Five Below, Inc (FIVE) Q3 2022 Earnings Call Transcript

Good day, and welcome to the Five Below Third Quarter 2022 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 Christiane Pelz, VP of Investor Relations and Treasury. Please go ahead.

Thank you, Cole. Good afternoon, everyone and thanks for joining us today for Five Below's third quarter 2022 financial results conference call. On today's call, are Joel Anderson, President and Chief Executive Officer and Ken Bull, Chief Financial Officer and Treasurer. After management has made their formal remarks, we will open the call to questions. I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and our SEC filings. The forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward-looking statements. If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our website at fivebelow.com. I will now turn the call over to Joel.

Thank you, Christiane, and thanks everyone for joining us for our third quarter 2022 earnings call. We delivered a third quarter that substantially beat our guidance against a difficult macroenvironment, especially given the comparison to last year's extremely strong sales. We are playing offense, staying nimble and controlling what we can, all the while keeping our customer promise of delivering value at the center of our decision making. We are also executing on our long-term growth initiatives that underpin our Triple Double plan, of which store growth is key, and we are pleased that the conversions to our new Five Beyond store format are being met with a very positive customer response. All of this helped drive total sales growth of 6% to $645 million, a comparable sales decrease of 2.7% and earnings per share of $0.29, which were all ahead of our guidance for the third quarter. The sales beat was driven by both ticket and transactions results, improving throughout the quarter. We opened 40 new stores across the country in the third quarter, finishing the quarter with 102 stores opened year-to-date. Three of these new stores ranked in the top 25 fall grand openings of all time, and two of them were in our new states of North Dakota and South Dakota. We were also very excited to open our third Manhattan location in Times Square. In addition, we have already converted approximately 250 stores this year to the new Five Beyond prototype. We are very pleased with the pace and execution of this rollout as well as the customer response, which is driving higher sales and traffic to these stores. This past year, we continued to focus on our strategic initiatives of product experience and supply chain, which were key to our performance and were important enablers of our past long term targets. Next year, we will outline our strategic pillars that will enable our Triple-Double goals. On product, the trends we mentioned last quarter continued, with our version of consumables or needs-based products resonating with customers. The candy world once again outperformed, featuring novelty candy like Slime Liquors, snacks from great brands like Hershey and Rochelle, as well as our salty business featuring the One Chip Challenge and Talkies. In games and toys, our Swiss model products remain popular. We connected with our customers with Squish Sunday events and recently launched our exclusive Five Below Only collection of squish models. Newer trends like Anime, Funko, and Hello Kitty grew, and we sourced more licensed products, including items such as Disney's, Lilo & Stitch and Marvel Action figures, all at extreme value. In addition, Halloween was more normalized as trick-or-treating and other Halloween rituals recovered from the pandemic-impacted 2020 and 2021 years. We were pleased with our performance, and our seasonal offerings were well received. Five Beyond, as I mentioned earlier, continues to be a growth driver for us, with more stores offering the full assortment in the back of the store. We have added about 200 items to the converted Five Beyond stores. Finally, I'd like to add that we took advantage of close-out opportunities and one-time special buys in the marketplace and now have additional extreme values across products of many categories. Our goal, especially this holiday inflation-induced season, is to drive even more value for our customers, and we will continue to selectively pursue opportunistic buys that will drive traffic and attract new customers to Five Below. As it relates to our strategic initiative of experience, we are focused on connecting with our customers and delivering an even better shopping experience for them. We already spoke about the successful rollout of the latest prototype featuring the Five Beyond store within a store in the back of the store, which includes the re-imagined tech and room worlds. We continued to see customers who purchased Five Beyond products, spend about twice as much as those who did not, which bodes well for continued increases in store productivity. With approximately 20% of our chain in the new Five Beyond format that we unveiled earlier this year, we are on track and marching toward our goal for over 80% of the chain to be in this format by 2025. With respect to marketing for the third quarter, we invested heavily in digital, specifically in paid search and social media. We increased our marketing spend year-over-year, focusing more on the second half of the quarter, leading into the key holiday selling season. We tested various strategies and believe our efforts were effective in driving sales. Our marketing and digital design teams did a great job communicating our value message to customers, whether digitally or in store. In addition, with increasing knowledge about our customers gained through tokenization, we are leveraging data to target both new and existing customers more effectively. For e-commerce, we enhanced our offering by rolling out buy online, pick up in store chain wide in September. The initial results are promising, and we look forward to our customers discovering the convenience that BOPIS orders during this busy holiday season. With respect to supply chain, we are proactively managing our operations and navigating dynamic conditions. We continue to look for ways to control our destiny. As an example, we strategically accelerated inventory receipts to ensure a great in-stock position for the holiday season. We remain nimble in this ever-changing environment, and I am extremely pleased with the positive results the team has delivered. Regarding our distribution infrastructure, we completed our Five Below network with the summer opening of the Indianapolis ship center. We now have the capability to reach approximately 90% of our stores within two days, and the network is expected to provide efficiencies and keep our stores well stocked. Peter Town, New Jersey, our first large ship center, has been fully built out with the ability now to service approximately 500 stores. The other four ship centers will be expanded over the coming years to support our continued growth. Now, on to the all-important holiday season. We are pleased with the start of Q4, including Black Friday weekend. Our stores are stocked and ready with an amazing assortment of value products that promises to delight our customers, from branded games and toys to pet beds and from holiday decor and license keys to bluetooth speakers, we have something for everyone to complete their shopping lists. In addition to our Five Below stocking stuffers and gifts, we are also excited for Five Beyond to provide new and extreme value products in different categories, which further reinforces our position as a must-stop holiday gifting destination. For example, this holiday season, we are featuring a folding light-up scooter with LED wheels for only $20. We are also really excited to have sourced Kylie and Kendall crossover bags for only $5, exclusive to Five Below. And to highlight these amazing values, earlier this month, we kicked off our save the holidays marketing campaign, utilizing social media, paid search, TV, and key partners like Kelly Clarkson, to attract new and existing audiences. In our stores, we've hired thousands of associates to keep our shelves filled and help customers with their holiday shopping needs. We also plan to further elevate our customers' journey with approximately 70% of our stores offering assisted checkout, which improves throughput and the customer experience during the busy holiday shopping season. We can't wait to see everyone in our stores and online at fivebelow.com. So in summary, we made great progress on several initiatives in the third quarter and are in a great position for the fourth quarter. We believe with the steps taken, including accelerating inventory receipts, expanding our value assortment, increasing marketing, adding BOPIS, and growing the number of self-checkouts in stores, we are well positioned for our customers as they adjust to an inflation holiday season and look even more for value. Last quarter, we said that Five Below becomes a needs-based retailer during the holiday season, and we are beginning to see that play out with improved transactions. We offer the extreme value our customers need to help alleviate macro pressures while providing a fun shopping experience to let go and have fun. Our customers know they can count on Five Below for amazing, affordable gifts and stocking stuffers to celebrate the season, and we won't disappoint. With that, I'll turn it over to Ken to review the financials in more detail. Ken?

Thanks, Joel, and good afternoon, everyone. I will begin my remarks with a review of our third quarter results and then provide guidance for the fourth quarter and the full year. As Joel said, we were pleased to exceed the third quarter guidance we provided. Our sales for the third quarter of 2022 increased 6.2% to $645 million from $607.6 million reported in the third quarter of 2021. On a 3-year compound annual growth rate basis, sales growth for the third quarter was approximately 20%. Comparable sales decreased by 2.7% with a comp ticket decrease of 1.8% and a comp transaction decrease of 0.9%. Our average ticket remains strong, increasing over 20% in the third quarter as compared to the corresponding pre-pandemic period in 2019, which is in line with the results we have seen since we reopened stores in mid-2020. We were pleased that our comps on a 1-year basis and a three-year geometric stack basis increased post-August with improvements in both transaction and ticket. We opened 40 new stores across 20 states in the third quarter compared to 52 new stores opened in the third quarter last year. We ended the quarter with 1,292 stores, an increase of 119 stores or approximately 10% versus 1,173 stores at the end of the third quarter last year. Gross profit for the third quarter of 2022 increased 2.7% to $207.8 million versus $202.4 million in the third quarter of 2021. Gross margin decreased by approximately 110 basis points to 32.2%, driven primarily by occupancy deleverage on the negative comp. As a percentage of sales, SG&A for the third quarter of 2022 increased approximately 270 basis points to 29%. SG&A expenses as a percent of sales were higher than last year driven primarily by fixed cost deleverage, higher store expenses, and increased marketing expense, all offset in part by cost management strategies initiated this year and lower incentive compensation. As a result, operating income decreased 50.7% to $20.9 million versus $42.4 million in the third quarter last year, with operating margin deleveraging year-over-year by approximately 375 basis points. These results were better than our expectations due primarily to the sales beat. Our effective tax rate for the third quarter of 2022 was 24.6% compared to 24% in the third quarter of 2021. Net income for the third quarter of 2022 was $16.1 million versus net income of $24.2 million last year. Earnings per diluted share for the third quarter were $0.29 compared to last year's earnings per diluted share of $0.43. We ended the third quarter with $117 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 third quarter was $702 million as compared to $521 million at the end of the third quarter last year. In line with our expectations, average inventory on a per store basis increased approximately 22% versus the third quarter last year. Approximately half of this increase came from unit growth as we accelerated inventory receipts to ensure better in-stock positions for the holiday period. We continue to expect the growth in average year-over-year inventory per store to moderate significantly by the end of the fourth quarter. Now on to guidance of fourth quarter and fiscal year. We are pleased with the start to the fourth quarter, including Black Friday weekend results. We expect fourth quarter sales to be in a range of $1.085 billion to $1.110 billion based on opening approximately 48 new stores in the quarter, with comparable sales in the range of negative 1% to positive 1% versus last year's fourth quarter comparable sales increase of 0.034. As Joel said, we feel great about our holiday assortment and expect to benefit from a better in-stock position in Q4, more targeted and effective marketing, and an expanded Five Beyond assortment in more stores. At the midpoint of our guidance, we expect year-over-year operating margin improvement in the fourth quarter of approximately 150 basis points, driven by leverage in both gross margin and SG&A expenses. Lower incentive compensation and additional cost management strategies are expected to more than offset deleverage on fixed costs and higher than originally planned marketing spend. Our effective tax rate for the fourth quarter is planned at approximately 25%, which excludes the impact of share-based accounting for any share repurchases. Net income is expected to be in the range of $164 million to $173 million with diluted EPS expected to be in the range of $2.93 to $3.09. For the full year, we expect sales in the range of $3.38 billion to $3.63 billion or an increase of 6.7% to 7.6% versus fiscal year 2021. We expect comparable sales in the range of negative 3% to negative 2%, and EPS in the range of $4.55 to $4.71, which is an 8.1% to 4.8% reduction versus last year. These full year projections assume opening 150 new stores and completing approximately 250 conversions to the new Five Beyond store format. For fiscal 2022, we are planning to spend approximately $235 million in gross capital expenditures, excluding the impact of tenant allowances. This reflects the opening of our new ship center in Indianapolis, opening new stores and executing conversions, and investing in systems and infrastructure. In conclusion, we had a better-than-expected third quarter and are off to a good start for the fourth quarter. It remains a dynamic economic environment. However, Five Below is a resilient retailer. Our teams continue to move quickly to adjust to changing customer preferences, and I want to thank them for their ongoing commitment and dedication. The combination of our long runway for growth, industry-leading new store economic model, and strong balance sheet, combined with disciplined cost management sets us apart and positions us to weather economic uncertainty, all while continuing to deliver on our strategic priorities to capitalize on the significant growth opportunity that lies ahead.

And today, it will come from Kathy Burns with JPMorgan.

Great. So congrats on a great quarter. Joel, so a couple of things. What do you attribute the inflection in business that you've seen since August? Could you elaborate on November? And is it fair to say that you're embedding a level of potential conservatism in the Q4 guide? And then just anything you see today that prevents you from returning to the components of the Triple-Double plan as we look to next year.

Yes. Thanks, Matt. Obviously, based on our guide where the quarter ended, the quarter improved throughout September and October. I think it's largely a combination of the factors I outlined in my prepared remarks, which specifically were a combination of what we've done around the Triple-Double has really helped improve transactions. And we've always said as we get closer to holiday, we become a needs-based retailer, and we are clearly seeing some of that begin to happen. And then finally, we increased marketing. So those are all things on our side of it. And then it's not lost on us that the consumer CPI has gone down throughout the quarter, which probably certainly helped customers as well. And that's kind of how we see Q3 playing out. As far as elaborating on the fourth quarter, conservatism is a tough word to confirm or deny in the sense that, as you always know, Matt, Q4 is a different quarter than the rest of the quarters. And we clearly have two-thirds of the quarter still in front of us. So I think we said in our remarks, we're really off to a very solid start to the quarter. It's in line with our forecast, and we see no reason for that to stop. But we also have to recognize that it's a pretty dynamic environment, and the customer hasn't dealt with inflation like this before. But look, all the stuff we put in place seems to be resonating, and we expect that to work throughout December. Thanks, Matt.

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

Happy holidays. Joel, can you discuss the product pipeline as we head into 2023? I understand you won't provide guidance for 2023, and that's not the main focus, but is there anything different? Also, are there any products not already planned for the holiday season that will be added to your offerings in the near future? I'm assuming there aren't, but I'd like to hear your thoughts on that and what to expect for 2023.

Yes. Regarding the assortment for Q4, you can expect to see some new items for Five Beyond. It’s a very dynamic line, and we anticipate that items will continue to come in and out. So there will be new and exciting additions. Specific products I mentioned earlier, like the Kylie and Kendall crossover bags, are great examples of our merchants being trend-focused and securing exclusives. That item has had a strong start and will continue into next year. Looking ahead to '23, we’ve observed that licenses have not been relevant for the past three years, primarily due to the lack of movie releases which usually generate these licenses. The resurgence of licenses in the fourth quarter is a positive indicator that this trend may carry on into '23 as well. That’s a brief overview of our product outlook as we approach '23.

Our next question will come from John Heinbockel with Guggenheim.

What are your thoughts on Five Beyond at this point, particularly regarding price points? It seems you have more $25 items than ever before. However, we know that it's important to have a range, including dollar items and $5 items. We also need to maintain discipline with Five Beyond, ensuring we have $10 items as much as $20 items. What is your perspective on this today?

Yes. Good question, John. And what I would say to you on that, and honestly, for everyone on the call, we're still Five Below. More than ever this year, we really focused on that $1, $2 price points and really tried to screen value in the stores. And at the same time, strategically, we are very excited about Five Below and what that allows us to do to not only be your stocking stuffer headquarters during the holiday, but also be the main gift. We've landed on a great platform, obviously called Five Below. But what you're going to see us continue to emphasize and build upon is the bifurcation of the two. It is not our intent in non-Five Beyond stores to grow that assortment. You will not see that assortment grow in the non-Five Beyond stores. We may still carry an 8-foot section in the front. But whether you're talking about Five Below or Five Beyond, the consistent message that the merchants will deliver is value. I think that's more important than the actual price. And you're right, John, we have more $25 items than we did last year. For now, I think that's the high end of where we'll go. We've got too many opportunities to have to go any higher than that right now, but you'll see that continue to expand in the Five Beyond stores. Michael and the team will do what they do. We'll start, as we said at the Investor Day, moving away from items on the shelf to a store within a store, and you'll start to see worlds emerge, you'll start to see categories emerge. I'm talking about Five Beyond for the second here, John. But hopefully, that gives you some sense of the difference between Five Below and Five Beyond, and yet at the same time, it's about delivering value. Thanks, John.

And our next question will come from Scot Ciccarelli with Truist.

I have a question on store growth. I think it's again going to be a bit lower than kind of previously anticipated. So I guess the questions are, are there still headwinds to the opening cadence we should be thoughtful about, especially as we look towards the '23 unit growth opportunity?

Yes, that's a great question, John. As we entered 2022, we continued to face challenges from the pandemic. The distribution of stores in the first half of the year compared to the second half is significantly weighted towards the latter part of 2022, and this trend carries over into 2023. We are still focused on our long-term Triple-Double goals, aiming for 1,000 stores over four years. Given the slow start in 2022, we might fall short by about 5%. However, we're still on track for approximately 1,000 stores, and this is largely due to the beginning of 2022. We are gaining momentum as we move into 2023 and anticipate continued growth. I believe most of the challenges are behind us. I hate to say it, Scott, but for the first time in three years, we might see some retail changes after the holiday season. This could be beneficial for us as we acquire more locations to support our expansion. I hope that provides some clarity. Thanks, Scott.

And our next question will come from Brian Nagel with Oppenheimer.

Congratulations on this quarter. My question relates to the opportunistic purchases you mentioned in your prepared comments. Can you elaborate on that? Is this effort larger now due to some dislocations? Also, are the products you are purchasing opportunistically similar to what you typically buy at Five Below, or do you have unique products this year?

Yes. I think that why it was important to get that included, Brian, in my prepared remarks is that, honestly, for the last couple of years, there hasn't been a lot of closeout opportunities or one-time opportunistic buys. And I think it's important to note, though it's still relatively low single digits of our overall purchases. But you walk in our stores, you'll see a big selection of Funko, our 12-inch Marvel action figures, Uno, and things like that are a combination of really great brands and licenses and then incredible value that we brought to the stores. So I think it's, look, it's something that's been in our DNA for quite some time, but I needed to remind everybody that's kind of back in our playbook, and it hasn't been there for the last couple of years.

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

Curious if you can share what you're seeing in terms of the Five Beyond prototype comp performance versus the rest of the chain? And any detail that you might be able to give in terms of the traffic or getting in those stores versus the non-Five Beyond stores?

That's an excellent question, Paul. It connects to what Matt mentioned about improvements during the Q3 quarter. While we are observing enhancements in both areas, it’s still early for us to make definitive claims because most of these improvements occurred in Q3, which contributed to the sales increase during that time. We really need to see how Q4 unfolds. However, as I mentioned at our Investor Day, we anticipated the first full year after the remodel to perform at mid-single digit growth. We haven't seen any indications that it won't meet that benchmark. Still, we aim to gather more substantial data. We now have a significant number of stores, 250 in total, and we will closely monitor their performance throughout the quarter. I would maintain the expectation of mid-single digit growth, which we outlined during Investor Day.

And our next question will come from Edward Kelly with Wells Fargo.

So there's been a lot of talk about heavy promotions this holiday period, especially in categories like toys. Can you just maybe talk about what your Q4 mix is in that category and how you think you're set up to compete? And then just a follow-up on one thing you talked about earlier on the closeout business. Just maybe a little color on what you're seeing there in terms of the opportunity. Could you maybe size it and the impact that could have in Q4 as well?

Yes. Ed, for us, the toy category during the holiday season is in the high teens range. While the industry is discussing heavy promotions and overstocking, we have not been significantly affected. We also don't typically compete in the traditional toy market that many are focusing on. Our offerings include squish models, which differ from the plastic toys most are referencing. I don't anticipate any major shifts from the high teens for our Q4 toy performance. Ken, do you have anything to add?

No, I think you hit it. It's always an important part of the holiday season. And as Joel mentioned, those are our expectations. That's what we've seen historically from a penetration standpoint. And that's what we're expecting to see for this holiday also.

And our next question will come from Jason Haas with Bank of America.

So Joel, you mentioned a few times, and I know you said on past calls that the business becomes more needs-based as we get into the holiday season. So I'm just curious as you're starting to plan the business for next year, if you think we could see a similar cadence, just this sort of environment continues. I'm curious to get your thoughts there.

Let me clarify. You see a similar cadence of the needs base going into the holiday?

Yes. I just wonder, as we get out of the holiday season, we entered the spring and summer, assuming that the consumer just broadly still under pressure if you're kind of planning the business this run rate won't continue if we'll see some softening before that it picks up again as we get into the holidays.

Yes, look, I wouldn't expect us to see softening. I think it's a very different time period than where the start of the year was. The consumer has clearly said value is important, and they figured out that we're a piece of the value equation. I think what we saw in Q2 where we saw a big slowdown, as did most retailers, and that was during the transitory time of massive inflation. Certainly, the war started, and we saw the consumer freeze. They've adjusted their budgets and lifestyles, and we're part of that equation going forward. Will the first couple of quarters be more focused on our needs-based categories like consumables and candy? Absolutely. But as long as we continue to deliver value, I don't see it going backwards. Plus, look, you're going to get the continued benefit of more conversions as we go into 2023, which is going to more than offset any potential slowdown you're foreshadowing there. Hopefully, that gets at what you're asking, Jason?

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

Congratulations on the strong results. I wanted to clarify the cadence trends. If I'm correct, it seems that the comparisons become easier as we move into the latter half of December and into January. Could you confirm that? Additionally, you've made significant investments in technology for the self-checkout in your stores. Many retailers have reported an increase in shrink rates in 2022. I would like to understand what you have observed, especially over the last couple of quarters and as we approach the holiday season.

Yes, thank you, Jeremy. I believe you're considering the cadence aspect, correct? If you remember, January of last year was challenging due to the stimulus payment from January 2021, which marked the end of our fiscal year 2020. That was a tough comparison for us last year. I believe January has now become a more normalized baseline compared to previous years. It’s also the smallest month for us annually. However, I think we clearly see that November was the most difficult month. Last year, there was a significant advance in buying due to concerns over the supply chain. We took that into account as we planned our cadence for the quarter. Regarding shrink rates, there has been considerable discussion in the industry. This issue began to arise in 2020 and 2021, and I don’t expect 2022 to differ significantly from 2021. Some of this is influenced by our price points in relation to higher-end retailers, but it’s largely already reflected in our base from last year.

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

This is Eric Cohen on for Chuck. Inventory growth definitely improved a lot this quarter. I was wondering if you could sort of unpack the drivers of improving growth and then also sort of how you're thinking about inventory as we get to year-end.

Thank you, Eric. As I mentioned earlier, we observed a substantial reduction in year-over-year average store inventory, which halved from Q2's growth rate in the high 40s, around 47%, down to 22%. This change was largely due to our strategy of increasing inventory receipts in preparation for the holiday season, as we wanted to avoid any supply chain issues. Looking ahead to the year's end, we anticipate this trend of moderation will continue significantly, placing us in a strong position. Currently, we're experiencing some of the freshest inventory levels we've seen in years, so we feel very positive about our inventory situation right now.

And our next question will come from Anthony Chukumba with Loop Capital Markets.

You mentioned that your assisted self-checkout penetration I guess it's in 70% of your stores. And I was just wondering what's sort of the long-term target? And are there any kind of limiting factors to get into 100%?

Thanks, Anthony. The long-term targets will likely never reach 100%. This is partly due to the challenge of converting older stores. In our very low-volume or smaller format stores, we probably won’t have the space to implement it. Additionally, in our stores with extremely high shrink rates, we tend to avoid implementing it. However, that number is expected to gradually increase. While it will never be 100%, it is unlikely to fall below 85%, so it'll be in the range of 85% to 90%. Thanks, Anthony.

And our next question will come from Brad Thomas with KeyBanc Capital Markets.

And best wishes for the holidays here. My question was, Ken, I know it's early to talk about 2023, but I was wondering if in broad strokes you can give us a little bit more thinking around margins given some of the noise that we're seeing and given the inflection that you're guiding for here in gross margin?

Yes. Brad, it's a question you're asking. It's probably on a lot of people's mind. I'll turn this over to Ken here in a second. But just look, this is normally where we wouldn't want to give any guidance on '23, and we tend to save all that for March or maybe a little bit of ICR. Listen, I know you're all trying to figure out your models, and you have to also realize we have to get through Q4. But maybe I can help you a little bit on the top line. Think about that. And Ken, maybe you can think about a scenario that would help them to think about the bottom line. I think our largest input to top line growth is new stores, and we wouldn't expect to be below 200 next year. I think that's in the range as we're thinking about it. We’ll certainly have full line of sight to the new store program as we get to March and our year-end call, but Ken help them think about a scenario of how to think about the bottom line.

Yes, sure. And thanks, Brad, for the question. As Joel mentioned, obviously, we're going to get through the holiday season, and we'll provide guidance as we normally do on our March call. Again, this is not guidance, but in a scenario format. So in a scenario, say, of a 3% comp for next year. Based on what we know today, Brad, we believe that operating margins should be up slightly, and that's versus our fiscal '22 guidance that we're providing. Now that does include some puts and takes that we've spoken about before. There are some headwinds that we would expect next year around areas like higher incentive compensation, the cost management strategies that we initiated this year, primarily in the back half of the year that we've spoken that have helped us significantly from a profitability standpoint, we're going to be anniversarying those. Some of those we're carrying forward and some of those we can't. So there will be a slight headwind there. Then inflation, we're seeing increases in certain operating areas of the business, especially coming on here late in the year. But as you know, we always look, and we do a pretty good job of mitigating a lot of those increases based on our Gale negotiations and other cost management strategies that we can put into place. So that's again, just a scenario of what we would see next year if it was, say, a 3% comp.

Thanks, Brad.

And our next question will come from David Bellinger with MKM Partners.

I appreciate the commentary around Five Below and the lift you're getting in that respect, but average ticket this quarter was still down. It was up 20% looking back to 2019, but down on a year-over-year basis. Did that acceleration you saw through the Q3 period in terms of comp, did that have to do more with sort of this quick shift to value? And are you seeing those lower price points? Are they moving at a faster velocity than, call it, $5 and higher?

David, you were asking about that throughout the quarter. Could you ask me that question again? I'm trying to understand it.

So the improvement you saw throughout Q3 and an acceleration, did that have to do more with some of your lower priced items just turning quicker and selling better? Or are you still being that lift from items that are $5 and higher?

Well, I think if I had to categorize it, it's probably roughly one third, one third, one third, meaning one third of it is coming from Five Beyond, one third of it is coming from strategic price increases we made to combat inflation, and then one third of it is coming from sales mix shift. I think that's...

Yes, David, if you're referring to the typical increase in average unit retail, that's where that mix is coming from.

It's probably roughly one third, with each component contributing to the average unit retail changes.

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

Ken, do you need a 3% comp to generate some margin expansion next year? Presumably, that's not the new norm for the leverage point given that you'll have some unique expenses rolled back into the base. So what is the new long-term sustainable comp amount that you'll need to lever expenses? And what happens if your sales are flat in 2023? How much margin compression would you see just given there's a lot of uncertainty in the macro environment into next year?

Let me start, Ken, and then I'll pass it to you. I jumped in, and I'll let Ken respond specifically to you, Michael, because I don't believe the scenario everyone should be considering is a flat comp. Ken mentioned a 3% scenario, but as we approach March, if things change, I might reconsider that comment. However, with all our initiatives that we discussed during the Investor Day, we are moving forward, and we target a growth of 3% to 5% over the next three years. We are working towards that goal for next year, and I still think 3% is a valid expectation. If we consider our historical low single-digit growth and include the advantages from conversions, that is what leads us to expect growth at 3% or above. We're not ready to set our sights higher right now. I advise caution about moving away from a flat comp. Ken, do you have anything to add?

Yes, Michael, you're looking at the timing a bit further out. I want to remind everyone that 2022 was quite unique, and various events from that year will affect next year. I mentioned some of the challenges we're facing, which are largely carryovers from this year, including reduced incentive compensation and cost management strategies. There's a lot to unpack in that area. To answer your question, I would refer back to our Investor Day where Joel discussed our top-line expectations. We highlighted our ability to leverage a stronger base, particularly due to investments in our distribution network and other areas, which will enhance our capacity as we progress. At this point, I can't provide specific details yet as we need more time to assess. However, I believe the key takeaway regarding our profit profile in the longer term is the operating leverage we have integrated into that.

Yes, I don't see anything longer term, Ken, that has said our leverage tipping point needs to stay up at the 3%, 5% where we used to be. We just got to get through '23 first.

And our next question will come from Michael Montani with Evercore ISI.

Just wanted to follow up. Joe, you had mentioned about the new store side earlier. Can you give any sense for the remodel conversion front in Five Beyond next year? Can we think $300 plus? And just remind us what the CapEx is for those?

Yes, I believe a number above $300 is certainly on the table. At the moment, we're still working everything out, Michael. However, I wouldn't anticipate it being less than $300 at the very least. It will likely be slightly above that. We will provide more details during the March call, not only regarding the quantity but also some timing aspects. Additionally, Ken will discuss the investment or build-out cost for each store.

Yes, Michael, that varies depending on the type of conversion and the age of the store. For a more recent store, the cost can actually be quite low, under $100,000. For a full store compared to an older vintage store, the cost will be roughly the same as building a new store.

But the overwhelming majority of those are going to be less than $100,000, right? That's about where we're thinking about it. Thanks, Michael.

And our next question will come from Krisztina Katai with Deutsche Bank.

Congrats on a really good quarter. I was just wondering, thinking about share of wallet. You did mention in your prepared remarks that you're working to leverage data for more effective messaging. You also invested in marketing more heavily in the back half of the quarter. So can you maybe talk about the customer response that you saw? Because it does seem like it could be a pretty meaningful opportunity looking ahead, especially to drive brand awareness.

Thank you, Krisztina. This is why we invested in tokenization. Starting in November, we began tracking year-over-year statistics at the customer level, a significant improvement from our previous DMA-level data. Moving forward, we will have this data to specifically address your question. Looking back, I will use transactions as a proxy for traffic. We observed an increase in transactions during the second half of the third quarter, which indicates that our marketing efforts are effective and customers are seeking value. As we approach the fourth quarter and beyond, we will start to analyze our customer mix, particularly those gained through advertising. I just need a bit more time to transition from our previous methods. However, our work on tokenization, which began last November, allows us to track year-over-year trends for the first time. We will have that data for you starting in 2023. Thank you, Krisztina. Operator, please go ahead.

I'm going to say this just concludes the question-and-answer session. I'd like to turn the conference back over to Joel Anderson for closing remarks.

Thank you, operator. I appreciate everyone joining us today. I want to emphasize our commitment at Five Below to provide exceptional value and excitement for our customers, especially during this crucial holiday season. We are very confident in our selection of value products for the fourth quarter that will delight our customers. We aim to be the preferred destination for stocking stuffers and gifts. Additionally, we are dedicated to giving back to our communities and are partnering with Toys for Tots, an initiative we've supported for over 10 years. I encourage everyone to visit our stores and make a donation to help make a difference for Toys for Tots. In closing, I want to express my gratitude to all our teams at Five Below for their hard work in making this a great company and brand. We look forward to connecting with you after the holidays. Have a great day and happy belated Thanksgiving. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.