Five Below Inc (FIVE) 2012 Q2 法說會逐字稿

Good day, everyone. Welcome to the Five Below second quarter earnings conference. Today's call is being recorded.

At this time, I would like to turn the conference over to Miss Farah Soi of ICR. Please go ahead, ma'am.

Thank you, Operator. Good afternoon, everyone, and thanks for joining us today for Five Below's second quarter 2012 financial results conference call. On today's call are David Schlessinger, Co-Founder and Executive Chairman; Tom Vellios, Co-Founder, President, and Chief Executive Officer; and Ken Bull, Chief Financial Officer, Secretary, 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 prospectus filed with the SEC and also in the second-quarter 10-Q, which will be filed by end of day tomorrow, September 11, 2012. 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.

Finally, we may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available in our press release issued today. 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 Five Below's Co-Founder and Executive Chairman, David Schlessinger.

Thank you, Farah. Good afternoon, everyone, and thanks for joining us on our first conference call as a public company.

Before I hand the call over to Tom to walk you through the highlights of the quarter and discuss our growth strategy, I want to take this opportunity to thank everyone who contributed to our very successful initial public offering in July, including our dedicated employees, loyal customers, and supportive shareholders. Tom and I could not be prouder of the Company we have built over the last 10 years and the execution of the Five Below team that has driven our success. We believe we have considerable runway for store growth ahead of us and a passionate and motivated team in place to harvest this attractive growth opportunity. With that, I will pass it over to Tom.

Thanks, David. Thanks to all of you for joining us for our second-quarter earnings call. I will begin by discussing the highlights of our second-quarter results and will then outline our long-term growth drivers. Ken will then review our financial results in more detail, after which I will provide some closing comments before we open the call up for your questions.

Our second-quarter sales of $86.8 million were up 40% from a year ago, driven by store growth of 35% and a comp store increase of 8.6%. This was our 25th consecutive quarter with positive comp store sales growth, beginning with the second quarter of 2006. We noted consistency in performance across all geographies and all store vintages. As we have seen in the past, our comp in the second quarter was driven primarily by increased transactions. As many of you know, we are committed to continually reinvesting in our business, which includes the introduction of new products at great prices in order to deliver what we call our wow factor, that creates excitement and is just one of the ways we drive traffic to our stores, which we believe we accomplished once again this quarter.

This sales performance, combined with the expense leveraging, resulted in us delivering a 61% increase in adjusted operating income versus the same quarter last year. Through the second quarter, we have opened 34 new stores and are on track to deliver a total of 52 new locations, to end the year with 244 stores in 18 states. We saw strong new store performance in existing, as well as new markets like Atlanta, St. Louis, and western Michigan, with initial results in these new markets continuing to confirm that the appeal of the Five Below concept extends beyond our existing geographic footprint and into new areas of the country.

Our store growth plans include a balance of openings in existing markets as well as continuous new market expansion. Our site selection and store approval processes are disciplined, and our new store opening and training teams have again executed well this quarter. We have consistently invested in our infrastructure and will continue to do so to ensure we have the capabilities in place to support and successfully execute on our new store growth plans. To support this planned growth, we will be opening our second distribution center in the Memphis, Tennessee region in fiscal 2013.

Our results to date speak to the strength of our business model. Since 2009, we have expanded from 102 stores to 226 stores at the end of this latest quarter. From 2009 to 2011, we have more than doubled our sales and nearly quadrupled our operating profits. There are four key aspects that define our business model and continue to drive our success. First, our unique focus on the core teen and pre-teen customer and the concept's ability to give them a venue to shop independently and exercise what we call self-expression. Second, our unwavering focus on trend-right, high-quality merchandise that is geared toward this target customer. Third, the exceptional value that we offer at the $1 to $5 price point. And finally, all of this is delivered in our unique and engaging store environment.

Our five-year outlook includes growing our store base by approximately 20% each year and assumes annual comp sales increase of 4%. These are expected to translate into an annual net income growth in the 25% to 30% range. Over the long term, we believe we have a 2,000 or greater store opportunity in the US and feel great about our ability to execute on those growth plans.

In summary, as David said, we are extremely proud of what the Five Below team has accomplished over the last 10 years. We have grown to 234 stores as of today, have 5 more openings planned for this week, and the financial profile of our current store base is strong. Every one of our stores is profitable. While proud of the past, it is the future that has us excited. We believe the runway for growth is considerable, and the team is focused on ensuring that we deliver against the opportunity, while maintaining our profitability and return on investment targets and without compromising on the merchandise quality, value, and store experience our customers have come to expect from us.

With that, I will now turn the call over to Ken, our CFO, to go over financial results in more detail. Ken?

Thanks, Tom. Good afternoon, everyone. I will begin my remarks with a review of our second-quarter and year-to-date results, and then discuss our outlook for fiscal 2012.

We increased our sales in the second quarter by 40% to $86.8 million from the $62 million we reported in the second quarter of last year. We ended the quarter with 226 stores, an increase of 58 stores, or 35%, over the 168 stores we had as of the end of the second quarter of 2011. We have opened 34 new stores so far this year, and we are on track to complete a total of 52 new store openings for fiscal 2012. We just finished the second quarter, and the all-important holiday season is still ahead of us, but we are pleased with the performance of our new stores opened so far this year. As a reminder, our new store model calls for average year-one sales of $1.5 million to $1.6 million and an average payback period of less than one year. That's on an average investment of $300,000, which includes store build-out costs, net of tenant allowances; inventory, net of payables; and cash pre-opening costs.

Comparable store sales [for the quarter] increased by 8.6%, versus a 0.7% increase in the second quarter of last year. This comp increase was driven by an 8% increase in the number of transactions. Gross profit increased 44% in the quarter to $28.7 million from the $20 million reported in the second quarter of fiscal 2011. Gross margin increased by 80 basis points to 33.1% from the 32.3% reported in the year-ago period. The increase in gross margin was driven by leveraging of the fixed component of non-merchandise cost of goods sold in our distribution, buying, and store occupancy expenses.

SG&A expense of $24 million increased from the $16.3 million reported in the second quarter of fiscal 2011. As a percentage of sales, SG&A increased to 27.7% from 26.3%. Excluding the $1.5 million in costs associated with the founders' transaction in the second quarter of 2012 and $200,000 in the second quarter of 2011, adjusted SG&A in the second quarter of 2012 was $22.5 million, or 25.9% of sales, as compared to $16.1 million, or 26% of sales, in the second quarter of last year.

Our GAAP operating income was $4.7 million. Excluding the $1.5 million and $200,000 in costs associated with the founders' transaction in 2012 and 2011, respectively, adjusted operating income for the second quarter of 2012 was $6.2 million, which was a 61% increase over last year's adjusted operating income of $3.9 million. As a percentage of sales, adjusted operating margin improved to 7.2%, compared to 6.2% in the same period last year. The increase in adjusted operating margin was driven primarily by leveraging of the fixed component of cost of goods sold on the sales increase.

Our net interest expense in the second quarter of 2012 was $1.3 million, compared to $5,000 in the second quarter of 2011. The increase in net interest expense was the result of the $100 million term loan entered into in the second quarter of fiscal 2012, of which $65.3 million was paid down subsequent to the completion of our IPO on July 24. In connection with that paydown, in the second quarter of fiscal 2012, we recorded a deferred financing fee write-off of approximately $1.6 million. Assuming we do not make any incremental principal payments on our term loan other than what is required under the loan agreement, we expect interest expense to be approximately $550,000 in each of the third and fourth quarters. Our effective tax rate for the quarter was 40.3%, compared to 39.9% in the second quarter last year. We anticipate our effective tax rate for the remainder of the fiscal year to be approximately 40%.

Before I discuss net income, I want to point out that for both the quarter and year-to-date periods, I will be referring to adjusted net income in both periods that exclude the impact of the founders' transaction. When I refer to EPS, it is EPS based on adjusted net income using adjusted diluted weighted average shares calculation for the quarter. The adjusted diluted weighted average shares outstanding assumes the IPO transaction took place at the beginning of each respective period, thus eliminating the lack of comparability due to the IPO taking place towards the end of the second quarter. A reconciliation of GAAP net income and net income per share to these adjusted numbers on an adjusted weighted share basis can be found in the financial tables included in our earnings press release issued today.

As a result of the factors I just described, adjusted net income for the quarter was $2.2 million, or $0.04 per share, based on 54.1 million adjusted diluted weighted average shares outstanding, as compared to $2.3 million, or $0.04 per share, based on 51.8 million diluted weighted average shares outstanding in the second quarter of last year. The decline in adjusted net income, as compared to the second quarter of fiscal 2011, was driven by interest expense and the deferred financing fee write-off related to the $100 million term loan that I noted earlier.

Looking at things from a year-to-date perspective, for the first half of fiscal 2012, net sales increased by 45% to $158.6 million, we opened 34 new stores and comparable store sales increased 9.4%, following a 3.8% comp increase in the first half of fiscal 2011. GAAP operating income was $2.8 million. Excluding the impact of the founders' transaction, adjusted operating income increased by 84% to $10.5 million, and operating margin increased 140 basis points to 6.6%, from 5.2% from the first half of last year. As a result of these year-to-date factors, adjusted net income increased by 38% to $4.7 million, or $0.09 per share, based on 54.1 million adjusted diluted weighted average shares outstanding, versus $3.4 million, or $0.07 per share, based on 51.8 million adjusted diluted weighted average shares outstanding in the corresponding period in fiscal 2011.

As you are all aware, our initial public offering transaction closed on July 24, 2012. Net proceeds to the Company, after IPO-related costs, were approximately $73 million, of which $65.3 million was used to pay down outstanding borrowings on our term loan facility. As a result, we ended the second quarter fiscal 2012 with $17 million in cash and cash equivalents on our balance sheet, $34.8 million in outstanding term loan borrowings, and full availability under our $20 million revolver facility. We ended the quarter with inventory of $63.6 million, as compared to $43 million in ending inventory in the second quarter of 2011. On a per-store basis, inventory increased approximately 10% year over year, reflecting a shift in the timing of merchandise receipts.

Now, I would like to turn to our outlook. For the third quarter ending October 27, 2012, net sales are expected to be between $79 million and $81 million, assuming a mid-single digit comparable store sales increase, which we define as 4% to 6%, and the opening of 14 stores. GAAP net loss is expected to be in the range of $700,000 to $300,000, or a GAAP diluted loss per share of $0.01, based on 52.6 million weighted average shares outstanding for the third quarter. On an adjusted basis, excluding $900,000 in tax-effected expenses related to the founders' transaction, earnings per share are expected to be in the range of $0.00 to $0.01 per diluted share, based on estimated adjusted diluted weighted average common shares outstanding of approximately 54.4 million.

For the full fiscal year 2012, sales are expected to be in the range of $402 million to $407 million, with a comparable store sales increase of 6% to 6.5%. We expect to open a total of 52 new stores this year, and end the year with 244 stores, as compared to the 192 stores we had at the end of fiscal 2011. Our sales outlook for 2012 compares to net sales of $279.1 million for fiscal 2011, representing a growth rate range of 35% to 37%.

GAAP net income is expected to be in the range of $18.2 million to $19.1 million, with a GAAP diluted loss per common share of $1.33 to $1.31, which includes the impact of $65.4 million of dividends paid to preferred and unvested restricted shareholders, on approximately 35.4 million estimated weighted average common shares outstanding. On an adjusted basis, excluding the founders' transaction expense and assuming adjusted weighted shares outstanding of 54.2 million, adjusted net income is expected to be in the range of $24.6 million to $25.6 million, and earnings per diluted share are expected to be in the range of $0.45 to $0.47. This represents a growth rate range for adjusted net income of 21% to 26% over last year.

Net income guidance for fiscal 2012 includes $10.8 million in pre-tax stock compensation expense, or $6.5 million on a tax-effected basis related to the founders' transaction. Of the $10.8 million, $3 million will be recognized in SG&A expense in the second half of the year. In fiscal 2012, we will also have all of the incremental costs, including additional payroll and professional fees associated with being a public company, representing roughly $1.5 million, with approximately $1.2 million of this expected to be recognized in the second half of fiscal 2012 that we did not have at all in fiscal 2011. As it relates to capital expenditures, we expect to incur approximately $22 million of CapEx in fiscal 2012. The vast majority of this will be spent on new store construction. The rest will go towards our existing stores, our new and existing distribution facilities, and corporate infrastructure.

With that, I would like to turn the call back over to Tom to provide some closing comments before we open it up to questions.

Thank you, Ken. I just want to reiterate that we are all pleased with our second-quarter performance, which was also our first quarter as a public company. The entire Five Below team is focused and energized as we look forward to the balance of the year, particularly the all-important holiday quarter.

I am also very pleased to announce that Jeff Moore has been promoted to EVP of Merchandising. Jeff has been with Five Below since 2007, previously held the position of GMM, and has extensive knowledge of the entire Five Below business. In his new role, Jeff will be overseeing the entire merchandising organization. We have a deep bench strength of talent within our merchant organization, and I am confident that the team's track record of success will continue under Jeff's expanded leadership.

In closing, I would like to echo David's comments earlier on this call and extend my thanks to everyone who contributed to a very successful IPO in July. Our employees, our advisers, and our shareholders all played instrumental roles in the process, and we look forward to a long-lasting and successful partnership with each of you. With that, I would now like to turn the call over to the Operator and begin the Q&A session.

(Operator Instructions)

Charles Grom, Deutsche Bank.

The [first question] I have is on your comp guidance. It implies a pretty material slowdown into the fourth quarter. I think if you back into it, it gets you to the 0% to 2% range. Just wondering if you could walk us through the factors behind that assumption?

Well, Chuck, we were pretty happy with the results through the first half of the year, and consistent with our plans, we are putting the third quarter at a mid-single digit, which we mentioned was a 4% to 6% comp, and full year at a 6% to 6.5%, which would put Q4 in the 4% range.

(Multiple speakers) Okay, fair enough. Then, I know there's a circular shift out of the first quarter, can you remind us what quarter that's going to go into, the third or fourth quarter?

Chuck, I'm sorry, what was that question again?

You guys, if I recall, in the first quarter you had a circular that you postponed into the back half, just wondering if that's going to go into the third or the fourth quarter?

There was some marketing shift, some dollars of marketing shifting from Q1 to Q4, that is correct.

Okay, great. Could you walk us through trends by category during the quarter?

As you know, Chuck, obviously, we don't get into a lot of specifics within the category. One thing I want to really reiterate, the strength of Five Below and the eight category worlds that we have is our ability to be flexible, our ability to shift with demand as we see it with consumers.

As we've seen in the past, we see certain categories that perform better than others. When we look at Q2, for example, we felt really good in the way our spring, summer business performed, from flip flops to beach and pool products, all did very well; cell phone accessories; tablet accessories; headphones; and other accessories doing very well as they've done in the past. And, I think it's what helped drive our business. We also see -- now, the categories from time to time that shift, but I will tell that you overall performance amongst the eight worlds were all within our forecast and guidance and internal guidance.

Okay, great. Congrats on the IPO.

Daniel Binder, Jefferies & Company.

It's Dan Binder. A few questions for you. First, could you discuss the trend through the quarter, what you saw by month relative to what you reported? Then also, with regard to new store productivity, just on our crude calculation, it looks like it maybe was off a little bit from where it had been. I was just curious if it reflected later store openings in the quarter versus last year?

I think we felt really good about the performance. We are very consistent throughout the quarter. Really, the only variance we saw, maybe, was a tad in the second quarter. We saw that when we got into that late June, July period, which we attribute to the shift in July 4 that pushed some sales from the end of June into that first week of July, but fairly consistent across each of the three months.

And then (multiple speakers).

Was there a second part to the question?

Well, just regarding new store productivity, I was just curious, were the stores in this quarter opened a little later, on average, versus last year? It just looked like the really, really strong in excess of 100% new store productivity that we saw in some recent quarters didn't really repeat in this quarter.

No, I don't think we had any difference in terms of the store openings, aside from the -- we did have 27 in Q2 versus the 23 in Q2 last year, so that we didn't see any change there in terms of the timing of openings.

Okay, great. Then, just a last question on the gross margin SG&A performance, a bit stronger than we expected, just curious if there were any special call outs relative to your original expectations.

We did see, again, the fixed component cost part of cost of goods sold, specifically with distribution. We saw some easier comparisons up against some one-time expenses that drove that a little bit higher for distribution.

Okay, thanks.

Matt Nemer, Wells Fargo.

First question is, can you comment at all on the trends that you saw post quarter? Particularly, I'm interested in what you're seeing in terms of back-to-school spending, and what that might mean for the holiday? If there's any early read for potential holiday trends?

Honestly, we really do not comment mid quarter on performance. That being said, I think with back-to-school behind us, we feel really good with the back-to-school performance and are confident with the guidance that we have put forth for the quarter.

Okay --

We don't really have -- nothing, really, to say on Q4 at this point, way too early.

Secondly, on the gross margin, you talked to leverage on fixed expenses, but is it fair to say that the merch margin was also up year over year? Can you talk to the merchandise margin at all?

Yes, our merch margins were consistent with the prior year.

I think I just want to expand a little bit on that because I think it really is the foundation of Five Below. Five Below's story is about growing our store base and performing on the comp level. The best way that we believe we drive our comp store sales is by continuing to reinvest, as I mentioned earlier, in our business.

One of the ways that we do that is to make sure that we drive the wow factor. And, what that really means, as we scale, as we leverage growth, as we leverage our vendor community, we want to reinvest that into better product, newer product, always changing the mix because if we drive the top line, the rest will take care of itself. That's why we feel really good about having our margin maintain at a level very similar to that [other line].

Okay, that's helpful. Lastly, can you quantify the public company costs that were recognized in the quarter? And, how should we think about that for the rest of the year?

Yes, the actual public company costs, there weren't that much in Q2, with less than $100,000. But, I do want to note that we did have some expenses related to the IPO that are going through SG&A and is offsetting some of the leverage that we would normally see in SG&A in Q2. Then on a go-forward basis, I think I mentioned we would expect to see about $1.2 million go forward in Q3 and Q4, and you can look at that pretty much evenly between the two quarters as we move forward.

Okay, great. Thanks so much.

Meredith Adler, Barclays.

Couple of questions. Here's a very simple question; other income, what is that?

It's $258,000. The $200,000 was a, what's called forgivable loan that was converted to a grant from a state, $200,000. Then, $58,000 was some additional insurance proceeds.

Okay, great. Then, I was wondering if you could talk a little bit about your plans for your stores that are -- that were opened first, the most mature stores, and if they have leases that are actually up for renewal? Is it your intention -- because everything is doing so well, would it be your intention to close those stores, or would you renew the leases?

I think the first comment (inaudible), as you noticed and as we all do, all of our stores continue to comp well, all vintages and all classes, so we feel really good about the mix of stores. And, it is our intent, obviously, as the leases come up, to either renew the lease; or in some cases, with some of the early vintage stores, that we refer to as classic stores which are some of the early stores that are a bit smaller than our current prototype, we look for an opportunity, if possible, to move or to expand that location to get it to the prototype size, which is approximately 7,500 square feet.

Okay. Then, maybe more broadly you could talk about the real estate environment. If there's anything -- I mean, I think you had talked about moving to more into power centers. Are you still seeing availability in those areas? Are you happy with the rents that you're getting? Have there been any changes?

No, first, to just go back to the last, this is David. Just to go back to the last question for a moment, we're looking at doing about four to five relo expansions on those classic stores a year, as Tom said, opportunistically. You won't see any major impact; but eventually, you will see over a course of years that the entire fleet will be the larger prototype size.

As far as changes in the real estate market, we're obviously starting to see, as other retailers are, that the supply and demand curve is starting to shift a little as the economy gets a little better, and a lot of retailers are starting to pick up their expansion pace. But, there's nothing that we see out there today that should impact our ability to hit our store expansion targets and keep our economics in line with the numbers we've been able to achieve over the last 2 years.

Do you think your sites are getting better because as your people become more aware of the concept and the potential?

We think we've had outstanding access to a really, really strong group of sites over the last three or four years. So, we don't think that our sites are likely to improve beyond what we've been able to accomplish in that period. We'd like to just be able to maintain that same quality level as we go forward, and we've been able to -- so far we've been able to do that.

Great. Thank you very much.

Rob Carroll, UBS.

Drilling down a little bit further on the Q3 guidance, is it safe to say that within that 4% to 6% range for Q3, is that looking at the quarter-to-date performance and then just carrying out that 4% comp [work] that you guys tend to model the business at, going forward, for the quarter?

Yes, I think we're -- so far through the quarter, we're pleased with the performance. Again, as I stated before, that's normally our go-forward guidance is around that 4%. But as you can see, we are moving that up a little bit to the 4% to 6% range.

Okay. That's mostly based on the bird in hand and then continuing to be fairly conservative from this point forward?

Well, we -- exactly, Rob. We do have, obviously, some insight as to how the quarter is performing with about six weeks behind us, so that's the guidance.

Okay. Then, not to split hairs, I know the 52 store openings that you guys have planned for the full year, just up a couple stores from the 50, 60, 70 stores per year progression that we've seen. Any thoughts to the pace of the square footage growth going forward, still on track?

We're still on track. Our plans go forward is to really see that the growth on a per-year basis to be around the 50 plus stores, or about 20% growth in new store count, each year.

We haven't changed our plans there at all. We're sticking with the same plans that we've had.

I think from time to time there may be site that's opportunistic that we think is right, makes sense for the business, makes sense for the location; and if that happens, we'll be happy to take it, which is really what happened here.

Fantastic. All right, thank you, guys.

Christian Buss, Credit Suisse.

Congratulations on the first quarter out the gate.

I was wondering if could you provide some color on the relative difference in performance by class of store? Also, where you see the ultimate, end-state productivity potential being for your most mature stores.

It's a good question, very hard to answer. I think one of the strengths that we see in our business is that all of our stores continue to perform well. All of our stores are profitable, and all vintages are continuing to comp.

What we feel, think is happening is really, almost two things. One, we see that as we grow and as the Company has grown, and as we get better and continue to improve and develop our business, our infrastructure, our practices, the team, and our ability to leverage, we improve the offering of the customer. At the same time, obviously, I think it speaks to the loyalty that we believe we've created with the customer, who is coming back over and over again, as evidenced by the solid comp performance of the earlier vintage of stores.

So, we really don't know when -- what the end game is, or when the stores start leveling off, or down trend from a constant point of view. Right now, we feel really good about the comp performance across all vintages.

That's great to hear. Could you provide a little bit of color on the timing of the new DC opening, and how we should think about incremental costs there?

Yes, we -- the plan is to open the distribution center in 2013. There are some costs that we would likely incur late in 2012, minor, and then we'll probably see a, somewhat of a deleveraging impact of that new distribution center coming on. Remember that those expenses are in cost of goods sold in 2013.

Okay, great. Thank you very much, and best of luck.

That is all the time we have for questions today. I would like to turn the conference back to Tom for closing remarks.

Thanks to everyone for joining us. At this point, we look forward to speaking with all of you next quarter. Thank you.

That will conclude today's conference. Thank you all for joining us.