Five Below Inc (FIVE) 2015 Q2 法說會逐字稿

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

At this time, I'd like to turn the call over to Ms. Farah Soi. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thanks for joining us today for Five Below's second 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 on our website at fivebelow.com. I'll now turn the call over to Joel.

Thank you, Farah, and thanks, everyone, for joining our second 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 to have delivered Q2 earnings per share of $0.13, at the high end of our guidance range. Total sales grew 19.5% to about $182 million, which is at the low end of our guidance. Comp sales grew by 3%, making this our 37th consecutive quarter of positive comps. I will discuss our sales performance in more detail in just a moment.

During the quarter, we opened 32 new stores and entered three new markets, with three stores in Kansas City, one store in South Carolina, and 11 stores in the highly anticipated market of Florida. We are very pleased with the initial performance of these Florida stores and look forward to expanding our presence in this market, as we believe it offers significant potential for future store growth in the years to come.

While not evident from our overall sales results for Q2, we had a very strong start to the quarter in the month of May. And also ended on a solid note in the month of July, with customers responding positively to our summer product and overall offering.

The weaker sales performance versus our guidance was concentrated in the latter half of June, which we believe was largely attributable to the following two one-time factors. As I shared with you on our Q1 call, we believe there's an opportunity to reduce our historical reliance on newspaper circulars and increase our digital mix to drive store traffic.

As part of our test and learn strategy, we shifted one of our circulars in Q1 to a purely digital ad with minor sales impact. In June, we made a similar decision to remove another circular and test a digital-only summer campaign ad that anniversaried a print ad last year. Unfortunately, the results were different this time, and impacted our sales run rate.

Our digital strategy is extremely important, and we remain excited about the potential to harness the power of email, digital advertising, and social media in order to expand the reach of the Five Below brand. However, out of this test, we learned that newspaper circulars will continue to be an important complement to our digital marketing efforts in key seasons like Easter, summer, and holiday, and we have incorporated these learnings into our plans for the second half of the year.

Secondly, and unrelated to this marketing change, but occurring at the same time, sales performance in the middle of Q2 was impacted by a brief and temporary delay in store receipts associated with the move out of our existing East Coast DC. We believe the combination of these two factors accounted for total Q2 sales coming in at the low end of our guidance in the comp sales shortfall versus our guidance.

It has been a year since I joined Five Below, and I believe the fundamentals of our business our strong. Our associates and management teams are engaged and focused and the progress we have made on our strategic initiatives is on schedule and within budget. Let me give you an update on the short-term and long-term progress we are making on these initiatives.

Number one, new store growth. Executing against our 2,000-store opportunity in the United States remains our number one priority. Through Q2, we opened 51 stores in both new and existing markets, on our way to our targeted 70 new stores for 2015.

We have also made significant progress and are on track for the 85 new stores we have planned for 2016. We continue to be pleased with the performance of our new stores, which will remain our biggest source of profitable growth.

Number two, merchandising. Our summer set was well received and was one of the key positive contributors to our Q2 sales performance. Other worlds that did well in Q2 were sports, candy, and tech.

I would also highlight that we are seeing our licensed product continue to gain momentum. We believe the merchandise you will see in the back half is fresh, compelling, and trend right with ample wow for our customers. I am pleased with the progress our merchandise team is making as we head into the holiday season.

Number three, our new East Coast distribution center. I am very excited to announce that we have fully transitioned to our Pedricktown distribution facility and have ceased operations in our Newcastle facility. This new 1 million-square-foot DC, which replaced our 400,000-square-foot facility, will support our ongoing East Coast store growth for years to come and will enable us to move our product more quickly and efficiently than we have in the past.

Number four, marketing. As part of our ongoing efforts to optimize our overall marketing efforts and increase our digital marketing reach, we conducted another TV advertisement test. This test was in nine markets, reaching about 15% of our store base, roughly equal to the reach of our Q4 test last year.

We are pleased with the results which were similar to what we saw with the prior test last year. We plan to complete our TV test phase this holiday season, and expect to be in a position to discuss our go-forward strategy early next year.

And number five, systems. As I said to you at the beginning of the year, implementing new systems that allow us to successfully scale our business is another key priority.

This month, we expected to installed our new merchandising financial planning system, another key step in our phased system upgrade, following the successful installation of our new merchandise allocation system last year. This system, which is scalable to support our growth initiatives for both stores and eventually e-commerce, will help enable our merchandise planning organization to make better informed inventory investment decisions in 2016.

Looking ahead to the back half of the year, we are currently in the midst of our back-to-school campaign, and we will be transitioning to our Halloween set later in September. Overall, I am very pleased with the assortment we have planned for the remainder of Q3, as well as the key holiday season. Our merchant teams have worked hard to ensure that we have the right amount of newness and freshness in the stores, and I think you are going to really like what you see in the stores this holiday season.

So in summary, second quarter provided us with a good opportunity to further test and learn from our digital initiatives and fine-tune how we reach our customers. We have factored these learnings into our go-forward plans without impacting our full-year outlook.

Our new distribution center in Pedricktown is up and running extremely smooth, and we are making progress on our other initiatives which will allow us to continue scaling the Five Below business. I believe we are well-positioned to deliver on our goals for 2015 and beyond.

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

Thanks, Joel, and good afternoon, everyone. I will begin my remarks with a review of our second quarter results, and then discuss our outlook for the third quarter and full year.

Our sales in the second quarter of 2015 were $182.2 million, up 19.5% from the $152.5 million reported in the second quarter of 2014. We ended the quarter with 417 stores, an increase of 64 new stores, or 18.1%, versus the 353 stores at the end of the second quarter of 2014.

Comparable store sales increased by 3% for the second quarter of FY15, as compared to a 3.2% comp increase in the second quarter of 2014. This comp increase was driven by an increase in comp transactions.

Gross profit increased 17.5% to $59.8 million, from the $50.9 million reported in the second quarter of FY14. Gross margin decreased by approximately 50 basis points to 32.8%, in line with our expectations, and driven primarily by increased expenses associated with the start-up and relocation of our new distribution center.

As a percentage of sales, SG&A for the second quarter of FY15 increased to 26.5%, from 24.6% in the second quarter of FY14, due primarily to the TV advertising test Joel discussed, as well as compensation expense related to the leadership investments we have made since mid-2014.

Our operating income decreased 13.3% to $11.6 million, or 6.3% of sales, from $13.3 million or 8.7% of sales last year. Our effective tax rate for the second quarter of 2015 is 37.1% compared to 37.6% in the second quarter of 2014. Net income decreased 15.1% to $7.1 million, or $0.13 per diluted share, from $8.3 million, or $0.15 per diluted share last year.

We ended the second quarter of FY15 with $60.9 million in cash and cash equivalents, availability of $20 million under our revolving credit facility, and no debt. Inventory at the end of the second quarter was $123.8 million, as compared to $106.7 million at the end of the second quarter of last year.

Average per-store inventory at the end of the second quarter of FY15 decreased 1.8%, as compared to the end of the second quarter last year. This slight year-over-year decline was due primarily to the later shift in this year's back-to-school selling season.

Now I would like to turn to our guidance. For the third quarter ending October 31, 2015, net sales are expected to be between $164 million and $167 million, assuming a 3% to 4% comparable store sales increase and the opening of approximately 16 net new stores. This 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.

As we said last quarter, we expect Q3 operating margins to be down slightly year-over-year, driven primarily by depreciation related to our new distribution center transition which is included in SG&A expense. Earnings per share are expected to be $0.06 to $0.07.

For the full year 2015, we are reiterating the guidance we provided on our Q1 call. Sales are expected to be in the range of $820 million to $828 million with a comparable store sales increase of approximately 3%. This full-year comp outlook continues to assume that our comparable store sales increase in the fourth quarter will be approximately 3%. 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 net 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 cost 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 to be 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 net new stores, investing in distribution centers, system upgrade, and corporate infrastructure. Included in our FY15 CapEx forecast is approximately $20 million for the new East Coast distribution center.

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.

Thank you, Ken. So in summary, we are pleased with our earnings performance for the quarter, and so proud of our associates and the great job they continue to do day in and day out. We continue to make great progress against all of our strategic priorities, including store growth, talent, merchandise, systems, and infrastructure as we position this great business for the long runway of growth that lies ahead.

I believe we are ready for the holiday season, and we are extremely focused on executing against our plans. As I look at the core fundamentals of the business, I am energized and excited about the future of Five Below.

Let me conclude by reiterating what I said earlier. I believe the merchandise you will see in the back half is fresh, compelling, and trend right with ample wow for our customers.

Thank you for joining us today, and we look forward to speaking with you again in December. Now I will turn it back over to the operator to open up for questions. Operator?

Thank you.

(Operator Instructions)

John Heinbockel with Guggenheim Securities.

Hey, guys. It's actually Steve Forbes on for John today.

Hi, Steve. How are you?

Very good.

As it relates to the licensed merchandise, I believe the Star Wars SKUs hit the stores in early September. I guess, is that right?

And then, can you provide any color on the assortment? Will it will be across the various worlds? Should we expect to see a display like we did last year for Disney's Frozen?

As I said earlier in my remarks, we like the trend we're seeing overall with licensed merchandise, Steve. And certainly, Star Wars is going to be a part of that assortment. It is just now coming into the stores. In fact, none of the new assortment is in there yet, and is not even allowed to be sold yet.

So that will be coming in early September here. And as I said, our overall assortment for license looks really good for the back half.

Okay, thank you.

You bet.

Dan Binder with Jefferies & Company.

Hi, it's Dan Binder.

Just on the marketing test, I'm just curious if you could maybe just give us a little bit more insights or thoughts on why you think the cut in the circular didn't have an impact on Q1 but did in Q2? And then, as a result of that, how does your marketing spend look for the balance of the year versus what you originally thought of their -- are there shifts that we should consider in that?

Yes. Thanks, Dan. I'll let Ken comment on the overall shift.

As I've been saying to all of you for the last several times on the call, we're going to keep testing and learning as we go through this marketing transition of our strategy, and how we communicate with our customers.

And the first step we took of that was in the first quarter, and we did eliminate a circular there, and as I said, we saw very little decline in sales. And certainly, we then tested that with another circular here in the second quarter.

I think the learnings we got out of that is we understand clearly now that there are certain times of the year in key holiday periods, namely Easter, summer, and certainly, the fourth quarter, that it's important to us that we continue to communicate with those circulars. And I think the one we cut out in the summertime was in one of those key periods, and that was really the difference between the two in first quarter and second quarter.

Right. Okay. Thanks, I was just wondering --

Oh, and then -- yes, you were asking about the shifts and stuff. Ken, do you want to --

Sure. Dan, just on an overall basis, total marketing, we expect to be similar to what we planned for the full year. So on a full-year basis, we don't see any change there. And, again, we had always planned to have circulars in that back part of the year especially Q4.

So there are some slight shifts in Q3 and Q4 but not really that material. So we are able to execute to this plan still under our -- the guidance that we had provided in terms of total marketing spend for the year.

Did I cut you off on something there, Dan?

I was just going to ask you just as a follow-up question on the new store productivity. Was there anything about the timing of the store openings year over year? Just looked like the new store productivity might have been a little bit lower than where you had been in recent quarters. I didn't know if that had to do with the product delays or the timing of the openings? But any color on that would be helpful.

Sure. As Joel mentioned, Dan, we're really pleased with the performance of the new stores. And I think there's a couple things there, you hit on one of them. We did open up a number of stores towards the end of the quarter in Q2, if you recall, we guided to 25 and opened up 32.

So some of those additional ones came on late in the quarter. But also, the new stores were not immune to the two one-time factors that Joel had called out around marketing and distribution. So that also impacted their productivity in Q2.

Great. Thank you.

Thanks, Dan.

Charles Grom with Sterne Agee.

Good afternoon. This is actually John Park on for Chuck. Thanks for taking my question.

I guess first, how have the back-to-school categories performed thus far in 3Q?

Yes. So back-to-school, we are still in the midst of it, as I said on my earlier comments. With the later Labor Day this year, and clearly us continuing to see our customer buying closer to need, we are still in the midst of our back-to-school campaign, and I think we'll have much more color on that as we get through the end of next week.

Got it.

And then, just switching gears a little bit, I guess. What kind of increase did you guys see on your brand awareness scores where you guys did a TV test here in 2Q?

Yes. You're right. The two things we're really tracking on the TV test that we're doing is the ability to move our brand awareness, as well as to move comp. And like our Q4 test, we saw similar movements in both of those.

We really need to get through this Q4 test, John, before we can really kind of lay it all out for you and spell out the exact trend we're seeing. But it's safe to be said that the results we saw in Q2 were positive and in line with what we saw in Q4. Enough so, that you'll see an expanded TV test from us in Q4.

Great. Best of luck.

Thanks, John.

Thanks, John.

Meredith Adler with Barclays.

Hi, Meredith.

Hey. How are you?

So I was wondering if you could talk a little bit about the container consolidation? I know that that is now in effect, and I'm wondering whether, given how much time containers are on the water, whether that has had any impact yet or sort of how you see those benefits playing out?

Yes. We did just complete that here in the second quarter. And we will really need, through the back half of the year, to quantify the benefits.

Clearly, it will give us flexibility to manage our inventory, and as we continue to increase our overseas penetration, that will be a go-forward benefit for us. And it's just too early to think about quantifying those yet at this point, Meredith.

Okay. And then just real quickly, on the openings you did in Florida, which you said were very good, is there something about having opened in the summer, or the fact that you have such a nice assortment of summer seasonal merchandise, do you think of that had an impact? Did you talk to customers, what were they saying about the product offering?

Yes. I don't think it was necessarily because we opened in the summer. If anything, it -- I think our customer base knows us a little bit more in Florida from having such a great presence in the East Coast.

We had some good marketing to get off to a good start, and I think, overall, it's a big opportunity for growth for us, as we haven't even penetrated the South Florida yet. But I don't think it had -- really had anything to do specifically with the season.

Okay, great. Thank you.

Thanks, Meredith.

Taylor LaBarre with Stifel.

I'm sorry, who?

This is Taylor LaBarre of Stifel. Thank you, and good afternoon.

Just wondering if you think about the holiday quarter and the marketing test you've been doing and how they'll continue to evolve. If you think about marketing the last year versus this year, what are some of the key differences that will be in place for this year? Obviously, next year you'll have a more robust strategy. Maybe from just a timing perspective if nothing else?

Yes. I think it's a little too early for us it to unveil the specifics of the marketing this far in advance for competitive reasons. Having said that, you should expect to see our digital marketing efforts really continue to grow year over year from where we were last year. The teams have made great progress on that.

As I said a few minutes ago, TV will be expanded from last year. And at the same time, we're still in the TV test mode. I think one of the things we need to test is TV in a larger market, and you'll see us do that for the first time this holiday season.

Great. And then, as you look into next year, if print circulars turn out to be more valuable than maybe you originally had guessed, if the answer is print circulars as well as increased exposure to TV and digital, would you be open to increasing marketing spend as opposed to just shifting from one medium to the other?

Yes. Certainly, be open to it, but I'm more inclined to say, let's keep print circulars focused on those key holiday times. And remember, from a -- we've said we're going to hold marketing from an absolute percent basis, but with our growth, our absolute dollars will continue to expand, and that will allow us to continue to fund digital strategy at the rates we need to do. But to -- the specific you asked, I think as we get to this Q4 test, we will come back to you with detailed specifics next year.

Great. And then just one last question on the new distribution center, depreciation will pressure that a little bit short term, but how should we think about the cadence of the cost of goods sold efficiencies out of that facility? Is this something that will continue to mature and give incremental efficiencies as more and more stores are added, or is it more of a one-time step up?

Yes. Ken, do you want --

Taylor, I think we would expect to see that as we continue to utilize that distribution center more fully and ramp up and see improvements in productivity and other areas from a leverage standpoint. But, again, we just opened that up and it's now fully operational, but as we continue to move forward, I think we should expect to see some leverage on the DC.

And, Ken, I'll just add, and, Taylor, we remind everybody, I think we've said to you before that the two DCs now give us the capabilities of servicing upwards of 700 Five Below stores, so it does give us some great growth capacity.

Thanks, Taylor.

Michael Lasser with UBS.

Hello, Michael.

Hi, Joel, how are you? Thanks for taking my question.

You bet.

Thanks for taking my question.

So I have a lot of focus on the marketing, why do you think circulars are more effective at certain times of the year? Is it because you are lighting up some products that are seasonally relevant and they are resonating to the consumer?

And along those lines, is it that commercials are not as immediately productive as circulars and they will be over the long term? Or maybe just not be as productive at all or as circulars?

There is a lot in there, Michael, and let me tell you a couple things. First of all, you got to remember that TV is still in a test mode, so you can never expect a chain-wide circular to compete with a TV test that's only in 15% of your market. So that's one thing to keep in mind, so it is not whether one is more effective than the other. You're comparing apples and oranges.

The second one is, let's forget that -- not forget that the circular is still relevant for mom, and Five Below is a destination at certain key seasons. And that's probably where the traditional circular works when you're thinking about the destination, and that's what Five Below is at Easter, at summer, and certainly, the all-important fourth quarter.

And then, on the expense side, I think you were expecting 300 basis points of margin deleverage in the second quarter, your comp was a little light, but even so, out performed your expectations. So what came in better than you anticipated?

Yes, Michael. So we had the -- those delevers that we spoke about around the DC, around leadership investments in marketing in that SG&A area. They did come in a little bit lighter, the deleverage, offset by some corporate expense savings.

Okay. Merch margin, how did that trend in the period?

Again, excluding all the other puts and takes here, merch margin was relatively consistent year over year.

Thank you so much. I appreciate it.

Thanks, Michael.

Paul Trussell with Deutsche Bank.

Good afternoon.

Joel, I think it's certainly been determined that same-store sales is really not the most important contributing factor to Five Below's P&L algorithm, but it certainly is important to investors to just make sure they have a handle on same-store sales cadence and the go -- the look -- the go-forward period, how to forecast it. So if you can just help us feel more comfortable with the 3% to 4% comp guidance for 3Q, and roughly 3% for 4Q, that would be helpful. Whether there's any shifts or changes that we should be aware of, which products and categories, perhaps, you are most excited about, and in particular, just how are you coming to market for back-to-school and the holiday?

Yes. Clearly, Paul, we don't take same-store sales lightly, and try to give you a really clear guidance of where we are going to be. But you're right. The growth of Five Below for the next several years is largely going to come out of new store growth, and we see that not changing at all.

Clearly, when we give you guidance on comp store sales, we expect to be within that guidance, and we -- remember my comments to you. We had a very strong start to the second quarter, and we finished very solid in July. Those combinations, and then, obviously, looking at our trend in June, is really what allowed us to guide to a 3% to 4% comp in the third quarter.

And it's also important to remember, Paul, this is our 37th consecutive quarter of positive comps. So in all cases, I think, you should remain very confident on the positive comp guidance we're giving you. And I think 3% to 4% is reasonable and is grounded in past trends that we are seeing, and then forward-looking at which departments are trending appropriately.

And, Paul, I'll just add to that. I know there's always the look back in terms of the prior year comp, and that 3% to 4% is up against a 1.5% comp from last year's Q3. That was coming off of a very strong quarter in third quarter in 2013 of a 9% comp when we had that rubber band trend. So I think if you also look at it on a multi-year level, it makes sense given where we've trended so far this year.

Got it.

And earlier this year, you spoke to 2016 being a year in which, I believe, margins could expand, especially as you cycle the opening of the distribution center and some of the other investments being made. Do you continue to see that opportunity as we look forward? What would be the comp needed to have margin expansion, and what are the buckets that will drive it?

Well, we'll get into more detail on 2016 as we get through this year, obviously, on our Q4 call, and we'll be able to provide that. But as it stands right now, and you're right, we've said that we would expect to see the margin expansion and a certain increase in bottom line net income as we go into 2016, as we come off of these investments that we've made.

And they could come from various areas, but we're not in a position at this point to talk about where they'll come from. And around the comp, I also think, we said since the IPO, we've spoken about that 4% comp as a tipping point, and I think we're in a position now to say that we would expect to see some leverage below that point, whatever that point may be.

But, again, all those details, let's get through 2015 and we'll be able to speak to those more clearly as we get to the end of 2015 and give you our guidance for 2016.

Thanks, Paul.

Matt Nemer with Wells Fargo Securities.

Hello, Matt.

Good afternoon. Thanks for taking my questions.

So first, it seemed to us like you were more active, and I guess, in some ways a bit more promotional on email this year. For example, you ran a two for $1 school supplies promotion that we didn't see last year.

I'm just wondering if you can kind of help us read that, read that as it was planned and it's part of your move to digital, or it was more of a tactical move in the quarter to drive traffic, and whether or not it worked?

Yes. You shouldn't read into it any more than that was planned. We continue to use digital, especially when we are really highlighting our new seasons and what's going on in wow, and there was nothing overly tactical about that.

Okay, that's helpful. And then just a quick follow-up.

Given your excitement about the Florida stores, I'm just wondering if those stores are set up in their pro formas to be much higher average unit volume stores over time? And I realize that'll probably vary kind of store by store. But just in general, are those markets where the occupancy is a little higher and they're going to be sort of big volume stores from your standpoint?

In general, Matt, they are really consistent with the rest of the chain, and there's nothing unique about them that we are setting them up to be higher than our other markets.

Okay, great. Thank you so much.

But you bet. Thanks, Matt.

Tom Filandro with Susquehanna Financial Group.

Hey, thanks, gentlemen.

Just on the DC delays, I just want to be clear, are you experiencing any delays in the back-to-school set? Because we've actually witnessed some out of stocks in-store that could be from outsized performance.

And I hate to harp on this marketing, but I just want to circle back to, if you could help us better understand maybe the plans in the second half for paper versus digital circular so we can think about framing what the likely impact might be on that comp trend. And then the final piece is, just to be clear, are you saying that the comp guidance that you provided for the third quarter is reflective of what you are currently seeing in the business? Thank you.

Yes. There's a mouth full in that one question there. Let me see if I can tackle that. Let me start with the DC and be really clear.

The new Pedricktown DC -- I've seen a lot of DCs come up in my lifetime. It is doing extremely well, and I am pleased with how well and smooth it's running. So any out of stocks you may be seeing are isolated and would be a one-off for that particular store. We are not seeing any chain-wide outages or things related to the DC.

What I talked about in my prior remarks was strictly responding to when we went through the transition from the old distribution center into the new facility. But the new one has been up and running for well over a month now, and we're not experiencing any delays associated with the DC.

In terms of marketing, you want to repeat what you were asking there?

So the question I'm trying -- I think we're all trying to understand since you have eliminated, you went to a full digital circular, what are we looking at comparisons in the second half where you have, I don't know, five circulars that are paper this year, last year, and four of them will be digital this year, what's the year-over-year comparison?

Yes. The year-over-year comparison -- let me just specifically focus on the fourth quarter because that's really the important quarter.

Okay.

We will have the same amount of circulars this year as we did last year. And, in fact, I'd go so far as to say we really weren't contemplating cutting circulars in the holiday season. That's an important season for us and we hadn't expected to cut those. And certainly what happened in second quarter confirmed that that was the right strategy to stick with.

Now had the second quarter performed differently, we might have looked at doing a different strategy. But that was built into our original plan and that's where we're staying.

A very helpful, and just on the third-quarter comp to-date comment?

We put a lot of factors in when we give you comp guidance. And it's, obviously, looking at where we're at as we sit here today, and then forecasting what we see for the rest of the quarter based on the trends of our business. And both those factors played into the guidance that we've got coming for you.

Obviously, with the shift of Labor Day, this coming weekend is -- will be significantly above our comp guidance range, while last weekend would have been a below. Netting together, that's factored in as we give you the overall comp for the fourth -- or the third quarter.

Very helpful. Best of luck.

Yes. Thank you.

Thanks, Tom.

(Operator Instructions)

Vincent Sinisi with Morgan Stanley.

Hi, thanks very much for taking my question. Good afternoon.

I wanted to ask, I know you said that the Florida stores have been doing well, but can you give us any further details around, was there anything notable to call out from a geographic performance perspective and/or from within the given worlds within the store?

Yes. I think it seems like certainly in my short-term tenure here, we've always had the pleasure of announcing a new state or market to you, and the announcement of this Florida opening is consistent with other ones.

So I think what that means for the Five Below brand is, as we continue to expand 26 states now, we see consistency in our performance across new states, new markets, as well as we continue to infill. I call out Florida specifically because it, like our entry into Texas a couple of years ago, will be a large market for us as we go forward in the years to come, and I wanted to reassure you that we didn't see any concerns going into Florida.

Okay. And then, just on the worlds part of that question, was there anything from a category standpoint that stood out in one way or another?

Nothing that stood out. Clearly, you would expect summer to last longer there as we kind of go to the fall here and it remains hot to down there, but we opened in the summer. As you know, it's a strong season for us across our entire chain, and certainly Florida echoed that.

I think, as we go through a full year with it, we'll probably see different performance in the worlds, as winter will be less meaningful, we'll have a different assortment in those stores. But nothing of note at this point in time because we really are -- just been open through the summer season.

Okay, thanks, Joel. And if I could just slide one fast one in here, I am sure we all have our own calculations, but new store productivity by your calculations, what was it this quarter?

Depending on whether you do it averages or end of year, it's off from, obviously, the 100%, which puts you probably in that 80% to 90% range -- 88% to 90 % range, sorry.

Okay, great. Thanks, Ken.

Yes. You bet. Thanks, Vinnie.

Matt McGinley with Evercore ISI.

Good evening.

My first question is on -- a balance sheet one, you said your inventory growth was light driven by that back-to-school shift and that caused the inventory per store to drop, but at the same time, you had a big surge in payables in the quarter. What caused that inventory growth to drop but the payable to go up so significantly?

Yes. The payable side of it was just the timing of some of the merchandise payment that took place at the end of the quarter. So just a timing issue there that you are seeing the increase in accounts payable. And, again, for the inventory piece of it, that slight decline, I think it was about 1.8%, due to the later shift in the back-to-school season.

Okay. And on the DC, you have a lot of moving pieces within the second and third quarter as it relates to that, the one in the second quarter you had all these start-up costs associated with getting this thing up and running and for a while having two open at the same time. But then you have the ongoing cost of running this DC going forward. So my question is into the third quarter, should we expect a dollar drop in SG&A sequentially? And would the EBIT margins still be down in the third quarter?

Well, I think, yes, we did say that EBIT margins should decline slightly and primarily driven by the distribution center. And really, it's the depreciation that's embedded in SG&A, so that's really the key driver that we look at that's driving that slight operating margin decline in Q3.

Slight. Okay. Thank you.

Thank you.

Scot Ciccarelli with RBC Capital Markets.

Hey, guys. Scot Ciccarelli. Can you help quantify the impact of the one-time items that you have already outlined?

I think what I've said to you during my earlier remarks, those two one-time probably represented why we came in roughly at the low end of our guidance, as opposed to being closer or above the high end. And was the difference between our comp store guidance and where we actualized the 3%.

Okay. So it's versus the high end, so call it a $3 million plus impact?

Roughly.

Okay, got it.

And then, there are some other companies that kind of experienced a bit of a funky slowdown in the month of June, also saw a bit of a rebound in July. Do you think you were impacted by any of that, and kind of let's call it the broader macro environment, or are you comfortable that the sales impact was from the discrete items that you mentioned?

Clearly, if we got impacted by some of those broader macro, it was buried at the same time of when we know we made a couple self-inflicted changes to the way we ran the business with the elimination of the summer circular. But I would say, we believe it was largely these two that contributed to the June sales run rate change that we explained to you.

Got it. All right. Thank you very much.

Jeremy Hamblin with Dougherty & Company.

Good evening, guys. Thanks for taking my questions.

Sorry to harp on these issues, but just if we could maybe hone in on this difference in the comps in Q2, with the -- let's call it a two-week period with the change in the circular ad. What kind of discrepancy did you have in those two weeks versus the rest of your quarter on your comps? Could you quantify that?

Yes. Jeremy, I guess the way I'll quantify it is just to reiterate to you, our May trend was very strong. And, I guess, the take away is above our guidance, and we finished in July very strong. And so, you can take that away of what the impact would have needed to be in that time period.

I think we've given -- I try to be as transparent with all of you as much as I can, and we've gone into a lot of detail, and I hate getting down to the weeks in where we are at, but we want to be transparent with you and share the time period in which something happened, and at the same time, reiterate, these are one-time events, and those are behind us and it's what allows us to be back in guiding in the 3% to 4% range for the third quarter here.

Okay. And then, just similar type of question, but in terms of the East Coast stores that may have been, or that probably were impacted by the delays in inventory receipts, Ken, could you call out, how did the stores that are serviced by your Olive Branch DC do in terms of comp performance? What was the disparity between those set of stores versus the one serviced by the new DC?

Yes. I think, Jeremy, the -- obviously, the stores that were being serviced by the East Coast facilities during the transition -- those were the ones that would've been impacted by this issue.

I don't think we're going to give out any kind of comp details between regions or distribution center performance. But, needless to say, obviously, it was the stores that were serviced by the East Coast that were impacted in that one time, kind of brief and temporary store delay in receipts.

Okay. And then just one other quick one here, on your guidance for the year, and what you are guiding to on new unit openings, it looks like, by my math, you're going to have three units open in Q4.

My assumption is that that's going to be -- they're going to be open early on in Q4, which I think you typically have. And, in the prior few years, you really haven't been opening stores in Q4.

As we look forward, is there likely as you -- the total number of stores increases, are you still going to have most of the openings, the vast majority, in the first three quarters, or should we be thinking about Q4 now having, let's say, a handful, or maybe even more than a handful of openings?

Yes, I think, as you've seen from us in the past, the overwhelming majority of our stores open in the first three quarters. We want to stay away from Q4 given all the activity around the holiday season. Store openings always depend on the timing of construction and some other things, so they are always planned to open up in the third quarter and prior, but things can slip.

So we may have a few that happen in the early part of Q4. And when we do open in Q4 it is always within like the first week or two. But go forward, again, the majority of store openings are still going to be in Q1 through Q3.

Thanks, guys. Best of luck.

Thanks, Jeremy.

Christian Buss with Credit Suisse.

Yes, it looks like you had fairly tight control of inventories coming out of the quarter. Could you talk about your comfort with composition of inventories? And is there any shortness of inventories in the stores right now?

No. Christian, we feel good about that. I think that's just another good example of the disciplined approach Five Below takes towards everything. And you saw that with our ability to still deliver at the high end of our guidance at $0.13. But no concerns over inventory, outages, or overages for that matter.

Thanks.

Yes.

And does the lack of response to the marketing campaigns shift the way you think about giving guidance on a go-forward basis because it lets a little more conservatism here?

Well, certainly, if we are planning to do any extreme cutting like -- to expand on what we did in the second quarter, but I think for we're guiding right now, this is in line with what we had said to you earlier, approximately 3% for the fourth quarter. And that hasn't changed.

So we gave you that guidance before the second quarter event and were giving it to you now. So it's roughly the same thinking.

Okay. Thank you very much and best of luck.

Thanks, Christian.

Kelly Halsor with Buckingham Research.

Hi. Thanks for taking my question.

Could you help us understand a little bit more about the cadence of 3Q as it relates to back-to-school? How big is August as a percent of the quarter? And just given the calendar shifts that have occurred this year with the later back-to-school, and also some tax-free holiday shifts out of July and into August, do you see any impact of that on your store traffic this year?

Yes, the impact in Q2 versus Q3 was very minimal for us. We've always been later and closer to the event. And there was a couple states where our states are that moved out of Q2 and into Q3, but it had a very minor impact, and hence, we didn't even call out the difference in Q2 versus Q3.

As I said to you earlier, we are seeing the trend of buying later and later and closer to the event. And then, clearly, with Labor Day also being later, we are still in the midst of our back-to-school period and will be through the balance of this week and into September.

And just any color around how big back-to-school is, or August, or how you quantify that as it relates to the entire quarter?

No, not specifically on that, Kelly. Back-to-school is another season for us, but it's not overall more meaningful than any other category or world we've got going in the third quarter here.

Okay. And then just, secondly, just a broader picture here, just in terms of attachment rates that you observed historically when you have had discernible traffic driving trends, it seems like there are some things that are working for you.

So in the past when you've seen trends kind of play out and people coming to the store to seek out items, do you have any quantification around particular attachment rates and how it relates to comp growth?

None that I am willing to share. I would tell you what's great about this concept is the engaging, compelling, exciting experience our customers have when they come to the store. Our associates are always great at engaging with our customers.

I get letters every day of customers talking about a great experience with that. And, certainly, as part of that, our associates are focused on units per transaction and -- but overall, a large percentage of our comp this past quarter was transaction driven.

Okay, thank you very much.

You bet.

Patrick McKeever with MKM Partners.

Thank you.

Just on the Star Wars product, I know it hasn't hit stores yet, but as you think about the licensed business and the products that you'll have available, do you think you'll have enough to -- enough in terms of just particular items and breadth of assortment to offset the Frozen strength last year?

And then, there was that question earlier about whether or not you are planning to have sort of a dedicated area, some dedicated space for that merchandise. I was just curious on that one, too?

And then just a third part of the same question, if that -- if the whole Star Wars thing is a lot stronger than you are expecting, do you think you'll be able to chase the business into the holidays by obtaining more product?

Sure. As I said earlier, we really like the trend, Patrick, of licensed overall. In fact, while Frozen peaked in fourth quarter last year, it is still [eight feet] in our stores today and will continue to be in our stores. Star Wars will play into that and you will see a dedicated area for it.

The ability to chase merchandise has always been a strength of Five Below, and if we need to do that with Star Wars, we will. But we believe we've certainly bought it appropriately based on prior trends we've seen with licensed goods, and that's what we're using to build our assortment going into the holiday season here.

And then just sticking with merchandising, I know you don't like to talk too much about specific products or mini trends, but there were some call outs earlier in the year, Shopkins and selfie sticks, and so I'm just wondering if there's anything going on with the various mini trends that you've seen, anything, any up-and-coming trends, anything diminishing, any call outs there?

Yes. I think the comment I'd make for you, Patrick, is mini trends, hot items, has always been a part of what Five Below's about. And I think since Five Below began, it's been about these mini trends and having great, unique items and wowing our customer with newness, and, how did they ever deliver that for Five Below? Certainly in recent times, the selfie stick was one of those.

It was a great item for us this summer. And so that trend has continued, and I'm not about to predict the trends for the back half of this year, but like we did with selfie stick and many other items, the rubber bands, and the looms of a couple years ago, as those emerge, we are very fast followers and you can rest assured will be on trend with it.

Great. Thank you, Joel.

Thanks, Patrick.

And that will conclude our question-and-answer session. I'd like to turn the conference back over to management for any additional or closing remarks.

Thank you, operator.

Thanks, everybody, for spending the time with us on the call. I'll just reiterate the focus we have on third quarter and the balance of the year. We are excited and, hopefully, we've been really transparent with you on where we've been, and more importantly where we are heading.

Thanks, and have a great day.

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