Five Below Inc (FIVE) 2014 Q4 法說會逐字稿

Good day, and welcome to the Five Below fourth-quarter earnings conference call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Farah Soi. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thanks for joining us for today for Five Below's fourth-quarter 2014 financial results conference call. On today's call are Joel Anderson, President and Chief Executive Officer; and Ken Bull, Chief Financial Officer. 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 Joel.

Thank you, Farah, and thanks everyone for joining us for our year-end earnings call. On today's call, I want to first review our fourth-quarter performance and the highlights of 2014, before discussing our priorities and areas of focus for 2015.

I am excited to be leading this extraordinary team of people, as we execute on the tremendous growth potential that lies ahead. We have accomplished a lot over the last 60 days, and it is great to finally be able to share some of that with you.

I also want to share how we are thinking about 2016, so you have a longer view of the journey we are making. Then Ken will discuss our financial results and guidance in more detail, before we open the call for your questions.

Starting with the fourth quarter, we delivered sales of $264 million, a year-over-year increase of 24%, driven by strong performance by our new and non-comp stores, as well as a 3.2% same-store sales increase. Q4 comps of 3.2% were in line with the updated guidance of approximately 3% that we shared with you in early January. This marks our 35th consecutive quarter of positive comps.

As we told you in January, we posted Black Friday softness -- we noted post Black Friday softness in the business, which continued into early December, until the business rebounded closer to Christmas and into the post-holiday period. From a merchandise standpoint, we saw strong performance out of our beauty, toy, and candy departments, as well as a positive impact from Frozen merchandise across several departments. At the same time, we believe our crafts and tech worlds could have performed better.

We also saw strong results from the limited TV test we conducted Q4, which reinforces our belief that a key opportunity lies in building awareness of our brand, and being more effective with our marketing. Particularly, in that early December timeframe, but quite honestly, throughout the year. I will discuss the marketing topic in more detail in just a moment.

This fourth-quarter sales performance was accompanied by an increase in gross margins, despite absorbing freight cost headwinds that Ken will discuss, and slight SG&A deleverage, to drive a 26% increase in adjusted operating income and a 30% increase in adjusted earnings per share for the fourth quarter. For the full year, we delivered sales growth of 27%, driven by a 20% increase in the number of stores, and a 3.4% same-store sales increase.

The highlight of our sales performance continues to be strong productivity of our new stores. 2014 will mark the fourth consecutive year, where our new stores have delivered first-year sales of approximately $1.9 million, nicely ahead of our model parameters, resulting in a less than one-year payback on our new store investment.

It is not just the level of performance, but it is the consistency of it that is impressive. We see across geographies, in both new and existing markets alike, and it continues to reinforce our strong conviction in the long runway of growth that the 2000-plus US store opportunity provides for the Five Below brand.

As for the full year, sales of $680 million were up 27%. Adjusted operating income was up 28%, and we delivered adjusted earnings per share of $0.89, which is a strong 31% increase over 2013.

Now, for 2015, and our key areas of focus this year, our priorities for 2015 are the same ones I outlined for you on our Q3 call at the end of January. Since our last call, though, we have made significant progress on our strategic priorities, and have set key initiatives we plan to accomplish in 2015 for each priority.

We have also outlined the vision internally for the Five Below team. Everyone here is aligned and energized by the progress we are making.

Allow me to briefly comment on each priority: Starting with our first priority, store growth. We ended 2014 with 366 stores, and expect to open 70 stores in 2015.

Executing on our new store growth plan is, without question, our number one priority. Our new stores have consistently delivered first year, four wall EBITDA margins in the low 20% range, driving a payback on our investment of less than one year, which honestly is among the best I have ever seen for any retailer. And the class of 2014, is on track to be another strong class in terms of year one sales and EBITDA performance.

As I just said, the consistency of this new store performance is impressive, with the concept of being well received in both brand-new markets as well as when we densify in existing markets. In 2014, we entered the new markets of Houston and Tennessee, and we also expanded our New York City markets, opening our first store in Brooklyn.

This year, for their 70 planned openings, we'll you enter the state of Florida for the first time, which we believe will be a large market for us. We have also already entered the states of Kentucky and Alabama, and we'll build out our existing markets, including Texas.

Bottom line, we expect that the class of 2015 it to be another strong one for Five Below. The people we have invested in, the systems and infrastructure we have in place, along with what we have in the current real estate pipeline will allow us to execute against our 2015 store growth strategy.

In fact, we would like to share with you today that we are planning approximately 85 store openings for 2016, which would represent about 20% unit growth. I want to reiterate that I have immersed myself in Five Below, and I remain confident in our new store growth strategy.

Priority number two, merchandising. Which also includes visual merchandising and the in-store experience. To ensure the success of both our new, as well as our existing stores, we must continue to deliver on the promise of newness and wow, exciting and delighting our customers.

We have a merchant team led by Michael Romanko, who joined Five Below in January. I've had the benefit of working with Michael before, and this will allow us to move that much faster. I have seen firsthand his merchandising passion and creativity, and know the positive impact he can make.

We are already aligned on his go-forward strategy. In a short period of time, Michael has already made a significant impact on our seasonal buys, and has positively influenced our in-store visual merchandising. As an example, in the now world, we've already changed the layout of the Easter set in more than half of the chain.

Michael has also spearheaded a significant improvement in the reporting structure of our merchandising organization with four DMMs and product development reporting directly to him. This allows for a narrower span of control for each of his direct reports, which enables a more detail department emphasis. The planning, allocation, and product development organizations have also streamlined to conform to this buying structure.

We have created a strong symbiotic relationship between all groups, which is important to excellent merchandising execution. Michael has the entire merchandising team energized, and while I used the example of our now world to highlight his immediate impact, you can expect to see exciting things in several worlds begin to emerge.

In addition to visual merchandising, we must continue to make sure our stores are fun places -- excuse me, where customers can explore and discover as well as receive great customer service. Our store teams are focused on delivering a great customer experience, including greeting customers, interacting with them, and reducing lines at checkout.

Priority number three, talent. In order to execute on the significant store growth opportunity ahead, and consistently deliver on our promise to customers, we have to ensure that we have the right people in place. So talent is an extremely important area of focus for me.

We hired a new Senior Vice President of Human Resources late last year, a position we did not have before. Bill Clark came to Five Below from Dollar General, where he was responsible for leading the human resource function for all retail store operations.

Prior to Dollar General, Bill held various human resource leadership roles at Walmart Inc. Bill will be instrumental in our efforts to lead and build the human resource capabilities necessary to scale this business, and further improve operational execution.

We also added two new independent Board members, as you saw in the recent press release we issued. Katie Barclay, and Kate Buggeln, together bring decades of HR, marketing, and strategic experience that we can leverage as we develop talent and create opportunities for advancement, as well as improve the effectiveness of our marketing.

Along with these additions, we are also ramping our internal training programs, enhancing communications, aligning teams, and clearly defining our values and our objectives. These are critically important steps to creating an organization that can successfully grow in scale where people can build their careers. With the tremendous growth that lies ahead for Five Below, there are outstanding career opportunities for great people, and we will ensure we are nurturing our talent and providing a career path for our team members.

Priority number four, systems and infrastructure. Building for the future is also a priority. We are laying the groundwork to support future store growth, and putting in place systems that will make us more efficient, and enable better decision-making. 2015 is, in many ways, an investment year for Five Below, and Ken will lay out for you in more detail the impact these investments are going to have in 2015.

On the distribution side, construction of our new East Coast distribution facility, located in southern New Jersey, is on budget, and we are on track for this facility to be operational later this year. This facility combined with our Olive Branch, Mississippi facility creates capacity to support 750 stores in the Northeast, mid-Atlantic, and south-Central regions of the United States. With our distribution infrastructure largely in place, we are now looking to optimize other areas of the supply chain.

One area of opportunity is overseas container consolidation. We plan to implement this in the latter part of this year. It will help us streamline our purchasing, improve inventory efficiency, reduce lead times, and lower our overall supply chain costs.

We will continue to support our merchandising and supply chain needs in 2015, and have developed a multi-year systems roadmap to support our growth. We'll implement a new merchandise planning system this year, and begin work on a new financial system that will be implemented in early 2016. These new systems are key modules for broader ERP implementation, which we currently have planned for late 2016 through 2017.

These initiatives that will be led by Eric Specter, our CAO, who joined Five Below last summer. Eric is a great example of the investments in talent I previously discussed, enabling us to undertake these necessary infrastructure initiatives. With sales growth in the 20-plus range, there's always going to be some level of investment we will continue to make, but in 2016 and beyond, the pace of investment will moderate, and we expect to see operating leverage emerge as we anniversary many of the current investments in systems, infrastructure, and people.

And lastly, but perhaps most importantly, is priority number five, marketing. Although our stores generates strong sales, recent market surveys we have conducted indicate that we have an exciting opportunity to expand our brand awareness, and attract more customers to the Five Below experience in both new as well as existing markets. We simply need to do more, to make people aware of this great concept.

Our marketing strategy has been predominantly circular driven, but in 2015, we will begin to optimize our media mix, as we aim to be more effective with our marketing message, by speaking to our core customers in the channels that are most relevant to them. What this means is a steady transition away from heavy circular dependence, and a move into more digital and social media messaging.

It also means that we will expand TV testing this year in Q2 and Q4 in select markets, as we build upon the TV test we undertook in holiday 2014. While we tested TV in a very limited fashion, we are pleased with the results. We saw these markets outperform the chain average from a comp perspective, and we saw meaningful increases in brand awareness.

Expect to see us expand our TV advertising testing this year, as we determine whether the limited, all-day 2014 test results translate more broadly. David McEwan leads our marketing efforts. His team is moving fast and I'm pleased with the pace of the changes they are making. This is another example of the strong, internal talent we have on board at Five Below.

Now, let me be a little more specific about our overall digital strategy. Since joining Five Below last July, and then again since assuming the CEO role, I have studied in depth the opportunity. I'm also very familiar with the digital landscape from my time at Walmart.com.

Five Below is indeed a very unique retail concept. It caters to a teen and preteen customer, but enjoys universal appeal. Our core customers view our stores as a convenient destination to discover items and buy fun product.

They also increasingly expect to interact with us digitally, and as a result, we are working on enhancing our overall digital strategy. We will begin to accelerate and build out engaging social media content, explore TV further, and will eventually launch e-commerce, among other things, to complement our in-store experience, and the outstanding economics we enjoy.

Our mission is to wow our customers by delivering trend-right product at a great value and a fun shopping environment. Digital enhancements should make Five Below even more relevant to our customers.

While our primary focus is ensuring that our stores become more of a destination, we believe there is a role for e-commerce as part of our overall digital strategy. We want to offer it to our customers as a convenience that is complementary to the stores, and for certain customers, is an efficient way to buy bulk product, and it is our goal to create this capability within the next two years.

We have considered the systems and infrastructure requirements for an e-commerce initiative, and with recent and upcoming system implementations, we are also laying the foundation to enable an online business, while maintaining a thoughtful, measured, and cost-efficient approach. On our other digital initiatives, which I just shared with you, we are proceeding with rapid cadence.

As you can see, 2015 is going to be an investment year for Five Below, as we absorb the people investments over the last few months, as well as the costs associated with the new distribution and the various initiatives I just outlined. We will be taking steps to strengthen both the foundation of the business, as well as our competitive edge. We can and will keep getting better and more efficient.

Our revenue forecast for 2015 assumes another strong class of new stores, coupled with a same-store sales increased of approximately 3%. This reflects a slow start to Q1, given unfavorable weather in late February and early March, it also reflects a conservative approach to Q4, particularly in early December. While we have marketing and merchandising plans that we are excited about, we would rather see them drive results than assume associated upside in our outlook at this juncture.

And finally, as I promised earlier, I want to give you a sense of how we are planning 2016 We expect to deliver revenue growth in the low 20% range, coupled with operating margin expansion, as we leverage many of the investments we have made in the business, resulting in net income growth of 25% plus.

Factored into this preliminary outlook for 2016, our costs associated with launching e-commerce, as well as costs associated with our ERP system build-out. Efficiencies that we are now able to generate with our growing scale and leverage from prior investments are expected to more than offset these key initiatives in 2016.

Now, to discuss our financial performance and outlook in more detail, I will hand it over to Ken.

Thanks, Joel, and good afternoon, everyone. I will begin my remarks with a review of our fourth-quarter and FY14 results, and then discuss our outlook for the first quarter and full-year of FY15.

Our sales in the fourth quarter of 2014 were $263.8 million, up 24.4% from the $212 million reported in the fourth quarter of 2013. We ended the quarter with 366 stores, an increase of 62 new stores or 20.4%, versus the 304 stores at the end of 2013. Comparable store sales increased by 3.2%, on top of a 0.3% comp increase in the fourth quarter last year.

Our Q4 2014 comp was driven primarily by higher average ticket, as compared to Q4 2013. In Q4 last year, we saw the lower price rubber band sales trend drive lower average ticket, so this increase represents more of a normalization of ticket versus the prior year period.

Gross profit increased 26.3%, to $106.3 million, from the $84.2 million reported in the fourth quarter of 2013. Gross margin increased by approximately 60 basis points to 40.3%, driven primarily by better merchandise margins versus the prior-year period, despite incurring some additional freight costs related to the West Coast port labor issues.

We are very pleased with how our team has handled the port disruption by proactively accelerating receipts, and rerouting shipments as needed, beginning in Q3. Thanks to their foresight, we did not experience any delivery issues, and were in stock during holiday. We have not seen any meaningful delays in product flow for Q1 thus far related to the port situation, and currently do not expect delays for Q2.

When I refer to adjusted SG&A, adjusted operating income, and adjusted net income, this excludes the impact of the pre-IPO founders transaction and costs associated with a secondary offering in 2013. And when I refer to adjusted EPS, it is EPS based on adjusted net income, using an adjusted diluted weighted average shares calculation for the fourth quarter of 2013. Please see the GAAP to non-GAAP reconciliation table in our press release, for further detail.

As a percentage of sales, SG&A for the fourth quarter of 2014 decreased to 20.2% from 20.7% in the fourth quarter of 2013. Excluding last year's impact from the founders transaction, adjusted SG&A for the fourth quarter 2014 increased 20 basis points from 20% in the fourth quarter of 2013, driven by new executive stock compensation expense.

Our GAAP operating income increased 31.2% to $52.9 million or 20.1% of sales, from $40.3 million or 19% of sales last year. Adjusted operating income for the fourth quarter of 2014 increased 26.5% to $52.9 million or 20.1% of sales, from last year's adjusted operating income of $41.9 million or 19.7% of sales. Our effective tax rate for the fourth quarter of 2014 was 37%, compared to 38% in the fourth quarter of 2013, with the decrease due to lower effective state tax rates.

On a GAAP basis, net income increased to $33.3 million, or $0.61 per diluted share, from $24.8 million or $0.45 per diluted share last year. Adjusted net income increased 29.2% to $33.3 million or $0.61 per diluted share, from $25.8 million or $0.47 per diluted share last year.

For the full FY14, total net sales increased by 27% to $680.2 million. Comparable store sales increased 3.4%, compared to a 4% comp store sales increase in FY13. GAAP operating income was $77 million.

Excluding the impact of the pre-IPO founders transaction in both periods, and costs associated with our secondary offering last year, adjusted operating income increased by 28.1%, to $77.9 million, while adjusted operating margin was flat to 2013 at 11.4%. GAAP net income increased 49.4% to $48 million, from $32.1 million in FY13. Adjusted net income increased by 31.6% to $48.6 million or $0.89 per share, based on 54.7 million adjusted diluted weighted average common shares outstanding, versus $36.9 million in adjusted net income or $0.68 per share based on 54.5 million adjusted diluted weighted average common shares outstanding in FY13.

We ended the year with $63 million in cash and cash equivalents, availability of $20 million under our revolving credit facility, and no debt. Inventory at the end of the year was $115.7 million, as compared to $89.4 million at the end of FY13.

Ending inventory on a per store basis was up 7.5% year-over-year, driven by increased direct import penetration versus last year, as well as accelerated receipts related to the port issues. Given the port delays will take many weeks to unwind, we currently expect inventory on a per store basis to increase by a similar amount in Q1, and possibly in Q2.

Now, I'd like to turn to our guidance. For the full year 2015, sales are expected to be in the range of $816 million to $824 million, with a comparable store sales increase of approximately 3%. This compares to net sales of $680.2 million for FY14, representing a growth rate of 20% to 21%. In 2015, we plan to open 70 new stores, and expect to end the year with a store count of 436, as compared to our 2014 ending store count of 366.

We expect to open approximately 60% of our new stores in the first half of 2015, as compared to almost 80% opened in the first half of 2014. This difference in timing of new store openings for FY15 versus last year results in an expected increase in store operating weeks in 2015 of approximately 18%, on a store count increase of 19%.

As Joel said, we expect the class of 2015 to be another strong one, building upon the success we have seen in the last few years with our new stores. Our new stores open up strong right out of the gate, which enables us to generate an exceptional return on our capital, with paybacks of less than one year. This strong year-one performance is also a key reason why our stores don't have a comp maturation curve, that you may see with other retailers.

I also want to add that our full-year outlook assumes a comp for the fourth quarter of approximately 3%, as we have assumed a similar comp performance for the fourth quarter of FY15 that we saw in the fourth quarter of 2014. For the full year, we expect operating margins to be down slightly versus 2014, as we incur initial start-up costs related to the new DC, and leadership investments that we have made since mid-2014. Both of these investments will be partially offset by leverage in other areas of gross margin and SG&A.

For the full year, the incremental DC costs will show up primarily in SG&A, due to an increase in depreciation on the larger facility, which represents approximately 30 basis points in SG&A drag, or $0.03 in EPS. I will speak to the quarterly cadence of these investments in a moment, as their impact on operating margin is most significant in the first half of the year.

We expect the full year effective tax rate of approximately 37.5%, and GAAP net income is expected to be in the range of $55.9 million to $57.7 million, or approximate16% to 20% increase over 2014, with GAAP diluted earnings per share of $1.02 to $1.05. Net income is expected to increase by approximately 15% to 19% over FY14 adjusted net income.

With respect to CapEx, we plan to spend, in total, approximately $56 million in 2015, reflecting the opening of 70 new stores, investing in distribution centers, system upgrades, and corporate infrastructure. Included in our CapEx forecast is approximately $20 million for the new East Coast distribution facilities, which we expect to be operational in mid-2015.

For the first quarter ending May 2, 2015, net sales are expected to be between $150 million to $152 million. We plan to open approximately 18 new stores in Q1 this year, as compared to 19 stores opened in the first quarter last year. Given the weather impact in the back half of February and early March, we are assuming a 1% to 2% comparable store sales increase against last year's 6.2% Q1 comp entries.

GAAP earnings per share are expected to be $0.06 to $0.07. Embedded in this outlook is an expectation for adjusted operating margins to be down about 100 basis points, driven by SG&A deleverage, as we absorb the compensation costs related to the leadership investments made since mid-2014.

Now, I will provide some color on quarterly operating margin cadence, starting with Q2. Given that we take possession of our new DC in Q2, we expect to see significant deleverage of approximately 125 basis points year-over-year, given start-up and relocation costs, including 50 basis points of depreciation, which is included in SG&A.

We also expect deleverage resulting from compensation expense of approximately 130 basis points related to the leadership investments, most of which falls in SG&A. And lastly, we expect a shift in marketing spend out of Q3 into Q2, related to the Q2 TV test that Joel discussed. This will result in deleverage of approximately 80 basis points year-over-year.

These items that will be only slightly offset by expected leverage in some other SG&A areas, resulting in an expected decline in overall operating margins of approximately 300 basis points for the second quarter. In Q3, we expect a slight improvement in operating margins, as the DC start-up costs dissipate and the deleverage from leadership investments is offset by the marketing shift out of Q3 into Q2.

For all of the details related to our results and guidance, please refer to our earnings press release. And with that, I would like to turn the call back over to Joel to provide some closing comments before we open it up for questions. Joel?

Thank you, Ken. In closing, we delivered a strong 2014 with a 31% increase in adjusted EPS, and 2015 is shaping up to be an exciting year for Five Below. We are setting out to accomplish a lot in 2015, and have shared with you many details.

We are positioning the brand for the years of strong growth that lie ahead, and after having doubled our store count in the last four years, we are looking to do that again in the next four years. I am proud of the team we have in place, and confident in their ability to execute.

I'd like to thank all of our great associates for their hard work and dedication, and thanks to all of you for joining us today. I hope you are as excited about the future as we are.

With that, I'd like to turn the call back over to the operator for questions. Operator?

(Operator Instructions)

Charles Grom, Sterne Agee.

This is actually Renato Besanta on the for Chuck. So I guess, first on the comp guidance for 1Q, you mentioned 1% to 2% for the quarter, and a slow start to the year. But I think you had a pretty strong April and Easter period last year, and Easter is a bit earlier this year.

So as it fair to say that quarter to-date trends are burning somewhere north of that range? I mean, are you sort of baking that into guidance?

But I think what we're saying is that with of the weather we saw in the second half of February, and the first half of March, we got off to a slow start. And we have, as you know, Easter is a very important part of Q1, and those big weeks are still out in front of us. Ken, would you add anything else on that?

Yes. That's right, Joel, and then also it's difficult to be able to talk, and we normally don't talk about monthly comps throughout a quarter, but it would be even more difficult in this quarter given the shift in Easter.

Okay. Got you. And then touching on distribution a bit. I think you said you have 50 basis points drag from Olive Branch back in 2013. If you were to isolate Olive Branch and the impact on margins this year, did you see any impact at all? And then, I guess, looking forward, or looking at this year, I know you have the hit from South Jersey DC but will you see any positive impact at all from Olive Branch, as the ramp up there continues?

Yes. I think when we brought Olive Branch on, in 2013, we had mentioned that was about a 60 basis point drag on overall DC costs. We have seen that, as we've been able to ramp up the throughput in the stores that are being serviced by the distribution center, we have seen improvements there in terms of overall performance with Olive Branch.

(Operator Instructions)

John Heinbockel, Guggenheim Securities.

I will ask two parts here then, so number one, just on marketing, I think you spent about $20 million in on marketing give or take. Do you see that going up as a percent of sales this year? And then of the amount, what percent of the spend would be digital, and how fast does not grow in the coming year? Could that double or triple?

And then, I guess, a second thing merchandising and what Romanko will focus on, Joel, where you think the most opportunity lies in 2015, maybe by world? Is party the biggest opportunity? Is style? Where do see the big hits?

Sure. There is a lot in there, in that two part question there, John, I'll try to cover it. As far as the marketing piece goes, for 2015, the absolute dollars will be up, but we are planning to hold the rate the same as it was last year.

And it's safe to say we'll increase our spend in digital. As I said in my prepared remarks, we are making the shift strategically from being primarily circular driven and will include a Q2 test, and an expanded Q4 test. We are still putting the exact dollar amounts behind that, but the overall spend will be about the same rate as it was last year.

In terms of merchandising, I shared with you a couple examples in my remarks earlier, Michael has already made a big impact in the now section, and I think what's important to call out on that, is that has an immediate impact in what our customer sees when they walk in our stores. We continue to get traction in the beauty world, and have seen a lot of success in that.

But I think what is important to share with you is that Michael sees opportunity in all the worlds, and I think as the year goes on, depending on if those worlds are domestically bought or are imported, you're going to see some of those change faster than others. But we are working honestly on improving the impact in all the worlds, John. Thanks, John.

Dan Binder, Jefferies.

My question is about e-commerce and customer engagement. As it pertains to e-commerce, I think part of the attraction to the story when you went public was that it was Internet resistant, given the low price points. So as you think about a transactional website, you mentioned selling bulk product.

I'm also just wondering, do you think about selling a completely different set of merchandise? If we look at Costco for example, there's a lot less overlap with their stores, versus what's online, versus maybe some other retailers. If you could add any color around that? And then with regard to customer engagement, I realize that's part of it, I'm just curious, when we should start to see some of these shifts in media that you talked about?

Yes. We still believe the concept is Internet resistant. And I think what I want to just reiterate is, my number-one priority is store growth. And we shared with you are not only our store growth plan for this year, but gave you a longer-term outlook on next year, of 85 stores. And that should signal to you that we are very bullish on the opportunity to continue to roll out stores throughout the United States for Five Below.

We do know that our core customer is a digital native, and so with that, we are focused on our digital marketing efforts, and e-commerce is a piece of that. It's not what's going to drive the success of Five Below, but we need it to complement the offering, and the product for Five Below.

We haven't contemplated at this time offering a large deviation from what's in the stores. I think it's important for us that we get e-commerce up and running.

That will come with a measured, disciplined approach, as right now, we are focused on all those systems infrastructure, distribution, overseas consolidation, et cetera. And we've got to get those in place to make sure that our number-one priority store growth continues to drive this concept.

Your second part was a question about customer engagement?

Start to see some of these -- I mean digital shifts, and --

Oh, when will we start to see the shifts? Right. And you'll begin to see as early as Q2, a new TV campaign.

We've already started to launch some commercials on, for example, on YouTube, and are beginning to get more traction with many of the different social networks out there. So we've already begun that now. And we will continue to test TV throughout Q2 and into Q4, and that will help give us indications of how fast we should think about a chain-wide rollout.

Okay. Thanks.

Michael Lasser, UBS Investment Bank.

I was hoping you could expand a little bit more on some of these investments that are being made this year. Both from a timing perspective, Ken, you had offered some detail, but maybe you could review that and where your offsets are going to come in because tying into the model, it seems like there's some disconnect there.

And then, B, can you also offer a rationale behind some of the investments? I think we can understand some of the systems areas, although at the time of the IPO, as far as the story was that there was -- the Company had -- they laid the foundation and invested in systems that were capable of handling a much bigger company?

And then B, on the people side, are you noticing some bottlenecks, are there areas right now where there's just not enough human talent in place to handle the growth of the company? And does that explain why trends haven't lived up to your expectations in recent quarters? Thank you so much.

Yes. I'll turn it over to Ken to share many of the thoughts on that, and just at the same time remind you the IPO was nearly three years ago and since then, we've doubled our store count, and we're going to double it again. So I think it's prudent that we continue to invest in the systems. Do you want to give some cadence on the timing?

Sure. Sure. And Michael, I'll just talk about the year first, and when we talk about those investments, I mean really what we've spoken to was the new distribution center that we are bringing on board, and that the leadership investments. And on a full-year basis, we're looking about -- at a slight deleverage on overall operating margins, with the impact of both of those really primarily being in the first half of the year.

And one of the reasons why I wanted to call out some of the quarters is just the impact and the nature of those. So if you go to Q1, really, what we're seeing there, no new distribution center impact in Q1, as we don't take possession of the new DC until Q2, but we are being impacted by the leadership investments there. And I spoke to about 100 basis points of expected operating margin deleverage there.

And then we get into Q2, there's a few things going on there. So overall about a 300 basis point decline in operating margins. We've got about 125 basis points related to the DC.

Now, that includes about 50 basis points of depreciation and SG&A, and the remainder up in cost of goods sold, related to start-up and relocation costs. And then, again, we've got the leadership investments in SG&A in Q2, and then we have the shift in marketing around the TV tests. So dollars that are being pulled out of Q3 and pulled up into Q2.

And then, as I mentioned, when we get into Q3, we would expect slight operating margin improvement, and I think I mentioned the full year. So that's to call out the cadence where, again, it's the distribution center and leadership investments primarily having an impact on the first half of the year.

And Michael, you called out people bottlenecks. In fact, I think it's just the opposite. Eric joined when I came on, I shared with you, Bill and Michael Romanko, and many of the other leaders that we have here, so it's just the opposite. I think we've really strengthened the Five Below leadership team over the last six months, and that's actually allowing us to accelerate and go faster. Thanks, Michael.

Meredith Adler, Barclays.

I wanted to go in a different direction. I was wondering, when we look at performance in the fourth quarter, well, I guess the question is, do you have stores located today that are in shopping centers anchored by grocery stores? And did you see a different kind of performance in those stores? And then, the question that goes with that is, is there any thought about putting more of your new stores into grocery-anchored shopping centers?

The short answer is, yes, we do have stores located near grocery, and, no, we don't see a significant difference in performance in stores that have a grocery store versus stores that don't have a grocery store. I think our overall real estate strategy looks at the broader demographics of the marketplace, rather than the specific capabilities of whether there is a grocery store or not. I think, bigger picture, it's more of a opportunity we have in early December, and that's why I shared with you some of the things we're looking at from a marketing and merchandising perspective. Thanks, Meredith.

Thomas Filandro, Susquehanna International Group.

Congratulations on strong execution. A question, I think, Joel, you mentioned earlier in your comments that beauty, I think, toy, and candy were three areas that were called out, and I don't know if you used the word under performance, it didn't perform up to expectations as craft and tech store. Two-part question related to that.

Was there any notable movement in the margin across the worlds? And can you tell us a little more about maybe what went wrong, and what the strategies are to improve the craft and tech areas? Thank you.

On the margin piece, no, there's nothing notable there. On the worlds that I called out, I think on the craft side, despite the rubber band and the loom trend from the prior year, candidly, we just thought this year we could have done better than we did as we anniversaried that and so we've got to go back and really uncover how we can recover from a trend like the rubber band and loom faster, and I think we just thought that our internal forecasts would have cycled that better than we did.

On the tech side, we were over assorted in a few of the categories, and we have an opportunity to tighten this up, and Five Below is all about presenting a more edited trend right assortment to our customers, and these are important departments and worlds for us, and while we accelerate in some worlds, when we don't quite get it right, we want to be transparent with you, and we go back to the well, and we are going to get it right. So in fact, we are already starting to see improvements there. Thanks, Thomas.

Jeremy Hamblin, Dougherty & Company.

Congratulations and thanks for taking my question. Just a question on e-commerce. Did you give a sense for when you are expecting a potential website to launch for transactions? And then the second part to that question would be, in terms of fulfillment, warehousing, distribution, is that something that, given your store growth, are you going to outsource that initially, and then bring it in-house, or is it something where you would start in-house from the beginning?

Sure. What I said on e-commerce is that we plan to launch that within the next two years. It's more important to me that we make sure we do everything in our power to get the store growth right. And that's why distribution, overseas, consolidation, all of these systems enhancements -- those are the number-one priority.

Those will benefit e-commerce when we are ready to launch it, but the plan right now is within the next 24 months. In terms of when we launch it, what will fulfillment look like? We haven't nailed down exactly, but outsourcing would probably be more prudent in the early days, than disrupting our current distribution centers. Thanks, Jeremy.

Matt Nemer, Wells Fargo.

It's actually Trisha Dill filling in for Matt today. Sort of a bigger picture question on the traffic slowdown over the holiday. You talked about marketing, after taking a step back, is there anything else you think drove some of the softness? And maybe then you could talk about how that slowdown looked across your mature markets versus some of your new markets?

Yes. Certainly, we think marketing is the biggest opportunity for it. And I shared with you some of the comments around craft and tech, but during that slow period, we saw that trend happen across all our worlds, so it really leads us to believe it was more a traffic issue than it was a merchandise issue with our customers.

Especially as we got into the back half of December, and saw sales accelerate into Christmas and the week after Christmas. So we've got some ideas, both merchandising driven as well as marketing, and as we gave you guidance for 2015, we are expecting the same trend in Q4 as we did last year, and as those initiatives play out, we'll look at those as upside rather than bake them into our forecast. Thanks, Trisha.

Paul Trussell, Deutsche Bank.

This is Tiffany Kanaga on for Paul. I was hoping you could talk a little more specifically about how you might be thinking about retooling merchandising and marketing for holiday this year? You've already mentioned TV ads, but if there are other things you are considering? And then, on the topic of the TV ads, are you finding that you need to build a lot of brand awareness, or is it more a matter of driving trips and building loyalty?

Yes. Tiffany, I'm not going to go into the specifics of our individual strategies we have planned for the fourth quarter. I think we've really shared a lot of details today of not only 2015, but what we're thinking about in 2016.

We're making strategic investments in people, in systems and in infrastructure. We've got new leadership in merchandising in Michael Romanko, and all these initiatives coupled together should have a positive impact on Q4. As far as the marketing piece, we think it's largely brand awareness, more than anything else.

I just want to reiterate, Tiffany, this business is not broken. We can go to market better, and we can do better, but as I shared with you my prepared remarks, we are really excited about 2015 and 2016, and that's why you see us continue to accelerate the number of stores that we are opening, and can give you a forecast as what we see for earnings growth into 2016. Thanks, Tiffany.

Christian Buss, Credit Suisse.

If we could talk a little bit about some longer-term question. If I'm looking at the EBIT margin performance post-IPO, we're now below the level achieved in FY12 and we got runway for expansion, but I'd love to know how you think about the revenue growth and the earnings growth algorithm longer-term. What is the opportunity here that we're playing for, from a margin and an earnings standpoint?

Yes, Christian. I think Joel had mentioned that and getting out there around 2016, obviously we gave you our guidance for 2015. But in looking out in kind of broader terms, looking at sales and top line growth of that 20%-plus, and then as we get into 2016 to be able to see operating margin expansion, leverage on investments that we've spoken about for 2015 and that we've made, and to see that 25%-plus net income and EPS growth in 2016. So that's kind of how we're thinking about it, how Joel had mentioned that, also.

Thanks, Christian.

Stephen Grambling, Goldman Sachs.

Maybe just a follow up on the last one, could you provide a little bit more detail on the timing and components of the ERP implementation? And maybe even clarify whether the steps -- the later steps have a smaller investment, or are you just lapping over some of the initial, and so that's we expect the leverage in 2016?

Yes. I think the timing is -- the planning system will be implemented mid this year and we'll begin work on the financial system, to have that in place early next year, and then followed by the larger ERP. I think we delevered the risk on the ERP system by doing it in incremental chunks, like we explained in my opening remarks. And feel really good about the steps we're taking towards getting a larger ERP implementation put in place. Thanks.

Vincent Sinisi, Morgan Stanley.

Just wanted to ask you guys about the TV advertising specifically. I know that during the fourth quarter, there were some limited tests, but can you give further color around how those particular markets performed from a category standpoint, if they saw similar to the overall results, where you had those two softer categories, and then you had a few stronger as well?

Yes. I'll tell you, the goal of the TV test wasn't about moving the category. It was about the box.

And what we saw almost across every market we tested TV in, was a movement in not only comp, but in brand awareness. In fact, the brand awareness moved significantly faster than the rest of the chain. That was one of the areas that we were most encouraged, but we saw an immediate impact in comp as well, in every TV market we tested.

Quite honestly, like I said, it wasn't about the differences in category. It's about exposing more people to the Five Below brand, and then getting them excited about what Five Below is.

We continue, and we've had four years running now of our customer satisfaction scores continuing to climb. And that just bodes well for, as we expose this brand to more customers, they're going to enjoy the brand as much as our current customers do. So we've got enough of a read in that Q4 test that we are going to expand it in Q4 this year, but also look at testing it in Q2 of this year.

So you can expect in future calls for us to continue to talk about what we're doing in brand awareness. As we continue to expand these digital tests. Thanks, Vincent.

Patrick McKeever, MKM Partners.

So, Joel, you mentioned just speeding up the checkout process, I think, in your prepared comments. So I was wondering if you would provide a little more color on that? And I would think that would be a huge area of opportunity, particularly during the holidays, but also during your grand openings, when you've got lines stretching really to the back of the store, and just, I've got to think that some customers walk away, because they don't want to stand in line.

I'm wondering if you'd do something like maybe -- I mean you probably can't add any more checkouts, but could you maybe do something with iPads like some retailers do and maybe do more of a mobile checkout process? Is that something you looked at?

Yes. Patrick, isn't that a great problem to have?

Yes. Exactly.

Too many people in our stores, right? And it's why I called it out. We know our customers don't like lines, and we know that we lose some sales when the lines are too long. And so the store operating team is working diligently on improving that.

Certainly, we are looking at ideas like mobile checkout, as you were talking about, but candidly, we can do stuff with line busting and more cashiers helping with bagging, et cetera, et cetera. But it is our goal to reduce the lines that you see in our stores.

Certainly, grand opening is one aspect, but I'm honestly more concerned with the ongoing day-to-day, our customers want to come in our stores, they love our stores as a destination, and we want to keep making that experience better in the stores, and reducing lines is one of those ways that we can do it. Especially in that all-important fourth quarter, where we think we can do more sales. Thanks, Patrick.

This does conclude today's question-and-answer session. I will now turn the call back to our moderators for any additional or closing remarks.

No. That's great. Thanks, operator. Thanks everyone, for getting on the call today. As you can tell, we're really excited about 2015 and the runway for 2016, and have worked to share with you a lot of information about this exciting opportunity at Five Below. Thanks, and have a great day.

This does conclude today's conference call. Thank you again for your participation, and have a wonderful day.