of the chain, so really changing the experience to make it even better.

And then, Matt, I think you also asked about new customer acquisition. And I think we've talked about that before. We were really happy with what we saw in the fourth quarter, very healthy results there. And we saw that again in this first quarter. So it's good to continue to see those new customers coming on board.

And our next question will come from John Heinbockel with Guggenheim Securities. Please go ahead.

Two questions. One, how do you guys think about gauging demand for the holiday season with a lot of moving parts and in light of the supply chain environment flowing product in? So that's number one. And then two, what are the things that COVID might have created that are structural? You think about operating hours, marketing spend, is any of that structural that would improve the profitability of the business on an ongoing basis?

Yes, John, those are great questions. Regarding holiday demand, it's part of why we aren't providing formal guidance. Looking ahead, there are many unknowns, but we see both challenges and opportunities. With our current momentum and Ken's revised outlook for the year, we feel optimistic about our position in the latter half of the year. Specifically about the supply chain, it’s a hot topic. We have two advantages: we have solid contracts in place for the year, which helps manage costs, and our treasure hunt concept allows for a variety of substitutions. Customers often come to solve specific problems, such as gifts for occasions, so this flexibility benefits us during times of temporary out-of-stocks. Our supply chain team has effectively prepared by bringing in products early for the holiday season, so we're in a good position. As for structural changes following COVID, we've made some adjustments, such as tightening our operations and fully transitioning to digital marketing, moving away from paper. Our marketing spend this year will likely be around 2%, which is lower than in previous years, and the efficiencies gained during COVID illustrate our progress. Additionally, we've streamlined our operating hours, which is advantageous in a rising wage environment. This has contributed to solid operating margins in the first quarter and a positive forecast for the second quarter. Ken, do you have anything to add?

Just another structural one I'll throw in there too, is because we all learned how to operate differently during the last year, John, look at the buyers and what they've been able to do and sort of look at the response of the merchandise, and they did it really with a tremendous amount of less travel than we've ever done. I'm sure they're anxious to get out there and get back to the vendors, but we still saw that we could be successful in another environment. So yes, there are a good number of takeaways and learnings that we're applying going forward.

Our next question will come from Karen Short with Barclays. Please go ahead.

Thanks very much. Wondering if you could just talk a little bit about maybe some pressures that people are concerned about? So, I know you said you were in a good position on freight, but wondering if you could give a little color on where you're at in terms of freight on contract versus spot? And then, how to think about actually '22 with respect to freight headwinds or maybe even tailwinds? And then also, if you could just give a little color on how you're thinking about inflationary pressures on the wage front, but also in products in general?

Yes. Look, on the first question about specifically contract versus spot. We're more than 90% on contract; spot would only come into play as sales go up, and we're exceeding our number of containers, but the team did a great job. We locked up our contract rates back in 2020. And so that really helps mitigate a pretty tough environment for the spot rate right now. It's a little early, Karen, to speculate on '22. I would be surprised if the spot rates stay up that high. The fact that we are such a growth retailer really helps as we negotiate for the next year because no carrier wants to lose somebody that's growing the number of containers as much as we are. So that's really helpful. But it's too early to speculate exactly on the numbers. But I think we'll be fine there. I'm not too worried about it. And as far as inflation goes, look, I think it's an advantage for a value retailer like us. One, we've seen in every other recession or some sort of tough environment, value becomes even more important. So, we will win with value. And then I think the difference this time is we now have Five Beyond. If you'd asked me that question two years ago, Karen, it would be tough; we'd be hitting some pricing ceilings, but we have pivoted nicely. It was Ten Below, which is really a defensive strategy into an offensive strategy of Five Beyond. And the last place we go is raising prices, and I think some retailers go there first. And so, as we can create more value, we're going to win. But we do have now the ability to go above the $5 price point, which is really a nice way to overcome the pressures of inflation.

Okay. And just on the wage front?

Yes. To address your question about wages, we have a few advantages. We remain competitive in every market, with the average wage now around $13. We've also employed many 16- and 17-year-olds who are eager to take their first jobs and are willing to work for a bit less. The environment is enjoyable, and particularly with ACO, we don't need many associates to operate a Five Below store. While we're observing wage increases, which I expect will continue along with the rising top line, this has really helped us manage costs. Overall, we are not facing any challenges in hiring. We are making adjustments in specific markets as needed, but our teams have done an excellent job with recruitment, and this has not become a significant issue for us.

Our next question will come from Simeon Gutman with Morgan Stanley. Please go ahead.

My question is also relative to 2019. So the implied guidance for Q2 is still way above on a volume basis, is still consistent or somewhat consistent with the Q1 run rate and compounded on a two-year basis, way above where this business has grown on a single-year basis, if that makes sense. So my question is, does that make the case for a potentially higher normalized growth rate going forward? And I know you're not going to guide to any of that now given the environment we're in. But is there a case to be made? And what would have to happen for that to occur? And where would that share come? And then my second question, unrelated, a little tongue in cheek. Your first half is getting raised effectively by 30%, 35%. Is there any reason why the whole year can't be bettered by that entire amount?

Simeon, you're asking why couldn't the second half's growth rate be as high as the first half growth rate, is that what you're asking?

I was looking at the consensus, which is in the low 4s, and you're effectively revising the first half by 30%. And can we think about it proportionally? I know you're not guiding for the full year, but thinking about the second half as well proportionate.

Yes. Look, certainly, the second half, I mean, the difference in the first half, you're just up against tougher compares. But clearly, given Ken's comments, we have great momentum going into the second half that we feel really good about. And your first question is a tough one too. You're absolutely right; we're not going to guide to a higher normalized growth rate, especially at this point when there are a lot of unknowns in front of us. But I think what's more important that everybody takes away is we're back to plan offense. And we're back to opening stores. The 2021 program is almost done. You can see how broad-based the momentum is across the merchandising assortments. We're clearly starting to pick up market share. I mean, we've really become the only national kids retailer that's out there. And as long as we can continue to deliver extreme value, we're going to keep growing Five Beyond. And Five Beyond is one that really helps us expand our reach. It moves us into the main gift destination. And it's just another way to deliver extreme value. Ken, anything to add?

Yes. No, I think you mentioned it, Joel. And Simeon, again, I mean, you can hear and just knowing where we've come from, we feel really good about where we finished last year, the first quarter, and where we are today. In terms of sales and customers and brand and market share, obviously, as I mentioned, there's just some uncertainty out there from a macro perspective. That prohibits us from providing explicit guidance. And then we do have some tough compares, given the business that we had in Q3 and Q4 last year. That's really what we're looking at in terms of not providing guidance, but you can hear it from Joel and myself that we're really confident in terms of where the business has been and where it's going.

Yes. Really happy with the momentum we've got going.

And our next question will come from Michael Lasser with UBS. Please go ahead.

Thanks a lot for taking my question. So you didn't give guidance, but you gave the parameters on how to think about the full year of a low 20s growth rate this year and last year, which would get you about 30 basis points of operating margin expansion versus 2019, getting you to a 12.1% operating margin. Why wouldn't it be higher than that? You've seen great leverage in the first part of the year; why would the leverage be even greater than that? And conceptually, is 12.1% a level that you can grow off of next year?

Yes. Look, Michael, it's a great question, right? And I think given the uncertainties that we just haven't have answers to, it's harder for us to put a number higher than that on it without giving explicit guidance. We're obviously trying to figure out childcare credits that are coming, understanding supply chain. But I think any way you slice it, you don't hear Ken and I looking at the second half of the year being down from the first half. And I think there's upside that we've set ourselves up for; we just need a little bit more time to try to understand the macro environment.

Yes. And Michael, I think the takeaway from that scenario that we provided was that we see the road to a meaningful improvement in operating margins over 2019. I think that's the story there. And I know you asked about going forward, and obviously, we're not in a position to talk about that now. But the one thing we can reference back to is what we've said historically, where we talk about comps. I think we've always said when we're in that 3% comp range, that gives us the ability to leverage. And I think that still holds true when we're in a non-investment period. So I mean, you can kind of take that and use that going forward from this point.

And just can I clarify what Joel, you said you had previously indicated it would be difficult to comp the comp in the back half of the year, given what you experienced last year. Are you now more confident that you'll be able to comp the comp, recognizing there is a host of uncertainties out there, but based on the momentum in the business, are you more confident now?

We're certainly more confident as we get closer to that midpoint. I'm much more confident than I was a quarter ago and even more than a year ago. We have a lot more tools at our disposal than we did two years ago. Regarding the bottom line, there are concerns like inflation, wage inflation, and supply chain issues, and our responsibility is to mitigate those challenges as we always have. What's in our control is to follow trends, and Michael's team has excelled at that. I wish I could predict any shifts in consumer spending, but I can't. Therefore, the prudent approach is to focus on what we can control, which is delivering a fantastic experience with great products at excellent value. If we analyze the situation, we can identify both headwinds and tailwinds, and they tend to balance each other out. Our job is to execute effectively. So yes, Michael, we are feeling much more confident about the year compared to our earlier position.

And our next question will come from Chuck Grom with Gordon Haskett. Please go ahead.

I'm curious if you've updated any of your brand awareness metrics that you've done in the past and, I guess, where we are in some of your most mature markets versus some of your more nascent ones. And I guess the reason why I'm asking is that your sales per store is moving up nicely. You're obviously getting more customers through the door. But I'm curious kind of where some of the more mature markets are resting on that sales per store front versus some of the newer markets?

Yes, I think the awareness metric I focus on most is exciting, especially when looking at our less mature stores. Our zero to two-year stores have seen their awareness increase significantly, from the high teens to nearly 40% in our latest survey. Utah is a great example; after opening there in the first quarter, those stores achieved record sales. Similarly, in Lubbock, Texas, we had our biggest opening ever, and this success can be attributed to the increased awareness. Remarkably, we achieved this without any marketing for our new stores this year due to COVID. We've focused more on the less mature stores because that's where we needed to accelerate progress, and you can see this improvement in new store productivities, even if they are difficult to measure right now. Overall, this has contributed positively to enhancing our model's productivity.

Right. But if I could just follow-up, is there a way to contextualize what your best stores are comping across the country? Is it $3 million, $4 million per store?

We certainly have stores in that range, Chuck. The location plays a significant role, and it's not solely due to being in Philadelphia; rather, it's about being in urban environments with higher density. The two main factors for the higher volume stores are the store's density and the duration of our presence in a market. However, in some of these markets, we've indicated that we currently experience about 100 basis points of cannibalization. Therefore, we haven't hesitated to impact those stores. But yes, that's about the right range.

And our next question will come from Scot Ciccarelli with RBC Capital Markets. Please go ahead.

It's Scot Ciccarelli. So I have a bigger picture question. You guys mentioned some of the merchandise assortments for the Room category. You mentioned full-size tables and an expanded pet offering. I know there are only two examples. I guess I'm wondering if that starts to move you a little bit away from your traditional focus on teens and preteens because you're finding higher-value items outside of that historical theme?

Yes, I think it's a fair question, but the answer is no. There's a reason we call it Room and not Home. Our focus remains on teens' rooms and kids. John Heinbockel mentioned structural changes, and kids want more in their space. Pets are also part of the family, and the trend of pet adoption was significant last year. Both categories are still aligned with our focus. While you might find examples that tie to teens, it's not our intention to move away from that. Our goal is to deliver extreme value; every survey we've conducted about Five Beyond has shown positive feedback because we consistently provide that value. We are dedicated to families, teens, and parents, and we are not trying to shift away from that focus. Great question.

And our next question will come from Paul Lejuez with Citi. Please go ahead.

This is Kelly on for Paul. I was just hoping we could dig into the gross margin a little bit more in the first quarter. How did product margins do relative to F '19? Was mix still a negative impact for you? And then on the same note, just could you quantify how much the freight negatively impacted gross margins in the second quarter, again, relative to '19? And how should we think about that in 2Q and the back half of the year?

Sure, thanks, Kelly. Regarding your first question about Q1 gross margins, we saw an improvement of about 70 basis points compared to 2019, primarily driven by occupancy leverage, which was more than double the actual gross margin leverage. However, this was somewhat offset by increased freight costs affecting gross margins. As we move into Q2, we expect to see similar dynamics, but the majority of the operating margin leverage we anticipate will come from SG&A. We also expect similar trends in gross margins for Q2, with occupancy leverage resulting from sales outperformance, but again, largely offset by higher incremental freight costs. Yes. I think, look, some people are going out hundreds of basis points; for us, it's in the tens. And that's the advantage of growing as fast as we are. The other side of it is we've been making investments for a number of years on our distribution network, and we're starting to get leverage there. And so that's a good guy that goes the other direction, and that's why when they net it all together, you're still seeing leverage come out of gross margin despite this rising environment around supply chain. And then as I answered someone else's question earlier, we've contractually locked up a large percentage of our freight. So that's why it's tens of basis points, not hundreds for us, and we don't expect it to deteriorate any further than that.

And our next question will come from David Bellinger with Wolf Research. Please go ahead.

Appreciate you going into detail about the performance of the worlds and the higher number of those you called out for Q1. But on the categories that underperformed over the past year or so, such as part of your Candy. Are you seeing those come back to, call it, normalized levels? Or do they still have room to go? And also, can you just give us an update on the space allocated to categories like apparel or even something like pool? Are those flexing and getting more attention in-store than just a few months ago?

Yes. Honestly, I've highlighted the top-performing worlds. However, among all eight, there's only one that is still underperforming, and I think you can guess which one it is: party. Given the impact of COVID and the decline in parties, it's not surprising. This is an area with great potential as America reopens. Regarding candy, it performed well since it had no competition last year when Easter was largely inactive. We're optimistic about party supplies. Michael's team has done a commendable job. If you visit our stores today, you'll see that our Party section has been reduced to make way for other departments that have been thriving. Once party supplies start to rebound, we will increase the space allocated to them. Overall, we are experiencing broad-based growth across all our worlds.

Yes. Yes. And David, to your question about flexing the store, I think that's one of the advantages of the model, the eight worlds in a 9,000 square foot store that we can flex it based on the customers' preferences and response. And it gives us an advantage from an assortment standpoint to put that product in front of the customer and really show it out there, whether it's a trend or whether it's just certain departments that we want to highlight.

And our next question will come from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead.

I want to come back to the performance in Q1 versus 2019 levels. So the 23% growth versus 2019, what's the composition of that ticket versus transaction? And then kind of as we move here into Q2, I think the implied guidance suggests that basically, you're comping similar levels versus 2019, kind of that 20%-plus versus 2019, despite the fact we don't have any stimulus juice here in Q2. Why do you think the relative performance has maybe not only sustained, but probably you could argue is maybe even better than in Q1?

I'll take the second part of that question. I want to acknowledge the merchants for their efforts. We are observing several positive trends. As indicated in the previous question, which I responded to for David, they have done an excellent job. We have been optimizing the store environment, and the treasure hunt concept creates an enjoyable atmosphere for customers to explore a variety of products. The economy is currently favorable. All these factors contribute to the momentum we're experiencing, which is why you aren't seeing a slowdown as we enter the second quarter. Ken, would you like to add anything?

Yes, in response to your first point, Jeremy, you mentioned the growth rate we discussed, which was a 23% increase for the comparable stores opened in the first quarter of 2019 and this past first quarter. If we look deeper into that, we noticed a slight decrease in transactions, but the increase in ticket sales was significant, leading to that 23% growth. This indicates a strong response from customers, similar to what we observed in the latter half of last year when we reopened the stores after the pandemic.

And our next question will come from Anthony Chukumba with Loop Capital. Please go ahead.

Congratulations on an impressive quarter and a strong start to the year. My question relates to the past discussions about various trends, like fidget spinners and rainbow loom, which I can’t quite remember the name of anymore. This makes your performance even more impressive since there hasn’t been a notable trend or fad in a while, at least from my perspective. I have two questions. First, are you observing any current trends or fads worth mentioning? Secondly, connected to that, I know you've experienced some strength in math due to the pandemic. Are you now seeing a reversal of that trend as we move towards normalcy? Thank you.

Yes. Look, all the PPE stuff is certainly reversed and slowing down quite a bit. We're in a good position inventory-wise, no inventory liabilities. In terms of specific trends, I think it's pretty broad-based right now. I called out PAT earlier as one example. Squishmallows is another that's been out there for a while that I would call out. But I think the bigger one is just the gaming, so another one I called out. And you put them all together, and it really leads to driving a lot of footsteps. And we're chasing them all. And the merchants are following up and pivoting as trends come up.

Yes. I'm sorry, guys. We just realized that it's almost 5:30. So, we're going to go right to our conclusion and then we'll pick up in a little bit here.

All right. Hey, thank you, and appreciate everybody joining us today on the call. As you can tell, a lot of great questions, and hopefully, Ken and I answered all of those, and we look forward to seeing it in our stores, and we'll speak to you again at the end of the summer. And thanks all. Have a great evening.

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