Five Below, Inc Q2 FY2024 Earnings Call

Thank you, Drew. Good afternoon, everyone, and thanks for joining us today for Five Below's second quarter 2024 financial results conference call. On today's call are Tom Vellios, Executive Chairman and Founder; and Ken Bull, Interim President and Chief Executive Officer and Chief Operating Officer; and Kristy Chipman, 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. In this presentation, we will refer to our SG&A expenses; SG&A means selling, general and administrative expenses, including payroll and other compensation, marketing and advertising expense, depreciation, amortization expense and other selling and administrative expenses. Additionally, we will be discussing certain non-GAAP financial measures. The reconciliation of these items to U.S. GAAP are included in today's press release. If you don't 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 Tom.

Thank you, Christiane, and thank you all for joining us today. To discuss our fiscal second quarter results and our path forward. Over the past six weeks, I have been heavily engaged with the company, working closely with Ken and the team as we thoroughly assessed our business challenges, navigated the CEO transition and launched the search for a permanent CEO. When David and I founded Five Below, our vision was clear: to be the go-to destination for preteens and teens, a cool store for kids and the YES store for parents. Our mission has always been to deliver an exciting assortment of extreme value, trend-right, high-quality products in a fun shopping environment. We have always been intensely focused on the customer, and this commitment has made Five Below a successful standout growth retailer. Over the past few years, we lost some of that sharp focus on our core customers. Since 2022, we launched the new store format, opened over 450 new stores, remodeled over 750 locations and expanded our product assortment. We did this all while managing a challenging macro environment and consumer shifts, which stretched our teams. We know the resulting issues are fixable. In fact, work is already underway, and we are committed to an operational and strategic refocus of our business. Going forward, we are refocusing on our core customers. We are prioritizing initiatives that enhance value, improve the shopping experience, streamline our operations and ensure that we meet the evolving needs of our customers. Specifically, we need to regain our speed and intensity in identifying and bringing in key trend items into our stores that delight our customers. We need to deliver more WOW and value, which for Five Below is the intersection of trend, quality and price. We are fortunate to have an engaged, energized and motivated team who understand the task at hand and the steps necessary to execute. We are confident in our leadership with Kenneth Bull; his operational experience, knowledge of the business and keen understanding of our culture position us well to execute this reset of our business. As we move forward, we are fully committed to making the necessary changes to deliver the wow factor of customers, associates and shareholders deserve. Together, we will emerge stronger and more vibrant than ever. And with that, I will hand it over to Ken to give you more information on our strategy and initiatives.

Thanks, Tom. Second quarter results fell short of what we know this business is capable of delivering. On today's call, I will discuss the learnings of the last six weeks and how we are approaching a refocus of the business. And Kristy will then provide the details of our financial performance and outlook. Tom and I and the team have spent the last several weeks thoroughly assessing the business. Before I share how we are addressing the issues we have identified, I want to take a minute to discuss how we got here. We experienced many macro pressures over the last several years that significantly impacted our business. Post pandemic, we saw stimulus-driven demand, supply chain disruptions and inflation, as well as evolving customer preferences and changes in where and how our teams worked. To manage the inflationary impact on our margins, we increased prices and expanded the number of price points. We overexpanded our assortments across our world without a strict editing process of past years and without the key item focus that screen value and differentiation. During this time, we also set our Triple-Double vision to triple our store count by 2030 and double EPS by 2025. With the benefit of hindsight, the timeline for these goals was too aggressive and put tremendous pressure on the organization. In addition, we added corporate overhead, further raising retail prices and tightening store labor. Recent shrink mitigation efforts also increased complexity and workload for our stores. To address these issues, we have a plan in place that includes key areas of focus and supporting initiatives across product and value as well as store experience. Starting with product and value, we are renewing our commitment to being that YES store for kids and parents. The preteen and teen demographic is our core customer. And while we will always work to deliver universal appeal, we need to refocus on delivering an assortment that will wow this core customer demographic. We are focused on the following actions to achieve this. We will significantly reduce the breadth of our assortment and return to pre-pandemic levels. We will lead with value, amplifying the price points that are most impactful for our core customer. We will emphasize key items at $5 and below price points. We will also reduce the number of price points to drive simpler store execution and customer experience, strengthening our competitive pricing. We will increase the flow of newness across all categories. We will reinvent and maximize our seasonal businesses. We will raise the bar on Five Beyond, focusing on key items amplifying value and trend. And we will leverage our scale and vendor relationships to a far greater degree to accomplish all of this. As we reduce SKUs and refocus on key items across all of our merchandise, the broader sales performance will allow us to reinvest in price while maintaining a stable product margin profile. To help achieve all of this, we are returning to in-person work at our office in Philadelphia. We work better when we're together. And I know this will drive better performance as we return to the culture that has driven our success. I am particularly excited about what this means for collaboration and innovation within our merchandising organization as we renew our focus on delivering wow and value for our customers. Our strategies to improve the product will only be successful if we deliver our customers a store experience that reflects our brand, fun and energizing. To accomplish this, we are evaluating our store operating model with the goal of reducing complexity and optimizing our store labor. The outcome of this work will be simplifying store tasks and adding labor hours where necessary. As we do all this work, we are also continuing to optimize our cost structure and sharpening our approach to investments as we implement each of these initiatives across product and value as well as store experience. Over time, these cost savings will serve as a partial offset to the labor investment I just mentioned. Finally, we will continue to be a leading growth retailer with best-in-class new store economics. As we reset the business, we are moderating our store growth for 2025 and currently expect to open 150 to 180 stores. This moderation allows us to focus on execution in the key areas that I have outlined. It also allows us to be more selective in our real estate locations, optimize our capital outlay and deliver better overall store execution. In summary, we have done a lot of work in the last several weeks, digging deep to understand our issues and implementing actions to address them, including our focus on the all-important upcoming holiday season. We believe our issues are fixable. We are moving with urgency, and we will see improvement in the business as newness and value are added to our product assortment. I would like to thank the teams across the organization for their hard work and dedication in helping us execute against our goals. And with that, I'll hand it over to Kristy.

Thanks, Ken, and good afternoon, everyone. I will begin my remarks with a review of our second quarter results and then discuss our outlook. Sales in the second quarter increased 9.4% to $830 million with comparable sales down 5.7%, driven by a decrease in comp transactions of 5.4% and comp ticket of 0.3%. Traffic to the stores was positive with conversion being the driver of the negative comp. The comp ticket decline was driven by lower units per transaction, nearly offset by an increase in the average unit retail price. Many of the categories that underpinned our comp performance in the first quarter continued as customers remained discerning with their discretionary spending. Our version of consumables in our candy and style worlds delivered positive results but was more than offset by underperformance in other categories, including the Now world, summerset and sports world, including games and toys as a result of the slowing Squishmallows trend. We opened 62 new stores across 22 states in the second quarter compared to 40 new stores opened in the second quarter last year. We ended the quarter with 1,667 stores, an increase of 260 stores or approximately 18%. Gross profit for the second quarter of 2024 was up 2.7% to $271.8 million. Gross margin decreased by approximately 220 basis points to 32.7%, driven primarily by deleverage of fixed costs on the negative comp and a higher year-over-year shrink accrual, partially offset by lower inbound freight. As a percentage of sales, SG&A for the quarter of 2024 increased approximately 60 basis points to 27.7% versus last year's second quarter. This was driven primarily by fixed cost deleverage on the negative comp and the impact of new retention awards, partially offset by lower incentive compensation expenses and a nonrecurring stock compensation benefit. As a result, operating income for the quarter was $41.5 million versus $58.6 million in the second quarter of 2023, and operating margin decreased approximately 270 basis points to 5.0%. Adjusted operating margin, excluding nonrecurring items was $37 million, and adjusted operating margin was 4.5%. Net income for the second quarter of 2024 was $33.0 million versus net income of $46.8 million last year. Adjusted net income for the second quarter was $29.7 million. Earnings per diluted share was $0.60, and adjusted earnings per diluted share for the second quarter was $0.54, compared to last year's diluted earnings per diluted share of $0.84. We ended the second quarter with $328 million in cash, cash equivalents and investments and no debt. Inventory at the end of the second quarter was $640 million as compared to $544 million at the end of the second quarter last year. Average inventory on a per-store basis decreased approximately 1% versus the second quarter last year. Turning to guidance. For the full year, we are comparing against fiscal year 2023 on a 52-week basis as the extra week in fiscal 2023 added approximately $48 million in sales and approximately $0.15 in EPS. I will also refer to comparisons to fiscal year 2024 on an adjusted basis that excludes the impact of nonrecurring or noncash items including asset disposals, retention awards and costs associated with our cost optimization initiatives. Our press release outlines our sales, new store and earnings guidance for Q3 and the full year 2024. So I will focus my commentary on additional details or drivers for that guidance. On an adjusted basis, the midpoint of our third quarter guidance assumes a gross margin improvement of approximately 190 basis points, primarily due to lapping the prior year's shrink reserve true-up, as well as efficiencies in our distribution centers and some timing benefits on product margin, partially offset by fixed cost deleverage on the negative comp. SG&A at the midpoint is expected to be 290 basis points worse than the prior year, driven by fixed cost deleverage on the negative comp, modest store labor investments and a small timing shift in marketing. Net interest income is expected to be approximately $2 million for the third quarter and taxes are expected to be approximately 25%. Now on to the full year. On an adjusted basis, the midpoint of our full year guidance assumes gross margin delevers 40 basis points, as benefits from inbound freight and lapping last year's shrink reserve true-up are more than offset by higher fixed cost deleverage due to the negative comp. SG&A at the midpoint is expected to be 170 basis points higher than the prior year, as incentive comp benefits and cost optimization savings are more than offset by fixed cost deleverage on the negative comp and modest investments in store labor. As a result, adjusted operating margin, excluding approximately $25 million in nonrecurring or noncash items, is expected to be approximately 8.6% or deleverage of 210 basis points on a 52-week basis. Net interest income is forecasted to be approximately $12 million for the year, and we expect a full year effective tax rate for 2024 of approximately 25%. With respect to gross CapEx, we now plan to spend between $335 million and $345 million, excluding the impact of tenant allowances. This reflects the opening of approximately 230 new stores, converting about 180 store locations to the Five Beyond format, the completion of expansions in our distribution centers in Georgia and Arizona, and investments in systems and infrastructure. For the fourth quarter on a 13-week year-over-year basis, which excludes the extra week in 2023, this full year guide implies the following: Total sales increased between 1% to 5% with an implied comp decline in the mid-single-digit range, in line with the second quarter results and the third quarter guidance. This sales range reflects five fewer shopping days between Thanksgiving and Christmas. It also implies a year-over-year adjusted operating margin decline at the midpoint of approximately 200 basis points due to fixed cost deleverage and a negative comp, partially offset by lapping a shrink true-up in the fourth quarter last year and lower incentive compensation. To wrap up, we know it needs to be done to return the business to its roots and realize its potential. That work is well underway. However, it will take time to be reflected in our financial results. We have a significant growth opportunity ahead, coupled with a meaningful opportunity to improve our comp trajectory, and the entire Five Below team is focused on executing against this. For all other details related to our results and guidance, please refer to our earnings press release.

The first question comes from Edward Kelly from Wells Fargo. Please go ahead.

Hi everyone, good morning or good afternoon. I wanted to step back and ask you about the issues you've identified, which seem largely self-inflicted. While there have been some macroeconomic pressures, concerns about competition and its impact are also noteworthy. Can you elaborate on what you believe is fixable and why there aren't more fundamental challenges? Additionally, considering the EBIT margin of 8.6% this year compared to nearly 12% in 2019, it appears that investments in value and labor are being made. What do you think is the ideal margin for the business once everything stabilizes?

Thank you, Ed, for your question. There’s a lot to address. To start with your comment regarding structural challenges, we don’t view this as a structural issue at all. As I and Tom have mentioned, this is something we can fix. In reviewing the business over the past few weeks, we've identified macro pressures that led us to pursue strategies that delivered short-term results but had long-term consequences. We strayed from the core aspect of our business focused on preteens and teens, and our mission to provide a curated assortment of trendy products, high quality, and exceptional value in an engaging environment. We lost our way a bit while concentrating on other matters post-pandemic. As for competition, it has always been present. Going back to when people were concerned about Amazon's impact, we've managed to grow into a $4 billion company with 1,700 stores. When we're at our best and performing well for our customers, we can succeed regardless of competition. In recent years, competition has started to catch up to us, and we need to reclaim our previous edge.

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

Good afternoon. Thank you for taking our question. We are interested in understanding the potential changes or influences you anticipate for the product around the holiday season based on some of these new strategic actions. We don't expect there to be much room for change, but we are curious if you anticipate any impact and how soon we might see these changes in the stores, if not during the holiday season.

Yes. Thanks, Kate. As you would guess, given lead times, the overwhelming majority of holiday product has already been purchased. Although we do have an opportunity to go and chase some items. Again, and you heard, I spoke about and Tom also, we have to return to our kind of basis here being an item-driven business at the end of the day. So we will chase some of those in the marketplace to try to help us. In terms of an improvement in the business, I think when we get to the point where we see that newness and value in our assortment, I think that's when you're going to start to see the improvement in our business and obviously with the lead times. And we were looking at a spring-summer now. But I would say we'd start to see that improvement as we see the improvements in our assortment. Thanks, Kate.

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

You mentioned speed, and I understand there’s always been a trend department. Are there any changes needed in how you organize merchandising to achieve that speed and introduce new products? Additionally, based on your consumer research, has the brand's perception shifted compared to two or three years ago? Lastly, as you implement these changes, how will you ensure customers recognize that you’ve made these updates and returned to your previous position?

Yes. Thanks, John. On the first part of the question around speed, it's interesting. I think we talked about it over the last few quarters. We have gone through internally here in merchandising organization transformation, again, kind of getting back to our roots in terms of how those teams, the buying teams, the planning teams, allocation teams are operating. So we're in the middle of putting that into place. And so I think that's going to help a lot to get back to speed, which we really have historically used as an advantage, and we have to pull that forward again. From a customer perception standpoint, part of the analysis we did was not only looking at internal data and some metrics but also customer surveys and intercepts. And I think one of the things that was clear with customers looking for more value from us at the end of the day. And that's the way we look at value; it's not just price. It's really a combination of trend, quality and price. So that's where we know we have to do better, and we're going to be working on. And then to pull customers back in, I think that's going to be marketing for us. We've done some marketing tests. We know we have the ability with testing to improve traffic but you heard Kristy talk about our challenges with conversion. So we'll focus on the marketing piece of it after we have the ability to improve the product and drive conversion.

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

Great. Thanks. So two questions, Ken. First, maybe could you just elaborate on customer behaviors and comp trends that you saw to exit the quarter, maybe what you've seen in August across categories? And then on store growth, could you speak to the reduction for 2025 growth? And what you'll be looking for to potentially reaccelerate unit growth over time?

Thank you, Matt. Customer behaviors were quite similar to what we experienced in Q1, with our lower-income demographic underperforming while our higher-income demographic outperformed. This indicates two key points. Firstly, we observed some movement from higher-income customers toward lower-priced options. Secondly, the lower-income group seems to be more focused on value, which we need to improve on. These trends have persisted. As we transitioned out of Q2 into August, we've noticed a boost in customer traffic, likely influenced by back-to-school shopping, a trend evident among other retailers as well. However, the performance gap between lower and higher-income customers remains consistent. Regarding store growth, I mentioned we plan to moderate our expansion in 2025 to about 150 to 180 stores. This decision allows us to concentrate on executing our initiatives, and we will provide further details as the year progresses, particularly in the fourth quarter. Overall, we anticipate that growth rates in the near term will align closely with those we’ve projected for 2025, but we will share more information as we approach year-end. Thanks, Matt.

The next question comes from Simeon Gutman with Morgan Stanley. Please go ahead.

Hi, everyone. Good afternoon. Hi, Ken, I wanted to ask about the unit growth for '25. Question is how do you land at whatever, I think it's a 9% number? And how much did you evaluate just cutting deeper for now throughout the business, get the operations in order and then come back to the store growth once everything is in order? And as part of that question, does it reflect that you're seeing a stabilization, at least at the current run rate, such that you don't have to do anything even more harsh right now to the unit growth? Thank you.

Right. Thanks, Simeon. We did a deep dive on all the deals. As you know, Simeon, there's a pretty long lead time for real estate. So we've got a lot of deals that are in the pipeline. And we looked at those closely because one of the other things we want to get back to are the returns that we've seen historically from us, and look to improve those and reinforce those. So we did a deep dive on all the deals that we have, and we have the ability to be selective around the real estate locations. But I'll mention to you again, the real reason was we wanted to make sure we weren't taxing the organization with a number because, as I said before, we really need focus across the company. So the real driver in terms of the number of stores was that we can have the organization focus again and go after the initiatives that we've put out there. Thanks, Simeon.

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

Good evening. Thank you so much for taking my question. Can you quantify the collective impact from the investments that you're making in both labor as well as value not only this year but what you expect that to be next year? And then on top of that, presumably, there are some expenses. You mentioned retention bonus but less incentive comp that are impacting the P&L this year that are going to come back or at least change next year. This will help formulate the building blocks that we can model your business more effectively as we make assumptions up and down the P&L. Thank you very much.

Thanks, Michael. I'll start with that, and then Kristy will kind of add to that in terms of some of the details. I think from a labor perspective, at least in the near term, we're going to make what I would call modest improvements in our labor out in the stores in the near term. As we move into next year, we'll build on that. From a value perspective and pricing, as I mentioned in my prepared remarks, what we would expect to see is improvement across all of our categories in merchandise, which not only will help drive an overall top line improvement but it should also help to kind of fund whether it's pricing investments or other things that we're going to do throughout the company that we can reinvest. Again, I would expect our overall merch margins to be relatively consistent year-over-year, being able to get broader performance from our categories and then using that to offset any price investments. But Kristy, if you have anything...

Yes, I'll just add on to that. And my comments for this year are on that adjusted basis. All of this has been reflected in our guidance. Pricing actions for this year would be margin neutral if we move forward with any and again, included in the guide. From an SG&A perspective, that modest store labor investment also included in our guide has a nil effect on a full year basis. When you go into 2025, again, on an adjusted basis, margin neutral, as you mentioned, the labor investments we are expecting to be higher, but that we are expecting to partially offset those with cost optimization savings that we are working through, and you've heard me talk about before but we've widened that lens a bit. And so we're not really prepared to talk too much about 2025 right now. Obviously, this isn't the time where we would typically be guiding. But I will tell you that in a scenario where we have a 3% comp, that is when we'll begin to start to leverage the business again into the future. I think the other piece you asked about was if I take the $25 million of adjustments that we have, about half of those will be repeated next year.

Next year. Yes. Thanks, Mike.

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

Good afternoon, everyone. So Ken, everything you kind of talked about in terms of the challenges the business is facing really should have been true for several quarters. So I guess the question is, why do you think the business seemed to slow so quickly, kind of positive low single digits to negative mid-single digits? And I guess somewhat related to that, it sounds like you're going to focus more on lower price points, if I understood your comments properly. So should we expect notable ASP compression as you start to undergo that process?

Thanks, Scot. Your question about the timing of this situation really reflects a culmination of various factors over several years that I mentioned, particularly reactions to post-pandemic macro pressures. One speculation is that lower-income customers are facing challenges, as our data indicates they're performing worse than higher-income customers. We also observed underperformance in our seasonal summer products. This ties back to our focus on product, value, trend, and effective delivery, which wasn't fully realized this year. That’s likely why you started seeing these trends late in the first quarter and extending into the second quarter. As Kristy mentioned, we'll be addressing this and will provide more information as we progress. We plan to reintroduce and emphasize lower price points of $1, $3, and $5. While we may selectively adjust prices where necessary, I don’t anticipate significant changes at this time. Our main focus will be on reintroducing these key price points for our customers, which hinges on value. For us, value encompasses more than just price; it includes trend products, quality, and pricing. We will continue to prioritize this approach.

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

Great. Hi, everybody. I wanted to focus more specifically on the Five Beyond strategy. Maybe just speak about the performance in those locations. And I'm just curious, do you think that strategy has played any role in the challenges? Do you think it's added to perhaps price perception issues or call it, even shopping complexity for certain customers in the store, just that wide range of price points? And then ultimately, what type of changes should we see in that assortment?

Yes, thanks. I'll start, and Tom, you can add in on that, too. We still believe in the Five Beyond product at the end of the day but we also realize that we're in a position where we need to restrategize around Five Below. So that's what we're going to be working on. And then Tom, if you have any other comments on that.

I think, Ken, is correct. We believe in the Five Beyond opportunity. But I think as we relook at our strategy around that, I think we have to apply the same lens, the same focus, the same discipline as we're trying to do to the rest of the business. And that's around a very focused, narrow assortment, key items, extreme value trends, but equally important focus specifically at our core customer. And that's something we are actively looking at, and we'll have more to say about overall Five Beyond as we move forward.

Yes. And I would just add, the performance itself has been pretty similar to what we've shared previously and in the first quarter as it relates to the lift from supercharge versus non as well as the sales penetration being in the mid-single-digit range of product.

The next question comes from Paul Lejuez with Citi. Please go ahead.

Hi, thanks, guys. Curious how you would characterize the environment in terms of trend? Are there trends out there that you feel like you're not capitalizing on? Or would you say it's more of an environment where there isn't a very strong trend? And I guess maybe relate back to some of your conversion issues that you spoke to. Do you think it is more of a lower-income consumer strap consumer issue? Or is it more tied to just not being a very strong trend out there right now driving traffic and conversions to stores?

Yes. Thanks, Paul. I'll take the beginning of that, and Tom, you can weigh in on that, too. One of the reasons we have eight worlds is that it gives the buyers the flexibility to go after whatever trends may be out there. And we realize that they may shift from one world to another as time goes on, but there's always something going on with those trends. And those trends drive newness, which is so important for our customer. And we do think we have the ability to continue to deliver newness, which then obviously drives the traffic in our customers. But Tom if you...

I would add to that. We obviously need to separate the two. Five Below was built and needs to be focused on newness inside the store. And the element of trend-right does not necessarily relate to what is a trend out there but what is it that our customer is looking for. Through a narrow assortment, a focused assortment, speed, I think, and the ability to move quickly and shift and create this ability to bring units constantly into our stores is a trend in itself. So it's how we reinvigorate our world, how we inject newness and how we focus on key items that will drive the biggest upside, we believe, for a business. And then as a trend comes into fruition, then obviously, that's an added benefit. Thanks, Paul.

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

Hi, thanks. Good afternoon. I wanted to revisit Seth's question. Can you discuss your commitment to the Five Beyond strategy? Have there been any discussions about moving away from it and returning to the core focus of being priced at $5 and below throughout the store? If that were to happen, how would we consider the potential one-time effects on sales and margins?

I'll start and then Ken can jump in. We think value is key. And Five Below is all about extreme value. We think price points in the $1 to $5 price point are very important, especially for our core customers, especially for mom and dad and kids coming into our stores, and creates that impulse environment and that arrival. We feel just equally that value and opportunity at Five Beyond exists for Five Below. So we believe in that what we want to do and what we've been focusing on is to make sure that our strategy applies the same principles in the Five Beyond as we try to do in the rest of the store of how we select product, how we edit the product, and how we present it.

And then, Tom, I'll just add to that. I mean that's related to the product. And then obviously, Chuck, we've got the Five Beyond prototype; I think that's another thing we're going to relook at in terms of what's appropriate for the presentation for our customer going forward with that Five Beyond product. Thanks, Chuck.

The next question comes from Anthony Chukumba with Loop Capital Markets. Please go ahead.

Thank you so much for taking my question. So you mentioned complexity in the store and that being an issue. And you did make a reference, someone a oblique reference to the assisted self-checkout. So I guess my question is, are you reassessing assisted self-checkout as part of this restructuring effort?

Thank you, Anthony. Regarding the complexity in the stores that I mentioned, we've implemented many changes over the years. We've made various requirements and introduced new services, including addressing shrink. We moved to associate scanning at checkout, and we're currently reevaluating that approach. We might revert to a more associate-monitored process at the front of the store around assisted checkouts, which should work better for us overall. We'll be examining many aspects of store operations and looking for systems and efficiencies to streamline processes. By saving time for associates, we can let them focus on essential tasks. This is just one part of our efforts to simplify store operations. Additionally, as Kristy noted, we aim to reduce their workload while also reinvesting in labor. Thank you, Anthony.

The next question comes from Joe Feldman with Telsey Advisory Group. Please go ahead.

Hi, good morning, guys. Good afternoon. Sorry. You talked about trying to improve your focus on the customer and capturing demand from the customer. And it makes me think about, we've collectively asked you guys about a loyalty program for years. And I'm wondering how effective that could have been in helping to better understand your customer, better understand what they want, when they want, the prices they want, any further thoughts on accelerating a loyalty program?

Yes. Thanks, Joe. You're right. We had talked about that for a while. I think that got caught up with a lot of those macro pressures and the other things that we dealt with post-pandemic. Fast forward to today, we are working on developing a program. It looks like we should probably have a possibly a test done, a very early test done by the end of the year. We'll see where that goes into next year. But to your point, we have kind of refocused on that because we really didn't work on that over the last few years, and we do view that as a potential driver for us, too. Thanks, Joe.

The next question comes from Brian Nagel with Oppenheimer. Please go ahead.

Good afternoon. Thank you for taking my question. I want to focus on store growth and have a two-part question. First, I need clarification on the moderation in growth you mentioned for '25. Should we view this as a one-time pause, or is this the way we should consider store growth moving forward? The second part is regarding your new store growth targets in the near term. Can you share your thoughts on the stores that are not being opened? Is this a widespread issue, or are you shifting strategy in some way?

Thank you, Brian. You're correct. As we discussed, we will be moderating our outlook for 2025 and will share more details as we progress. The main goal is to concentrate on our initiatives. If we achieve success with our focus on product value and store experience, we will be able to provide more specifics. Right now, if I had to estimate, it would be a growth rate similar to what we are currently experiencing. Our priority is to return to building a strong company, which is essential for us. Once we achieve that, I believe we will be able to address more detailed questions about growth. Currently, from a growth standpoint, this is our view. Regarding your comment about other store locations, our model has always been flexible, allowing us to succeed in various settings. I believe there are still opportunities available for us. We have been successful in urban areas, semi-rural spaces, typical shopping centers, and rural regions. That potential for growth remains. As I mentioned, we continue to be a growth company and are confident that opportunities for expansion still exist. Thank you, Brian.

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

Hi there. Good evening. Thanks for taking the questions. Just wanted to think through two lines of questioning. The first was on the SKU front. And I know, Ken, if you can share kind of what the average SKU count was pre-pandemic, how high it had gotten and now where you see it shaking out moving forward, as you mentioned, kind of intensifying focus? And then I guess the second part of the question was trying to better understand the store labor model and the two specific things I'd ask like; one is average hourly wages. We were thinking $13 to $14 an hour. I don't know if you'd care to comment on that, where they need to go or if you're happy with that. And then the other one is store hours? Are we talking about kind of low single-digit increases in store hours to kind of get the experience right? Or is it a more material investment than that?

Okay. Thanks, Michael. On the SKU front, I'm not going to give you the details around SKU counts and things like that. But suffice it to say, we had a, I would call it, a double-digit percentage increase versus pre-pandemic. And that's us becoming overskewed and overassorted, as I discussed over the last several years, and we're going to get that back. As Tom mentioned, we're an item-driven business at the end of the day. So we're going to renew that focus and also renew a focus in terms of reducing those SKUs. In terms of store labor and hourly wages. We always want to remain competitive in the marketplace and we've always been that way. So we've had to adjust our labor rates accordingly within the various markets around the country. We're going to continue to do that because we have to remain competitive. And with regards to store hours, we will reinvest the hours that are necessary to be able to deliver the store experience that we need. We're going to be looking at the workloads. We're going to be looking at standards in terms of how long it takes to perform process and things like that. But at the end of the day, it has to be about the customer coming in and our stores in crew delivering a great experience for them. So that will drive the hours that we put back into the model. Thanks, Michael.

The next question comes from David Bellinger with Mizuho. Please go ahead.

Thanks for the question, two-parter. So Ken, you laid out a number of initiatives at the onset of your prepared remarks. What's the biggest near-term opportunity within that? And then also, connected gears up, is there a specific category, maybe toys, beauty, etc., that we should be watching for as part of this edited assortment in order to get back to that core younger customer and that eventually leads to, call it, more spending across the complete store?

Thank you, David. We've always focused on being a merchandise-driven business. When I refer to product and value, it encompasses everything we do. Additionally, enhancing the store experience will be crucial, and we'll prioritize that. Regarding areas where we can return to a curated assortment, trend, and quality, Five Below has eight worlds that allow us to achieve this across all of them. This approach is not limited to one specific area; it's a strength of our business model that enables us to create impact across all worlds. When everything is functioning well, it positively affects the entire business. We are committed to pursuing this across all departments and categories. Thank you, David.

The next question comes from Brad Thomas with KeyBanc Capital Markets. Please go ahead.

Hi, thanks. Two follow-ups on some earlier topics. The first would be around the shrink and the self-checkout initiatives and efforts underway here. I don't know if you quantified it, but do you have a sense if there's any quantification of how much that is impacting sales right now just to address that directly? And then secondly, just as you work on changing merchandising, Tom, if I go back and look at when you started the business in 2002. We adjust for inflation, $5 would be closer to $9. Do we think we can do this still under $5? Or should you be turning yourselves into Ten Below, just to throw it out there? Thanks.

Thanks, Brad. I'll take the first part, Tom, if you want to take the second. Around self-checkout, Brad, you mentioned, does that have an impact on processing? And part of the work that we've done, we've surveyed customers and done intercepts, and actually we rank pretty high among other retailers in terms of speed and efficiency through self-checkout. So we do think that's appropriate for the stores at the end of the day, and our customers seem to appreciate it. So obviously, we're going to continue that. We're just going to go about a different way than what we've been doing recently to try to mitigate shrink because we think we can mitigate and control shrink by having that associate-monitored area in self-checkout as opposed to the scanning side of it, that we were doing for a while. So we're going to institute that over the next, say, 30 to 60 days. And then on the product...

I think with regard to the product, you raised a great point. Maybe best way to answer it, as we look back to that, I think we had a few less stores than we did today, just as a starting point, which have put us in a different position. But I would tell you, what I've been very impressed by as we've spent time and we set with the whole merchandising team inside the organization. To be honest with you, I think we need to focus on the areas that Ken outlined, create discipline, narrow focus on what's important inside the company, move away from the destruction. And I would tell you, I've seen enough opportunity, and this team is ready to move and they're ready to engage, and their confidence and their ability to deliver on product, price points and value, I've seen them so energized. So I must tell you, I don't have any concern that this team will be able to deliver. It just will take some time. And we need to support them with some of the initiatives that Ken highlighted, and we'll be in a good place, I believe.

The next question comes from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead.

Thanks for taking the question. So first, just wanted to ask if you've always had all of your stores profitable on a 4-wall basis; I want to make sure that, that still stood. And then just in terms of thinking about store development going forward, what do you think is your kind of new unit productivity expectations? And as you look into next year, cannibalization is something that's come up a little bit. How do you expect your overlap to be in 2025 in kind of, let's say, new markets versus infill? Thanks.

Thanks, Jeremy. In terms of the profitability of the stores, we're still in that position where our stores across the board deliver profit on a 4-wall basis. So we're very pleased with that. And as we mentioned before, our new store economics are still leading. Even though they've fallen off a little bit in the recent past, there's still tops out there in retail. In terms of unit productivity, for years, we were in that like 95% to 100% productivity. And if you recall back in the day, I would always say, I don't know how long this is going to last. But now we're probably in that 80% to 85% range, which we think is reasonable and appropriate. Keeping in mind to your point that we do have levels of cannibalization given the densification we're doing in markets, I would expect to consider to see those similar levels that we've experienced recently as we go forward. But it's one of the things we can do, and it's having more data and more locations in the base to be able to look at performance. We've got pretty good measurements in determining and estimating what cannibalization will be. So we'll take that into consideration. But I would say in the near term, we'll be looking at that. And I think Kristy has mentioned it in the last couple of quarters around that 80% to 85% productivity. I think that's reasonable in the near term. Thanks, Jeremy.

The next question comes from Melanie Nunez with Bank of America. Please go ahead.

Hi, thanks for taking my question here. So I know in the past you've talked about the spring and summer timeframe as being a bit more of a lull given the lack of events I was just wondering if you could talk about back-to-school performance has typically been a driver. Obviously, I know these assortment changes aren't coming through yet but just any thoughts as we're in the midst of this? And then how you're feeling entering the holidays? Thanks.

Thank you, Melanie. The seasons are very important to us. The Now section of the store showcases our seasonal products. As Tom mentioned, we focus on newness, which allows us to highlight that in the store. While you noted that spring and summer can be quieter, we actually expect them to be significant seasons for us due to their length, the kids being out of school, and the opportunities we can pursue. Regarding back-to-school, I would say that moving forward, the product assortment and the strategies we've outlined will play a role in our future performance. We believe we've largely secured our holiday inventory and are now looking for specific items to enhance our business. However, we won't see improvements until we can refresh our assortment and reintroduce excitement and value. We are confident in our ability to focus on our core customers and products, but there's still a lot of work ahead. I recognize it's only been a few weeks since we conducted all our analyses, but we have developed a plan to implement. Nonetheless, much work remains. The team is very energized and motivated to tackle this. Thank you, Melanie.

This concludes our conference call and the Q&A session. At this time, I'd like to turn the call back over to Ken Bull for any closing remarks.

Thanks, operator, and thank you all for joining us on the call today, and we look forward to updating you on our progress in a few months. Thanks, everyone.

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