Five Below Inc (FIVE) 2015 Q1 法說會逐字稿

Good day, and welcome to the Five Below first-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 today for Five Below's first-quarter 2015 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 first-quarter earnings call. I will review the highlights of the quarter, before handing it over to Ken to discuss our financials and our outlook, and then we will open the call up for questions.

We are pleased with our Q1 results. We delivered a sales increase of 22% to $153.7 million, exceeding the high end of our guidance range for the quarter, with the upside coming from continued strong new-store performance. This sales upside drove the EPS beat of $0.01, even as we absorbed the costs associated with the investments we have made in our Business since last year, which Ken laid out to you in detail on our year-end earnings call in March.

We opened 19 new stores in Q1, representing store growth of 19% from Q1 last year, and these openings included the new states of Alabama and Kentucky. As you can see from our results, the performance of our new stores continues to be very strong. And with each set of openings, our excitement and our confidence in the store growth potential for this brand continues to grow.

We offer an edited, trend-right merchandise assortment at exceptional value that caters to our core teen and pre-teen customer, yet enjoys universal appeal. Our offering is delivered within a differentiated store experience that creates a destination for our customers. These continue to be distinguishing attributes of our concept that resonate with our customers in both new and existing markets.

This is why our store growth opportunity is so attractive, and store growth remains our number-one priority. Already in Q2, we have entered the new market of Kansas City with three openings, including our first store in the state of Kansas; and we are thrilled to enter the very important new state of Florida, with nine planned new-store openings for the month of June.

Our Q1 comp increase was 1.7%, making this our 36th consecutive quarter of positive comps. This was in line with the upper end of our expectations, and compares to a 6.2% comp increase in the first quarter of 2014. The weather-impacted February and early-March performance this year gave way to much improved March/April trends. And I do say March/April because, as you know, the Easter shift limits the usefulness of discussion of any individual months.

The teams did a great job improving several worlds during Q1, which were well received by our customers. In the now area specifically, as we headed into Easter, the improvements we made with cross merchandising and enhancing the visual appeal resonated with the customers. This continued with our post-Easter reset of spring.

It is all part of the more holistic merchandising approach we are taking, where we pull in product from different worlds to create a customer presentation that we believe is more cohesive and compelling. In addition, the merchant team has done a great job, infusing the assortment with the right amount of newness and freshness, like selfie sticks and shopkins, just to name a few. Overall, from a merchandising standpoint in Q1, we saw strong performance out of certain categories in our style, sports, and candy worlds, and we are well positioned for the summer selling season.

Last quarter, I talked to you in detail about our priorities for 2015, and the entire Five Below team is making good progress on each one. I just discussed our store growth, which remains our number-one priority. Florida will be our fourth new state so far this year, coming on the heels of Kansas in May, and Kentucky and Alabama in Q1.

We remain on track for our planned openings of 70 new stores in 2015. This will be a combination of six new states, as well as densification in existing markets like Texas and the New York metro areas, as we continue to realize the tremendous growth opportunity that still exists for Five Below.

In fact, our planned opening in the Orlando market in Kissimmee, Florida, next week will be our 400th store. Opening in Orlando will expose our brand to new people from all over the country, and the world for that matter. As we have consistently seen, and as is implied by our outlook, the class of 2015 is expected to be another strong one for Five Below, and our real estate teams are already hard at work on the planned 85 openings for 2016.

On the merchandising side, those of you who have been in our stores have surely noticed the merchandising improvements that I spoke to earlier. You can expect to see our merchant team touch more of the worlds as we move through the year, and continue to make progress on this important strategic priority.

I'd also like to give you more color on two of our key 2015 priorities: number one, marketing and brand awareness. We continue to see a significant opportunity to increase consumer awareness of Five Below. Our most recent study, which was completed since our last call with you, confirmed the earlier brand awareness observations that I shared with you in January, and on our Q4 call. As you know, we did a TV advertising test in Q4 of last year, which we will expand during Q2, and again in Q4 this year. In fact, the Q2 ad launched on this past Monday in our test markets, and you can view it on our website.

There is also the opportunity to reduce our historical reliance on newspaper circulars, and increase our digital mix. We made progress on this front in the first quarter, testing multi-page digital ads via email and Facebook, and we like what we are seeing. As an example, in Q1 we shifted one of our circulars to a purely digital ad, fully supported on our social channels, and sent to our email database. Expect to see more of this, as we continue to work to optimize our media mix.

We are also ramping up our digital content by producing engaging videos targeting our core teen audience. For example, we created our first 60-second Easter video ad, Sugar Rush, that received strong viewership on YouTube. In addition, our daily Instagram content is receiving positive engagement levels.

Lastly, as our store count increases, we are adding new customers to our email database, and using email to tell compelling merchandising stories, and drive traffic to our stores. I am proud of the progress the team is making in our digital transformation.

Number two: systems and infrastructure. We continue to make good progress on our initiatives to build for our future. Our East Coast distribution center in southern New Jersey is on track to be operational in July. In fact, we held a ribbon-cutting ceremony just this morning, and have already begun receiving product.

Our overseas consolidation initiative is starting up this month, and we believe this will start to have a positive impact on our supply chain in the second half. I am also pleased with the progress we are making on all our systems initiatives, including the implementation of a new merchandising planning system later this year, which will help make us more efficient and nimble, strengthening the inventory management and improving product flow.

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

Thanks, Joel, and good afternoon, everyone. I will begin by reviewing our first-quarter results, and then discuss our outlook for the second quarter and full year of FY15.

Our sales in the first quarter of 2015 were $153.7 million, up 22% from the $126 million reported in the first quarter of 2014, with the upside versus our guidance driven by continued strength and performance of our new and non-comping stores. We ended the quarter with 385 stores, an increase of 62 new stores or 19.2%, from 323 stores at the end of the first quarter of 2014.

Comparable-store sales increased by 1.7%, compared to a 6.2% comp increase in the first quarter of last year. As we said last quarter, Q1 got off to a difficult start, given the weather impact in the back half of February, and early March, but solid performance for the combined months of March and April helped drive comps toward the high end of our guidance range for Q1.

Our Q1 comp increase was driven by average ticket, as the adverse weather in late February and early March impacted traffic. In addition, last year in Q1 we had the residual impact of lower ticket rubber band sales related to the loom trend. So, average ticket this year is more normalized in comparison.

Gross profit increased 21.1% to $47.2 million, from the $38.9 million reported in the first quarter of 2014. Gross margin decreased by approximately 20 basis points to 30.7%, in line with our expectations, and driven primarily by higher freight expenses.

When I refer to SG&A, operating income, net income and EPS for the first quarter of 2014, these are all references to adjusted amounts. There are no adjustments to the reported financial results for the first quarter of 2015. Please see the GAAP to non-GAAP reconciliation table in our press release for further detail on these adjustments.

As a percentage of sales, SG&A for the first quarter of 2015 deleveraged slightly to 26.1% from 26% in the first quarter of 2014. This deleverage was less than anticipated, due to our better-than-expected total sales performance, as well as favorability on certain expense line items, including the more cost-efficient marketing mix that Joel spoke to, which is funding our TV ad tests in Q2 and later this year.

Our operating income increased 14.7% to $7 million or 4.6% of sales, as compared to $6.1 million or 4.9% of sales in Q1 last year. Our effective tax rate for the first quarter of 2015 was 39%, compared to 37.7% in the first quarter of 2014, as a result of changes in state tax rates. We expect our effective tax rate for the full year of 2015 to be 37.5%.

Net income increased 18.4% to $4.3 million or $0.08 per diluted share, from $3.6 million or $0.07 per diluted share in the first quarter last year. We ended the first quarter of FY15 with $52.4 million in cash and cash equivalents, availability of $20 million under our revolving credit facility, and no debt.

Inventory at the end of the first quarter of FY15 was $119.8 million, as compared to $98.6 million at the end of the first quarter of FY14. Average per-store inventory at the end of the first quarter of FY15 increased 2%, as compared to the end of the first quarter last year.

Now I would like to turn to our guidance. For the second quarter ending August 1, 2015, net sales are expected to be between $182 million and $185 million, assuming a 4% to 5% comparable-store sales increase, and the opening of approximately 25 new stores. Earnings per share are expected to be $0.12 to $0.13.

As discussed on our year-end call, in Q2 we will see the most significant operating margin decline of the year for the following reasons. First, our new DC becomes operational late in Q2. And we expect to see associated year-over-year deleverage of approximately 100 basis points, given start-up and relocation costs, including approximately 50 basis points of depreciation, which is included in SG&A.

Second, we also expect deleverage of approximately 100 basis points resulting from compensation expense related to the leadership investments we have made since mid-2014, most of which falls in SG&A. And lastly, as we have said before, we will see a shift in marketing spend out of Q3, into Q2, resulting in deleverage of approximately 100 basis points related to the Q2 TV test that Joel discussed. These items will be partially offset by slight leverage in some other SG&A areas.

For the full-year 2015, we are increasing the guidance we provided back in March. Sales are expected to be in the range of $820 million to $828 million, with the comparable-store sales increase of approximately 3%. This full-year comp outlook continues to assume that our comparable-store sales increase in both the third and the fourth quarters will be approximately 3%. This back-half comp outlook takes into consideration the comparison against a healthy Frozen license business in Q3 last year, which came on the heels of a strong 9% comp in Q3 of 2013.

We now expect Q3 operating margins to be down slightly year over year, as we have further refined our quarterly cadence estimates for depreciation related to our DC transition, which resides in the SG&A line. This full-year sales guidance compares to net sales of $680.2 million for FY14, representing a growth rate of 21% to 22%. 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.

For the full year, we continue to expect operating margins to be down slightly versus 2014, given the new distribution center 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 distribution center 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 approximately $0.03 in EPS.

We expect the full-year effective tax rate of approximately 37.5%, and GAAP net income is expected to be in the range of $56.4 million to $58.2 million, or an approximate 18% to 21% increase over 2014, with GAAP diluted earnings per share of $1.03 to $1.06. Net income is expected to increase by approximately 16% to 20% over FY14 adjusted net income.

We are still planning CapEx at approximately $56 million for the year, reflecting the opening of 70 new stores, investing in distribution centers, system upgrades and corporate infrastructure. Included in our FY15 CapEx forecast is approximately $20 million for the new East Coast distribution facility, which we expect to be operational by the end of July. For more 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?

Thanks, Ken.

So, in summary, we are pleased with our overall Q1 performance, and the solid start to Q2. The entire team, including our great store associates, is focused and executing on all of the initiatives that support our strategic priorities, and I want to thank them for their efforts.

Let me reiterate: We are on track for our 70 new-store openings, and continue to see very strong performance out of our new stores. We are excited about our marketing mix changes that are designed to drive brand awareness and customer engagement.

Our merchandising teams are hard at work invigorating the worlds and assortments with even more newness and wow, to keep the stores looking fresh, and the product presentations compelling. And as such, we continue to operate the Business with a thoughtful, measured and disciplined approach. We are keenly focused on systems and infrastructure to ensure the foundation for this great Business is capable of supporting significant growth that lies ahead for Five Below.

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

Thank you.

(Operator Instructions)

We will take our first question from Dan Binder with Jefferies.

Good afternoon. It's Dan Binder. My question is around some of the tests you're doing on TV. Is there anything more concrete, in terms of statistics or data that you can share with us on what you're finding? And then, just as maybe as a follow-up to that, as you think about Q4 and ways to engage the customer beyond these TV tests, any early thoughts on what you can do either from a promotion or store event type initiative?

Yes, thanks, Dan. Regarding the TV, it's a little early to really give you any further statistics on the Q test. We shared on the last call the results from Q4, which we said, we're very pleased. It moved consumer awareness and it moved comp store sales.

We expect that -- those same results to happen here in Q2. And given that the TV test just started, I mean literally less than 48 hours ago, we really don't have any results yet on that. As for Q4, you can expect to give us, expect us to give you a little more clarity on that in our Q3 call. But it's safe to say, as we said, we're going to build a lot of our Q4 marketing around the TV test, based on what happens with our Q2 results, that like I said, started two days ago. And we'll certainly share a little bit more on that, as we get later in the year.

Great, thanks.

Thanks, Dan.

We will take our next question from Michael Lasser with UBS.

Good afternoon. Thanks a lot for taking my question. It's really two parts, maybe unrelated, but hopefully counts as one. The first is on the guidance for the second quarter, 4% to 5%, it would imply at the top end a nice acceleration on a multi-year stacked basis. So maybe you can walk us through some of the puts and takes that you're thinking about for the second quarter? How much did you factor in the response to the television advertising?

Plus I believe last year in the second quarter, started out a little slow as trends dropped off following Easter, so maybe you can give us more detail just on your confidence in the second quarter outlook? And then, Joel, you also mentioned the updated brand awareness study that you had done earlier this year. Can you give us an exact percentage of where you think your current brand awareness is? Thank you so much.

Thanks, Michael. On the first part of your question, in terms of guidance, 4% to 5% range, that's on top of the 3% comp last year in the second quarter. So you're looking at a two year stack of about 8[%] comp. And so, it's right kind of in the range of that 4[%] comp per year for us. Certainly, we baked in some thoughts on the TV test, as that is based on the results from Q4, and we're off to a solid start as I said for May here, as we go into June.

In terms of brand awareness, I think what I meant by the latest results we got in March. What we're continuing to see Michael is that our brand awareness, whether we're in a market two years or six years, the delta is less than 10 points in terms of brand awareness. And for a brand our size and in markets where we've been for that long, we believe we should have much higher brand awareness levels. And hence, the reason the shift into TV and digital, which is really where our core customer spends time.

So it's continued to see that. We look at that before holiday, we looked at it after holiday. We looked at it in the TV markets, before we started in the TV Markets, after, and we saw significant increases. So the numbers are about the same as they've been in the past. It's just that we need to move the needle in total. Ken, anything else to add on comp?

No. Michael again, as Joel mentioned, as we always do, look at our guidance, we see where we are up to this point, and then we also consider what's out ahead of us. And I think he -- Joel mentioned, we did bake in some upside around the TV. And as you probably know, we have been benefited by some good weather, and we're pleased with the results so far, in the beginning of the quarter and coming off of Q1.

Thanks, Michael.

We will take our next question from Charles Grom with Stern Agee CRT.

Hi, good afternoon. I am just going to dovetail off the last question. When we look at your AUVs, where do you think they can ultimately go, as you build the brand awareness? Because clearly, since the IPO, the rub on the Company is that your new stores don't have that traditional comp waterfall. But if your AUVs can continue to grow, then theoretically you do have a comp waterfall. So just curious where you think those AUVs can go over time? Thanks.

Yes, I think the issue with TV is more about -- a rising tide raises all boats. And so, I think that if we can significantly change the trajectory on brand awareness, it will impact new stores as well as existing stores. So I think that it's too early, Chuck, to have a sense of putting a projection on that. We are still in the early days of this test.

We're going to roughly be in about the same percentage of stores in Q2, as we were in Q4. And as I guided all of you on our last call, our goal is that we come out of holiday, and have a full plan on where we're going to go with our digital strategy. But to get there successfully, and to do it with the discipline that Five Below always does, we've got to get through this test, and we've got to get through an expanded Q4 digital test. And then, I think we'll have a good sense on where we think AUVs will go.

Thanks, good luck.

Yes, thank you, Chuck.

We will take our next question from John Heinbockel with Guggenheim Securities.

Hi, guys. So two things. On the TV test, it looks like the incremental cost is maybe a $1.5 million to $2 million. Is that about right? And then, how many markets, how often is that ad running? Is this broadcast or cable? And then, if cable, is it sort of cable-geared to your core audience Disney? And then secondly, more strategically, Joel, if you think about the worlds -- I don't know if you want to -- I could frame it one or two ways -- but when you look at the ones that are maybe not reaching their potential, where you see the most opportunity, what one or two worlds are kind of -- have the most head room to where you think they can ultimately be?

Yes, thanks, John. There's a mouth full in there, John. So let me try and get them, and you can come back at me if I missed it. I think you're about right on the TV test numbers. It's right in that range. In terms of markets, it will be nine markets. And in terms of the mix, it's roughly about 75% TV, 25% digital, somewhere in that range. And it's certainly, weighted towards cable -- when I say TV, but it's certainly a combination of cable and network. But about 25% of it will be digital, meaning things like YouTube and that.

In terms of worlds, John, what's great about this business is that it changes every quarter. I mean, the worlds balance themselves out. We certainly shared with you that crafts, games and style, we saw a lot of positive in. And I would say the -- if you had to pick -- if you press me on it, I think we could have done better in crafts and room. But you know what? That's going to change next quarter.

And in the nine months I've been here, John, you continue to see it change quarter after quarter. And I think that's what's so unique about this business, is those worlds help keep us relevant, as our [cycle] team changes from time to time. As for the TV test, it's only going to be in 13% to 15% of our stores for this second quarter. Did I capture everything there, John?

Yes, thank you very much.

Hey, thank you, appreciate it.

We will take our next question from Meredith Adler with Barclays.

Hey, guys. Thanks for taking my question.

Yes. You bet, Meredith.

I just -- I would like to talk a little bit about the stores you're opening in new markets. Are you seeing anything different in terms of the kinds of products people are buying, the patterns of when they buy? Anything that tells you that you need to be adjusting for different markets?

Yes, good question, but the answer quite simply is no. Florida is still in front of us. We certainly expect to see a different pattern down there, more from the seasonality perspective, but not from a type of product that we carry.

But quite honestly, as we move from market to market, we've seen similarities. I would say the one difference is, any time we see a hot new trend emerge, it tends to hit the coast first, and work its way inland. And but other than that, there's nothing that said we need to be thinking about different assortments by market (multiple speakers).

I'm sorry.

Go ahead.

I just wanted to follow-up, just with what you just said. Do you have the capability, if it seems obvious to not put that most hot trendy merchandise into the other markets as quickly? Do you have the technology or the capability to do that?

Yes, we certainly -- we have the ability already today to assort stores differently. We assort our classic stores, as an example differently than our large stores. Team sports is another great example. In our Texas market, in Dallas you're going to find the Cowboys, and here in Philly, you're going to find the Eagles. So we've already built -- have those capabilities built in.

Great. Thank you very much.

Thanks, Meredith. Have a great day.

You too.

We will take our next question from Christian Buss with Credit Suisse.

Yes, hello. I was wondering if you could talk about how much progress you've made in terms of the reset of the assortment? How far through that process are you, and has it been rolled out across all stores?

Yes. Well, first of all, Christian, I'd say, we're probably never going to be done. I mean, that this is a business that is always evolving. Michael and his team have already made an impact specifically, and the Now world is the example I talked about.

But I think as we get through the entire year, you will feel that impact touch each world. And the reason it takes the year is, it depends on if it's a domestically sourced world, versus sourced overseas. So each world takes different amount of time before you'd have an impact, it might be seasonality, et cetera. So certainly, by the time we roll through the holidays, you will begin to see an impact on the assortment across all worlds. But when we do impact the world, we do do it across the chain.

That's very helpful. Can I also ask about traffic and what you're seeing from the TV test that you're doing? Is it helping stimulate traffic in the markets that you're rolling it out?

Yes, absolutely. That's why as we saw in Q4, a healthy increase in comp store sales, and that was certainly transaction driven. I don't have any commentary on the second quarter here, as it literally got into market Monday night.

That's very helpful. Thank you, and best of luck.

Thanks, Christian.

We will take our next question from Paul Trussell with Deutsche Bank.

Hey, good afternoon, guys. Ken, on the gross margin, I believe you attribute it -- the decline in the first quarter, mainly to freight expenses. Could you just give us a little bit of detail around merchandise margins overall? What's your -- how you guys have been trending in terms of markups, markdowns? And just what are the factors that are going to impact that line item in Q2 in the second half?

Sure. Thanks, Paul. The -- as I said in the statements, the gross margin declined by about 20 basis points over last year, again driven by the freight expenses. A little bit more of a hangover from those -- the additional container costs that we saw from the West Coast port disruption that started back in Q3 of last year.

But if you dig in deeper, from a merchandise margin perspective, again consistent with what we've seen historically, excluding the freight component of that, that those were relatively flat year-over-year. And I think we've talked about this before, that we would expect to see that going forward, as we continue to invest in our scale in terms of product, as opposed to taking the costs there. So merchandise margins relatively consistent year-over-year.

That's very helpful. Thank you. And then, similarly just on an expense -- from an expense standpoint, like you said there's a lot of timing that is impacting the second quarter. If you don't mind, just give me a little bit of detail specifically, as we move forward to the second half of the year, on how you're going to be able to leverage -- what the comp is you're going to need to leverage in the back half?

Sure. I think, again, we had called out, from an overall performance standpoint for Q3 and Q4, Q3, what we're looking at now is a slight decline in operating margins. And again, that's more of some clarity around the transitional costs around the distribution center, specifically in SG&A and depreciation which we'll see, and that's probably the key driver there.

We've also said historically, that we'll start to see some of those leadership costs start to anniversary themselves in the back half of the year. And then, also the start-up DC costs that we're seeing in Q2, those should dissipate as it's embedded in cost of goods sold. So that's just a little bit more color, in terms of the back half of the year.

We will take our next question from Matt Nemer with Wells Fargo Securities.

Afternoon, everyone.

Hello, Matt.

First question is on your comments, Joel, around new store performance driving some upside in the quarter. I am wondering if you can provide a little color on whether that's coming from existing markets or new markets? And if any changes have been made to the stores, in terms of some of these recent states that you're going into or about to go into?

What was the second half again?

Have you made any changes to the store, in these newer states that you're going into?

Yes. I'll take the second half first, and then Ken, [maybe I'll let you give] some cadence on the upside in the new stores. Similar to what I was talking about with Meredith, we really haven't made any material changes to the -- what we're doing in new stores versus what we're doing in the rest of the chain.

As I talked on the last call, we made changes to the now section. We've done that in both our new stores, and we've done it in our existing stores. As for the new store performance, Ken, maybe you want to talk about the cadence and -- (multiple speakers)

Sure.

And what led to that upside?

Yes. We were -- as we noted, we were pleased with the performance of the new stores, and Matt, that was actually coming out of both new markets. So we had -- we opened up Alabama and Kentucky, but also in existing markets also, and we were benefited slightly from the new stores, from the timing of the new store openings. But again, performance was the key driver there, and we saw that in both new and existing markets.

Okay. If I could just ask one follow-up too. If we look at Frozen versus the licensed opportunities that you see this year, how do you think that lays out on a full year basis? Can you match Frozen with some of the movies that are coming out later this year? Thanks.

Yes. Matt, you're asking for a crystal ball there to kind of predict what's going to happen with the past. Frozen was a great license last year. But as you look at the history of Five Below, we've had several great licenses. So it's too early in the year to say what's going to materialize for the back half on licenses.

As you can recall, Frozen was non-existent in Q1 of 2014, and it turned out to have a large presence in the back half. So overall, we aren't materially worried about it one way or another. It was just a big license last year, and others will surely materialize as we go through the year here.

Okay. Thanks, and good luck.

Yes, thank you.

We will take our next question from Patrick McKeever with MKM Partners.

Thanks. Hi, everyone. So on the inventories up 2% per store at the end of the quarter, a pretty big decrease from where they've been running. I think they were up 20% per store at the end of the third quarter, and then up 7.5% at the end of last year. So maybe you could just talk about that, and how you've managed to -- I know the comp was a little bit -- the sales were a little bit better than expected, but there wasn't a huge variance there.

So just wondering how you are managing the inventories down, if that level up, let's say about 20% relatively in line with footage growth is where you'd like to keep them? Or if there are opportunities perhaps to continue to work inventories down and boost inventory turns?

Let me give you an overall color commentary, and I'll let Ken speak to the numbers exactly. But this is just a great example, Patrick, of the investment we've made in people. Eric Specter joined us last year as our CAO. Michael Romanko in here, now is our Head Merchant, and both those gentlemen have their teams focused on a disciplined approach to running our business. And it just says we're investing in systems, investing in infrastructure, we're investing in people to run this business with a disciplined approach, and grow it for the future. And those examples have made a difference. Ken, do you want to talk about?

Sure. Just Patrick, from a comparison standpoint, I think we've talked about in the past, we get affected by the timing of the imports, and the penetration of the imports. And I think if you go back to Q3, that high average store increase was really driven by getting around that West Coast port disruption, where we wanted to get the product in earlier to position us appropriately for holiday and for Q4. And I think you see us now getting into a little bit more of a normalized period.

I think we were in high single-digits in Q1, and now down to a 2% increase. So we feel good about where we are right now. It's a good level of inventory, especially given where we see the summer business, on where that needs to be. And again, we can in the future have some of those puts and takes, if there's changes in import troubles, and taking ownership of that inventory, and when it comes on the balance sheet for us.

Are you having any problems getting any specific products -- I guess I'm thinking -- and you did call out shopkins as a strong item in the quarter. Some of my checks haven't been -- it's found the inventory levels on those to be pretty spotty. So is that just an isolated incident with that particular item? Or any other issues that might be stemming from perhaps the -- in other areas of the store from the ports disruptions?

As we shared on the last couple calls, the West Coast port disruption had a relatively, extremely minor impact on Five Below. And so, any checks you may be seeing would certainly be an isolated incident. Any time you have a hot product that's going to be something that's in and out. But we're not having any supply chain issues that we control, in terms of fulfilling our store inventory levels.

Great, okay. Thanks guys.

Thanks, Patrick.

We will take our next question from Vincent Sinisi with Morgan Stanley.

Hi, this is Andrew Ruben on for Vinny. Thanks for taking the question. Is there any detail that you can provide on the entry into Florida? It looks like the initial nine stores are a little more spread out, compared to some of the clustered openings in some cities. So is there any color in your approach to entering the state, and how you look at the opportunity for expanding in Florida longer-term?

Yes, Andrew, the nine stores next week in the month of June will be largely in the Jacksonville, Orlando and Tampa metroplexes, and the stores we'll add -- the balance of the year will be largely in those marketplaces as well. So while not clustered on one day like prior ones, we are clustering largely in those three metros for the 2015 openings.

Thank you.

You bet.

(Operator Instructions)

We will take our next question from Kelly Halsor with Buckingham Research Group.

Hi, thank you for taking my question. Just a question about your more mature markets, like Pennsylvania and New Jersey, for example. What inning are you in there with the store growth plans? And I think, as we look at those markets as benchmarks for the trajectory of your newer markets going forward, have you seen any changes or differences in those performance of those stores from a traffic or a new store productivity perspective?

Yes. Certainly, our Philadelphia Markets probably in one of our most built-out markets, but we continue to see opportunities in -- to open new stores there. We're going to open one, as an example here in Center City Philly later this year, and we still see opportunities emerge as we go forward.

So you have to balance these existing markets, with the need to continue to expand into new markets. And you'll roughly see us continue down that path over the next several years of expanding. And in this case for 2015, six new states, and we'll backfill into states as real opportunities present itself. I think all signs, Kelly, would still say that we haven't seen anything that would limit our growth below the [2,000] mark that we've shared with you a number of times.

Okay, great. Thank you. And just secondly, you talked about the merchandise changes that the new team has made, and I think you talked about the cross-selling initiatives. Could you just give us any specific examples of what we should be seeing in the stores? Is it better product, is it sharper price points, if you could just elaborate on that please?

Yes, I think it's a combination of all of those. We're always going to be sharp on the price point, and the team is really focused on newness, wow, value for our customers. Examples in the Now area is, you might -- you will see now in there apparel and tech items in the Now area, as well as the traditional items like in inflatables, boogie boards, beach towels. So it's really bringing that holistic approach to everything somebody is going to need to have a great summer experience. And we'll pull from whatever world is necessary to kind of cross-merchandise, and bring a more holistic approach together.

This does conclude today's Q&A session. I will turn the call back to Joel Anderson for closing remarks.

Thank you. Appreciate the time you've given us to share our Q1 results with you, and we look forward to our sharing the Q2 with you in the months to come. Thank you. Have a great day.

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