Five Below Inc (FIVE) 2013 Q1 法說會逐字稿

Good day, everyone. Welcome to the Five Below first quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Farah Soi of ICR. You may begin.

Thank you, operator. Good afternoon, everyone, and thanks for joining us today for Five Below's first quarter 2013 financial results conference call. On today's call are 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 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.

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, President, and Chief Executive Officer, Tom Vellios.

Thank you, Farah, and thanks, everyone, for joining us for our first quarter earnings call. I'll begin by discussing the highlights of our first quarter results. Ken will then review our financial results in more detail, after which I'll provide some closing comments before we open up the call for your questions.

We are pleased with the first quarter results, particularly given that they were delivered against a challenging macro backdrop in the first half of the quarter and with much cooler weather than we saw in the first quarter of 2012. As we said last month, the quarter played out much as we had expected. We delivered sales for the quarter of $95.6 million, which was an increase of 33% over the first quarter of 2012, at 30% unit growth as well as a 4.2% comp increase.

We opened 14 new stores in Q1, of which six were opened in the last nine days of the quarter. You will recall we indicated in our Q4 call that some planned Q2 openings could get pushed into Q1, and that indeed happened. As a result, we ended the quarter with a store count of 258.

More importantly, our non-comp stores, which are predominantly the class of 2012, continued to deliver strong performance across new and existing markets alike. It's obviously very early to assess our Q1 openings, but those stores are off to a good start, and we are on track for the planned 60 net new openings for 2013. Work towards the 2014 class is well underway, and we are excited about the new store opportunities we see for this group.

In addition to our new store performance, we are pleased with the 4.2% comp we delivered for the first quarter, which was, again, driven largely by increased transactions. This was the 28th consecutive quarter of positive comp store sales growth, beginning with the second quarter of 2006. This timeframe spans both good as well as lean economic times, and our performance through it all speaks to the strength and resilience of the Five Below concept.

We saw relatively consistent performance across our categories for the quarter, with the exception of our seasonal spring and summer merchandise, which was impacted by unfavorable weather. Our strong sales results helped drive a 10% increased in adjusted operating income in the first quarter, even with the planned investments and expenses related to our new distribution center, public company costs, and a marketing shift, all of which were anticipated, and Ken will discuss in more detail momentarily.

In order to support our growth, we continue to invest in infrastructure, and I am pleased to announce that our second distribution center in Olive Branch, Mississippi, is now fully operational. By the end of the fiscal year, we expect to service approximately 90 stores, and we'll continue to increase utilization as we grow our store base.

We believe having a great team in place is crucial for future success, and I am pleased to announce some key new hires that we made. Building a strong product development and sourcing team is a priority for us at Five Below, and we are thrilled that Michael Panullo will be joining us in the next two weeks as Senior Vice President to lead that effort. Michael has an extensive background in retail, with significant merchandising expertise at department, discount, and specialty retail stores prior to his 13 years as President of JM Manufacturing, which is a Hong Kong-based company specializing in product development and sourcing for national retailers. I've had the benefit of working with Michael in the past and believe he will be a great asset to our organization as we further strengthen our product development and sourcing capabilities.

We've also hired Julia Benaur as Director for Product Development, to support Michael in building these capabilities. Most recently, Julia worked with Li & Fung, and prior to that has had significant product development experience at Avon Products and Victoria's Secret Direct.

We're also pleased to announce that Sharon Cardinal joined Five Below in April as Divisional Merchandise Manager. Sharon brings significant merchandising leadership experience from her prior roles at Bath & Body Works, Payless Shoes, Disney, and Eddie Bauer. She will work with her team to drive the continued growth of our fashion accessory, groom, apparel, and beauty categories.

We are very excited to have Michael, Julia, and Sharon onboard as we continue to broaden and strength our product development, sourcing, and overall merchandising capabilities. I believe these new additions to the team will further invigorate our offering with compelling, trend-right product, so that our customers can always look forward to newness and excitement when they shop our stores.

So even though we've seen a cool and wet start to Q2, as we look towards peak summer selling weeks in the rest of June and July, I am confident we are well positioned from an inventory standpoint of view with a fresh, trend-right mix of compelling product at outstanding values delivered in our characteristically fun and differentiated store environment. From boogie boards to pull-toys, water guns and flip-flops, backyard games and tiki torches, Five Below is the destination for summer merchandise.

I feel great about our ability to continue to deliver trend by product because of the strong merchandising team we have built, as well as our vendor partners who have and continue to embrace the Five Below concept and our significant growth opportunity. There's an abundance of product to choose from and a broad range of vendors who have increased appetite to support us. This helps us continue to deliver the newness that is key to driving traffic and, as important, enhance the Five Below shopping experience.

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

[Technical Difficulties]

Thank you and good afternoon, everyone. I will begin my remarks with a review of our first quarter results and then discuss our outlook for fiscal 2013.

We increased our sales in the first quarter by 33% to $95.6 million from the $71.8 million we reported in the first quarter of last year. We ended the quarter with 258 stores, a net increase of 59 stores, or 30%, versus the 199 stores we had as of the end of the first quarter of 2012. We have opened 14 net new stores so far this year, and as Tom noted, six of these were opened in the last nine days of the quarter.

Comparable store sales for the quarter increased by 4.2% versus a 10.4% increase in the first quarter of last year. This comp increase was largely driven by transactions. Gross profit increased 31.2% in the quarter, to $30.2 million, from the $23 million reported in the first quarter of fiscal 2012. Gross margin decreased by 40 basis points to 31.6% from the 32% reported in the year-ago period. The decrease in gross margin was due to the expected deleverage of distribution expenses driven by our new Olive Branch distribution center, which was partially offset by occupancy and buying cost leverage.

SG&A expense of $27 million increased 8.2% from the $25 million reported in the first quarter of fiscal 2012. As a percentage of sales, SG&A decreased to 28.3% from 34.8%. Excluding the $1.5 million in costs associated with the founders' transaction that was recorded in the first quarter of 2013 and $6.3 million in the first quarter of 2012, adjusted SG&A in the first quarter of 2013 was $25.5 million, or 26.7% of sales, as compared to $18.7 million, or 26.1% of sales, in the first quarter of last year.

The increase in adjusted SG&A as a percent of sales was due to the planned marketing shift as well as public company costs, partially offset by the timing of compensation and related costs associated with new hires and leveraging of store payroll costs.

Our GAAP operating income was $3.2 million. Excluding the $1.5 million and $6.3 million in costs associated with the founders' transaction in the first quarters of 2013 and 2012, respectively, adjusted operating income for the first quarter of 2013 was $4.7 million, which was a 9.7% increase from last year's adjusted operating income of $4.3 million. As a percentage of sales, adjusted operating margin was 4.9% compared to 6% for the same period last year, with the decline driven by the gross margin and SG&A factors I just described.

Our effective tax rate for the quarter was 41.4% compared to 40% in the first quarter of 2012. The increase in our effective tax rate was due primarily to permanent book to tax differences related to fees expected to be incurred for the secondary public offering in the second quarter.

Before I discuss net income, I want to point out that I will be referring to adjusted net income in both the current and prior year periods that excludes the impact of the founders' transaction. When I refer to EPS, it is EPS based on adjusted net income using an 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 of 2012. 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 $2.5 million, or $0.05 per share, based on 54.5 million adjusted diluted weighted average shares outstanding, as compared to $2.6 million, or $0.05 per share, based on 54.1 million adjusted diluted weighted average shares outstanding in the first quarter of last year.

We ended the first quarter of fiscal 2013 with $36.7 million in cash and cash equivalents on our balance sheet, $34.5 million in outstanding term loan borrowings, and availability of approximately $19 million under our revolving credit facility.

Our ending inventory balance was $75.3 million as compared to $51.5 million in ending inventory in the first quarter of 2012. Ending inventory on a per-store basis increased approximately 13% year over year, due primarily to the initial inventory build at our new distribution facility, as well as the timing of shipments of imported merchandise. We expect inventory to continue to increase at a faster pace than sales through the balance of the year and into next year as we ramp up utilization of our new distribution center.

Now I would like to turn to our outlook. For the second quarter ending August 3, 2013, net sales are expected to be between $112 million and $114 million, assuming a 4% to 5% comparable store sales increase and the opening of 14 new stores. GAAP net income is expected to be in the range of $2.7 million to $3.2 million, with a GAAP EPS of $0.05 to $0.06. Adjusted net income, which excludes expenses related to the founders' transaction and the estimated costs associated with the secondary public offering, is expected to be $4.6 million to $5.1 million, or an adjusted EPS of $0.08 to $0.09.

I want to provide some color on certain Q2 income statement items that will help you for modeling purposes, first with respect to gross margin. As we mentioned on our Q4 earnings call, we expect the cadence of store openings by quarter in 2013 to be different than 2012. Specifically, in Q2 we plan to open 14 new stores as compared to 27 new stores opened in the prior year period. This results in lower pre-opening rent, which is included in cost of goods sold. And this benefit more than offsets the drag from the costs associated with our new distribution center in the second quarter.

On the SG&A line, we will incur public company costs in Q2 that were not incurred in the prior year period, and we'll also incur some hiring-related costs that got pushed into Q2 from Q1. But both of these will be largely offset by lower pre-opening expenses associated with the fewer store openings compared to the prior year period. The net impact of all this is an expected year-over-year operating margin increase of approximately 50 basis points in the second quarter.

As we saw in Q1, where six stores originally planned for Q2 were opened in the last nine days of the quarter, there is a possibility that a handful of Q3 openings could get pushed up into the last few weeks of Q2. Should this occur, we do not expect it to have a material impact on revenue or earnings for Q2.

For the full fiscal year 2013, we are raising our guidance. Sales are expected to be in the range of $524 million to $529 million, with 60 net new store openings and a comparable store sales increase of 4%. This sales outlook for 2013 compares to net sales of $418.8 million for fiscal 2012, representing a growth rate range of 25% to 26%.

GAAP net income is expected to be in the range of $31 million to $32 million, with a GAAP diluted income per common share of $0.57 to $0.60. Adjusted net income is expected to be in the range of $36 million to $37 million, or $0.65 to $0.68 per diluted share. This represents a growth rate range for adjusted net income of 29% to 35% over last year.

And to help you with your quarterly forecast, I would now like to speak to some Q3 timing factors that are contemplated in our full year guidance. The first timing issue relates to the cadence of store openings that I just described when speaking to Q2. While Q2 benefits from a pre-opening rent and pre-opening expense standpoint, given fewer openings year over year, we will see a reversal of this dynamic in Q3, as we expect to open more stores than we did in Q3 last year.

In addition, the calendar shift in 2013 could impact the timing of certain marketing spend that could move into late Q3 this year from early Q4 in 2012. And, of course, we will also have the deleverage associated with the new distribution center in Q3. As a result, adjusted EPS in the third quarter could be down from the prior year period.

Our guidance for 2013 assumes roughly flat operating margins for the full year, as any leverage associated with the 4% forecasted comp is expected to be offset by the 50 basis points of deleverage associated with our new distribution center. For all other details related to our guidance, please refer to our press release.

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. Tom?

Thanks, Ken. In summary, we're pleased with our results for the quarter, particularly given the environment in which they were delivered. As always, our focus continues to be on the teen and preteen customer, with trend-right products priced at $1.00 to $5.00, delivered in a fun and differentiated store environment. Our stores are filled with great summer products to delight our customers, and we look forward to some warmer, drier weather, and the real start of the summer selling season.

With the opening of our new distribution center and the great new hires I spoke to, we continue to invest in our infrastructure to support the significant growth that lies ahead of us. Our track record of consistent, profitable growth has been driven by the uniqueness of the concept, but also by a disciplined approach that we've always taken to making investments in merchandise, new stores, systems, and talent.

As we capitalize on the 2,000-store opportunity that lies ahead for Five Below, we will remain disciplined and continue to invest in a responsible and thoughtful manner to support our planned growth.

Thank you for your ongoing support. And with that, I would like to turn the call over to the operator to begin the Q&A.

(Operator Instructions.) John Heinbockel, Guggenheim Securities.

So a couple of things. Tom, what are the few things you want Michael to focus on at the outset, and how quickly do you think he and his new team can make a difference in the stores?

I think, as I mentioned, I've had the pleasure of working with Michael in the past, and I believe he's just a terrific, terrific addition to the team. We certainly have our own internal strategy of what we believe to be the big opportunities that we want him to focus on. I think, John, you'll hear quite a bit about our plans in future calls and in conversations that we'll have with each of you. Not a lot to say today, but I'll tell you this -- certainly we don't anticipate a lot of things happening for the balance of this year, but I'm confident Michael's impact, Michael, the team, in working together with merchandising, won't take long. And I would say that as we get into next year, you'll start seeing some of the impact of the product development and sourcing capability that we're bringing on and the impact it will have on the newness and the excitement that we push into the stores.

All right. And then secondly, so Texas is, I guess, about two months away, give or take. Have you thought what, as you cluster those, and probably your most important openings to date, have you thought about how you want to merchandise those differently to the market, and market a bit differently from what you might have done in the past to generate greater brand awareness? Or is it going to be very similar to what you did in Atlanta and other markets? Or do you think there are some new wrinkles there?

That's a great point. I'll answer it two ways, John. When you look at Atlanta, Detroit, Chicago, we opened 10 stores in a single day. The overall market out here is going to be very similar. We've seen it works. It's worked consistently across all markets. The merchandise inside, given, obviously, of regionality, particularly around teen, some of the team sport categories, as well as some other small tricks that we're doing to the offering. The team's working on that. You'll see some minor changes to the offering for that market.

But for the most part, again, one of the strengths of Five Below is our ability to really export this concept to other markets without really having to change it by much. The team's really excited. The distribution's up and running, the hires are in place, our regional manager's in place. They're ready to go.

All right. Now I guess, just lastly, is it fair to say, when I look at the slow start you had to the second quarter, where you came out, that you probably exited the quarter north of 5%, and I don't know if that's still where you're running. The summer seasonal kicks in here, but is that close to being right?

As we've done in the past, John, and I think you know us well enough now, what we do is we look at how we started, how we fare today. We combine the two, and we give our best thinking of what we think the quarter to date, plus anticipate it go forward, and that's how we came up with the 4% to 5%. I will tell you, we feel good with our guidance of 4% to 5%.

Okay, thanks, guys.

Paul Trussell, Deutsche Bank.

There's a lot of moving parts, certainly, with some quarter-to-quarter volatility, given the cadence of the store openings and the distribution center, et cetera. But big picture, just stepping back, I see the full year guidance. I noticed that the margins, that the absolute margin is expected to be a little bit higher than what the original plan was coming into the year.

Can you just speak to what has improved, whether it's in more efficiency on the expense side, whether you're getting some better merchandise margins? Just speak to what occurred in 1Q and what you expect to see going forward that is better than your original plan. Thanks.

With respect to the full year, I think I mentioned we're looking for flat operating margins, for the most part, year over year. I do want to emphasize that we have the impact of the distribution center, the deleveraging. But really, what we're seeing is there's some leveraging on that 4% comp and our increase in sales that's offsetting that to land at a relatively flat operating margin year on year, which is, as you mentioned, slightly higher than what our initial guidance was for the year.

Okay, thank you. And then just to follow up on this second quarter guidance, it looks like new store -- in order to get to your sales numbers for 2Q, new store productivity needs to be quite a bit higher. Can you just run through what we should expect on that line, and then how that should continue the new-store productivity over the balance of the year?

Yes, I think from an expectation standpoint, I think we would see similar performance and productivity from the new stores that we saw in Q1. There's two factors that really drive that. It's obviously the initial performance that we saw in Q1, and as Tom pointed out, looking at trends and then guiding to that into Q2. And then also from a store weeks perspective, the stores were opened for more store weeks than we had estimated and assumed in our guidance. So you should expect that continuing on into Q2.

Thank you.

Chuck Grom, Stern, Agee.

Can you just remind us when you dropped that extra circular during the quarter? I'm just curious what the impact was to SG&A and also to the comp during the quarter.

Yes, we had mentioned we had that additional planned marketing drop, that ad drop. It was at the end of Q1. And I think that Tom also mentioned we saw through the quarter how we got off to a challenging start with some of the issues there, and then we saw an improvement in the back half. That improvement started before we dropped the ad in the back half, or at the end of Q1.

I'd say, Ken, I would just add to that, again, the reason for that ad, which really, I'm probably going to be calling that an ad, we drop a circular just as a reminder, particularly during the key times of the year, to announce new arrivals in the stores and new seasons. Due to the Easter shift and a very early Easter this year, what we typically will do, as we probably have done in the past when Easter fell on a similar schedule, is run this circular to really announce some of the summer arrivals. I think from a sales impact, I think it really wasn't a material impact at all to the quarter. Is that fair to say, Ken?

Yes, I would say a modest positive. And I think, Chuck, your other question was with regards to the expense impact. I think we mentioned the combination of that shift in the ad, that planned shift in the ad, and the public company costs, was offset partially by the timing of new hires, which will shift into Q2, and some also additional store leveraging.

Okay, fair enough. And then, as Paul noted, there was a lot of moving parts in the quarter, particularly in the gross profit margin line. I believe the expectations for DC cost pressure in the quarter was supposed to be about 70 bps. Was that about where it fell out, and are you anticipating a similar hit over the next couple of quarters?

That's about where it landed for Q1, again offset by some leveraging on occupancy and some buying costs. And I think we mentioned before, from a full-year perspective, we would expect that deleverage to be about 50 basis points, weighted heavier in the first three quarters. The next two quarters, most likely similar to Q1, and then trailing off in Q4.

Okay. And then with regards to that DC, obviously, there's a 50-basis-point drag this year, like you said. But when you look to '14 and beyond, can you maybe speak to some of the benefits you expect to reap from the distribution center?

Well, we'll certainly start leveraging as we go into next year, and the goal, as we continue to add stores in the markets supported by the DC, obviously, the leverage is going to be quite material against this year. Because remember, the facility, just to remind everybody, it's a 600,000-square-foot facility. And by the end of this year -- by comparison, our facility in Delaware is about 400,000 square feet. We will have 90 stores by year's end. So we have quite a ways to go to really fully utilize that distribution center. So as we continue to add stores into 2014 and beyond, we will definitely build leverage in that facility.

Okay, great. And then one follow-up question, just with regards to the 4% to 5% for the second quarter, with the NRF shift this year, is there any swing because of the later, the week of back to school that, I guess, in theory, moves into the second quarter from the third quarter? Or is it immaterial?

Yes, no material impact to that. We normally do our initial back-to-school sets, initial sets in the middle of July and consistent with everyone else. But no impact in Q2, as a lot of those sales are really in Q3.

Okay, great. Congrats on a good start to the year.

Matt Nemer, Wells Fargo Securities.

I just wanted to quickly, in on the weather, just wondering if you made any tactical changes during the quarter as the weather played out the way it did. And now that we've seen some warmer weather, what kind of demand are you seeing in your seasonal categories? Does it spike way above normal, where there's potentially pent-up demand, or are the volumes similar to what they should have been?

Well, Matt, I'd say two things. We don't like unseasonably cold and wet weather, but if we're going to have it, we'd prefer to have it early in the season when it's not that big for us. As we really kick-start the summer season, as we get into the month of June, June and July are really the biggest months for the season for us.

It's very hard to say. I'll tell you, we've had a couple of warm days, and then the next thing you know, the next day it starts raining again. It's too early to tell. We've not made any tactical shifts. Our feeling that we feel really good about the product, the mix that we have, how well we're positioned.

And we want to be ready when the weather turns, and when the weather turns, we think our customers, as they have each and every year -- we've had consistently terrific performance in years past in our spring-summer business. Our customer looks to us, we become a destination for the business -- beach, pool, backyard. Particularly as schools get out around this week and next, the Five Below is the go-to place, and we need to be ready for that and not overreact because of an early soft start to the seasonal business. So we're ready for the business that we believe is ahead of us.

And then as we remove seasonal from the mix, if we look at the other seven worlds that you're operating in, can you talk about where you're seeing success, where there's strength in those other seven categories?

You know, I think relative to other quarters, and I think, as I mentioned, the categories tend to be pretty consistent, and the performance across the categories has been pretty consistent in the rest of the world. Seasonal is the one that really stood out as a category that we felt was worth mentioning.

Okay, and then just lastly, it sounds like you're already doing some good work on your Class of 2014 openings. Can you talk to the mix of new markets, new island-type markets that are farther away from your existing footprint, contiguous markets, and then maybe fill-in stores within your existing markets?

For '13 or '14?

For '14.

For '14? Well, as you know, the (inaudible) into Texas and putting up the distribution facility in Olive Branch, Mississippi, the Tennessee area, that's a big market for us for a lot of stores. So as we get a little further into the year and we finalize our plan for next year, we'll share that with you. But as of this moment, no additional new markets, large new markets, to announce.

Okay. Thanks so much.

And the base of the balance stores, obviously, or the mix of stores for next year, you can expect, would be definitely a combination of both existing and new stores. Haven't finalized the mix yet as to give you an actual percentage and a breakdown of new versus existing, but we will do that as we get a little further along.

Okay, fair enough. Thanks again.

Michael Lasser, UBS. I'm sorry, that's John Zolidis with Buckingham Research.

Good start to the year, guys. Question on the guidance, a follow-up question to Paul's earlier question. 2Q, you've got about 20% square footage growth, or store growth, compared to 30% in the first quarter. And yet you're guiding to about 30% top line sales growth compared to 33% in 1Q on a similar comp performance. So 10 points difference in store growth, but only three points difference in revenue growth.

And so that would imply that new stores were coming in at about 120% productivity, which doesn't seem right. So I was wondering if you could talk about that a little bit more. And then also, are there any changes in the size of the stores that you're opening? That would be helpful. Thanks.

Okay, I'll take your second question first. We haven't seen any material shift in the size of the stores that we're opening at this stage. Relative to, I guess, your comments about the percentage increases in sales, I guess Q2 estimated over Q1, again, I think the productivity that we're assuming and we're guiding to is similar to what we saw in Q1.

And I think there's two effects, really, going on there that has to be taken into play. One is just the additional performance in sales and productivity of the stores that we saw in Q1, but also the weeks versus our original guidance. So the two of those are really driving that productivity level.

And we don't like to spend too much time on a quarterly basis on productivity. We like to look at that over a longer period of time, because that will, then, even out the impact of productivity based on the timing of openings. But I think you're seeing some of that quarter over quarter.

Jerry Hamblin, Dougherty and Company.

I wanted to just follow up on the questions on the seasonal business and just get some context. I think that category world typically is about 13% or 14% of sales. I was wondering if you could just give a little bit of detail on that category in Q1 versus Q2 and Q3. Is it more or less than the average for the year?

What we define as seasonal, the category "seasonal" really is spread across every category world, with the exception of maybe a couple. There's a seasonal part of our business in everything from party to fashion to sports, games, et cetera. So it's when we aggregate that, that we call it the Now world.

No question about it, Q2 is really the largest single biggest quarter for us for the seasonal business. Q1 is -- late Q1, really, is when it kicks in. But Q2 is the large quarter and the important quarter for us for seasonal. Not a big quarter for us in Q3.

And then also just in looking at your comps, was there anything noticeable -- again, tying this back to poor weather -- was there anything noticeable among your geographies, whether your stores that are a little more in the South performed better relative to those that are a little bit further north or in the Midwest? Any color there?

I'll turn it over to Ken. Before I do, I just want to be clear on the seasonal. I assume when you were saying "seasonal," you meant the spring-summer. The seasonal could be holiday when we get into Christmas. But with regard to seasonal that we define as spring-summer seasonal, this is the quarter that matters, just to clarify the point. Ken, you can comment on the --

Yes, and just with regard to the geographies and their performance, we saw relatively consistent performance across the various regions. Keep in mind, I think you mentioned comps -- you know, a region like the South, and Atlanta, that's a newer area for us, so that wouldn't be in the comps yet. But again, we did see consistencies across, for the most part, across the regions.

Thank you.

Michael Lasser, UBS.

First, on the gross margin performance in the first quarter, you mentioned the 70-basis-point drag from the distribution center. So that would imply you got about 25 bps from occupancy leverage and the purchasing leverage. On a 4% comp, is that a good rule of thumb to think about? Or was there something happening in the first quarter that made it unique?

Michael, I think that would be -- and we've said it before -- the 4% comp is something we've always looked at that's somewhat of a point where we start to see that slight leverage. And those numbers are relatively small, and you're pretty close in terms of the occupancy and the buying costs in there. But yes, I think at a 4% comp, we'd see slight leverage in those fixed areas.

Now, the other piece, too, you mentioned occupancy of fixed costs there. The buying, that ties into, I mentioned some of the timing of the compensation costs that will move into Q2 and Q3. So that's what drove that. So that was more of a timing issue than a full-on leverage.

Okay. On some of the new hires, I think in the past you said that about 90% of your sales are domestically sourced. Should we expect that to change over time as you're building out some new competencies? And do you view these competencies more as a sales driver from a product development, or more of a margin driver?

Again, I think we've been very consistent. What we believe drives the Five Below success is the delight that we provide for our customer through the newness and the excitement of our product. That's why our customers shop us frequently, and that's why our top line is driven primarily by transactions. We feel good where we are with our margin today, merch margin. Our goal is to continue to move forward, and as we leverage scale of the Company and the growth gives us to reinvest that into continuing to deliver amazing product for our customers.

Tom, on a different subject, Texas has been notoriously a finicky market for retailers. What have been your initial observations as you've moved very close to launching in that market? And do you think that all indications are that you're going to achieve just as much success there that you've achieved in other areas?

We haven't opened up yet, so time will tell. But our feeling internally has been, and continues to be, and as we get closer, even more so, it's a great market for us. From a profile stand point of view, it has the makeup of what makes us a terrific and successful company, as we've been in all the other markets.

The audience is right, the profile of the customer is right, tons of kids. What we provide is a destination in a fun environment, trendy product for kids and all those that want to be kids. We think Texas is going to play really well for us. We haven't opened the stores yet, but I think we feel really bullish on the market. And we're just about there, but we really feel good about that market.

And my last question is on the productivity of some of the oldest stores. Where are you in terms of sales per store, and what does that say about the long-term potential for the entire organization in terms of what the productivity of the average location could be? Thank you very much.

Well, as you know, and as we said in the past, we have, the earliest vintage stores continue to comp. So I think that speaks to just the opportunity that we have ahead for a lot of our stores. And we have stores in the north of $2.5 million to $3 million in the base of stores across the chain.

I think we believe that there's a lot of potential, but we have seen a little bit, particularly in some of our earlier markets, as we continue to add stores and feed those markets, where we think there's demand for the concept, that on an isolated case -- not a material number, we don't expect it to be a material number for this year -- we've seen a little bit of cannibalization on a handful of stores in some of those markets where we've gone in by design when we looked at demand to try and add extra sites. But when you look at the volumes that we do in some of those sites, particularly some of those earlier vintage stores, we think these stores, over time, we have a ways to go before we max out on the stores.

Great. Thank you so much.

Patrick McKeever, MKM Partners.

I know there was a question earlier on merchandise margins, but just wondering if you could provide a little color around merchandise margin in the quarter and what the outlook might be there, looking into the back half of the year and what you're seeing, just from a product cost standpoint. Are costs going up? Are they going down? Do you continue to reinvest in the products to hold merchandise margin flat, which is, I think, what you've discussed in the past. Thanks.

Yes, I think in a way, you pretty much answered it. I'll tell you what we have seen and we'll continue to see, of one of the advantages that we spoke to in the past, and I think we continue to see today, is the benefit of scale that Five Below has. And as we continue to grow and you look at the way in which we're growing, the vendor community has embraced Five Below in a fashion that has given us some leverage, no question about it.

We just made a conscious decision, and we'll continue to do so as a Company, to take that leverage and the benefit and to really reinvest it in amazing product. Overall margin, I think, has been very consistent and particularly are very consistent with our plan. And we don't see any issue with the margin on a go-forward basis.

To be clear, we really don't see -- on the other side, we don't see anything today that would give us a pause or concern around price increases, et cetera. On the contrary, I think we see quite the opportunity to really pull out and harvest the plethora of product that's available to us.

Yes, to just add what Tom said, no issues that we see in terms of our merch margins. And again, you mentioned and we've mentioned it before, we've seen them remain relatively consistent over the prior year, and that's our expectations as we go through this year.

Okay. And then a question on the secondary that was announced in mid-May. That has not priced yet, correct?

Correct.

Any color you can provide there? It just seems, it's been longer -- I know these things take time, but it's been a lot longer than the one that you did back in January, from announcement to pricing.

Yes. Unfortunately, we can't really provide any color, given the status of that filing at this point.

Okay, thanks.

And at this time, there are no further questions. I'd like to turn the call back over to Thomas Vellios.

Terrific. Thanks, everyone. I know we got a little bit of a hiccough earlier, but I'm sure you wanted to hear Ken repeat himself on the earnings and the results. We appreciate your patience, your time, and thank you for your support, as always.

Thank you.

This does conclude today's conference. Thank you for your participation.