Five Below Inc (FIVE) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to the Five Below Fourth Quarter Fiscal 2017 Earnings Conference Call.

(Operator Instructions) And please note that today's event is being recorded.

I would now like to turn the conference over to Christiane Pelz, Vice President of Investor Relations.

Please go ahead.

Thank you, William.

Good afternoon, everyone, and thank you for joining us today for Five Below's Fourth Quarter and Fiscal Year 2017 Financial Results Conference Call.

As a reminder, 2017 was a 53-week year.

On today's call are Joel Anderson, President and Chief Executive Officer; and Ken Bull, Chief Financial Officer and Treasurer.

After management has made their formal remarks, we will open the call to questions.

I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended.

Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.

Those risks and uncertainties are described in the press release and Five Below's SEC filings.

The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements.

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, Christiane, and thanks, everyone, for joining us for our fourth quarter and year-end earnings call.

I will review the highlights of the quarter and fiscal year as well as discuss thoughts on 2018 before handing it over to Ken to discuss our financials and outlook.

And then we will open the call up for questions.

Our fourth quarter was one of the best fourth quarters we've delivered since going public in 2012.

Sales increased 30% to $505 million, driven by solid results from our new stores and a transaction-driven comp of 5.9%.

Earnings per share grew 34% to $1.21.

The fourth quarter capped a very strong year for Five Below in which annual sales grew 28% to almost $1.3 billion, driven by new store unit growth of 20% and a comp sales increase of 6.5%.

2017 was our 12th consecutive year of positive comps.

For the year, operating margin finished at a record 12.3%, while net income and earnings per share grew over 40%.

We continued to generate strong free cash flow and ended the year with cash and investments of $272 million.

With our strong balance sheet, we are in a position to begin allocating some of our free cash flow toward share repurchases and are announcing today our first-ever share repurchase authorization for $100 million.

Key to these great results was the strong and consistent performance we continue to see from our new stores, which remain our most significant growth opportunity as well as the main driver of our 20/20 through 2020 (sic) [20/20 by 2020] vision.

As we announced in January, we believe our store opportunity now exceeds 2,500 stores in the United States, 25% higher than our previous target of 2,000-plus stores.

As we finish 2017 with 625 stores, the runway for growth remains long.

During the year, we opened 103 net new stores, each of which opened with a refreshed Five Below store experience.

The class of 2017 was our most diverse class with stores opened across a range of rural, suburban and urban markets in 28 states.

This class is generating very strong productivity with first year average unit volumes on track to exceed $2 million, which would make this our first class to achieve that milestone.

We're excited to continue to grow our footprint and densify our existing markets, including California, with a plan to open 125 stores in 2018.

Moving on to comps.

Our 5.9% comp for the fourth quarter came in at the high end of our original guidance of 4% to 6% and was once again led by transactions, which we believe illustrates the underlying strength of our business.

We saw broad-based performance throughout our core business led by Tech, Style, Room, Create and Candy.

With respect to merchandising, we were very pleased with the customer response to our selection of high-quality, trend-right items at an amazing value.

As we leverage our scale and vendor relationships and continue to invest in product, our overall assortment gets better and better.

In the fourth quarter, we offered thousands of incredible and affordable options for gift-giving.

Trends like slime and smiley contribute to -- continue to contribute to sales, and emerging trends like mermaid also wowed our customers.

We closed out 2017 celebrating the year of the S trends: spinners, slime, smiley, spa and squishies, and we began 2018 with momentum.

On the marketing front, we were focused on continuing to increase our brand awareness, traffic and customer engagement.

We believe our efforts are working as evidenced by the 15-percentage-point increase in our aided brand awareness in markets open 2 years or more.

We continue to shift our marketing efforts into digital and TV, which includes mobile/social and e-commerce.

This was our fourth year of holiday TV advertising, and we reached markets covering approximately 40% of our stores.

As for mobile/social, we expanded our testing of more targeted marketing by deploying engaging brand, video and customer-generated content.

Additionally, e-commerce, while a very small contributor to sales, serves as a vital marketing tool that creates brand awareness and traffic to our stores.

Now on to 2018.

We remain focused on our 5 key strategic priorities and continue to invest in new stores, merchandising, marketing, people and infrastructure, including systems, as we further solidify our foundation to support the significant growth that lies ahead.

The recent tax reform legislation has provided us the opportunity to accelerate some important investments and enhance the long-term value of the business for associates, customers and our shareholders.

Associates are key to our customer experience, and we believe it is vital for us to stay competitive in attracting and retaining talent.

We will be investing a portion of our tax reform savings into higher store wages and benefits as well as additional associate training and development programs.

On the systems front, we have accelerated our point-of-sale upgrade which will now be completed in 2018, a full year earlier than anticipated.

The new POS system is necessary for future capabilities such as a customer loyalty program, self-checkout and omnichannel initiatives.

Regarding infrastructure, it is crucial that we support our growing store base by delivering product faster and in the most efficient manner possible.

In January, we announced 2 new distribution centers, which we plan to open in the Southeast in 2019 and Southwest in 2020.

Additionally, today, we are announcing a planned 3PL in California in 2019 and a DC in the Midwest in 2021.

These additions will be important to improve supply chain efficiencies, like increasing delivery speed to our stores and reducing freight costs.

This acceleration of our distribution network reflects the discipline with which we invest ahead of growth as well as our confidence and optimism around both our stores' growth potential and the pace at which we plan to open stores.

An additional component of our strategic investment is focused on our customers.

Our goal is to continue to provide an amazing, differentiated store experience and in doing so, increase our customers' already fierce brand loyalty to Five Below.

Based on the success of the store remodel test we conducted in 2017, we plan to further refine the model in 2018 before moving forward with a more formal store remodel program in 2019.

The refreshed store experience is designed to create an even better shopping experience, which we believe will drive more repeat visits and foster even more loyalty among our loyal customers.

Additionally, given the positive response to our brand awareness efforts, we'll be investing more resources into targeted marketing to better reach new customers and increase overall customer engagement with our brand.

Finally, we are pleased to announce that within our investment initiatives is also an initial funding of approximately $1 million to launch the Five Below Foundation.

Over the years, we have raised and donated millions to support charities focused on children, the largest recipients of these being Alex's Lemonade Stand, St.

Jude's and Toys for Tots.

And we are at a point in our growth where we wanted to formalize our charitable activities.

Along with continuing to support the causes important to us, we will also be in a better position to help associates in need, as we did during the hurricane in the fall of 2017.

We are thrilled to be in a position to increase our focus and service efforts in helping communities where we operate.

All the investments I just outlined as part of the tax reform benefits are things we believe we would have done over time but are now able to accelerate and accomplish sooner.

While these investments will impact 2018 operating margins, as Ken will discuss shortly, they will further strengthen our foundation and support the long runway of growth that lies ahead.

Looking ahead beyond 2018, we will continue, as we have done in the past, to invest in the business in such areas as wages, distribution and marketing.

In summary, we're extremely pleased with our fourth quarter and full year 2017 performance, both financial and operational.

Our results continue to reinforce the universal appeal of Five Below and the strength, consistency and flexibility of our model, giving us continued confidence in our 2,500-plus store potential and our ability to achieve 20% top line growth with 20%-plus bottom line growth through 2020.

We are focused on executing our plans in 2018 and beyond as we see tremendous opportunities for us to continue to grow Five Below from new stores with fresh, trend-right merchandise, to innovative marketing and technology, to more efficient distribution as well as hiring more amazing people.

With that, I'll turn it over to Ken to provide more color on the financials.

Ken?

Thanks, Joel, and good afternoon, everyone.

I will begin my remarks with a review of our fourth quarter and fiscal 2017 results and then discuss our outlook for the first quarter and full year fiscal 2018.

As a reminder, the fourth quarter of 2017 and the fiscal year included an extra -- 53rd week versus the 52-week fiscal year 2016 and the upcoming fiscal year 2018.

This extra week added approximately $15.7 million to sales, $3 million to operating income and $0.03 to diluted earnings per share.

Our sales in the fourth quarter of 2017 were $504.8 million, up 30.1% from the fourth quarter of 2016 or up 26% excluding the impact of the 53rd week.

We ended the quarter with 625 stores, a year-over-year increase of 103 net new stores or 19.7%.

Comparable sales increased 5.9% for the fourth quarter of 2017 versus a 1% comp increase in the fourth quarter of 2016.

The comp increase for the fourth quarter of 2017 was driven by a 4% increase in comp transactions.

Gross profit increased 30.2% to $207.5 million from the $159.4 million reported in the fourth quarter of 2016.

Gross margin finished flat to last year at 41.1%, with leverage in occupancy expense from the higher comp offset by higher incentive compensation costs.

SG&A as a percentage of sales for the fourth quarter of 2017 decreased to 20.6% from 20.8% in the fourth quarter of 2016 due primarily to leverage of fixed costs on the higher comp, offset in part by higher incentive compensation.

Our operating income increased 31.2% to $103.5 million.

Operating margin increased approximately 20 basis points to 20.5% of sales.

Our effective tax rate for the fourth quarter of 2017 was 35.2% compared to 36.9% in the fourth quarter of 2016.

The decrease in the effective tax rate was driven by the benefit from share-based compensation accounting and the net benefit from tax reform, reflecting a lower blended tax rate as well as the write-down of our net deferred tax asset.

Net income for the fourth quarter increased 35.3% to $67.4 million or $1.21 per diluted share from $49.8 million or $0.90 per diluted share last year.

Diluted earnings per share included a $0.03 benefit from share-based compensation accounting and a $0.01 net benefit from tax reform.

Also included in diluted earnings per share was a $0.03 benefit from the extra 53rd week which was included in our guidance.

For fiscal 2017, total net sales for the 53 weeks were $1,278,000,000, an increase of 27.8% or 26.2% on a 52-week basis.

Comparable sales increased 6.5% as compared to a comp sale increase of 2% in 2016.

This comparable sales increase was driven by an increase in comp transactions.

Gross profit for the full year increased 29.8% to $463.4 million from the $357 million reported in 2016.

Gross margin increased by 60 basis points to 36.3%, driven primarily by leverage of our occupancy expenses on the higher comp and improved merchandise margins from the high-margin spinner sales.

SG&A as a percentage of sales for the year decreased 35 basis points to 23.9% from 24.3% in 2016 due primarily to leverage of fixed costs on the sales outperformance.

Operating income of $157.4 million increased 38.1% in 2017.

Operating margin of 12.3% increased approximately 90 basis points from last year's operating margin of 11.4%.

On a 52-week basis, operating margin finished at 12.2%.

Our effective tax rate for the year was 35.5% compared to 37.1% in 2016.

The decrease in the effective tax rate for the year was due primarily to the benefit of share-based compensation accounting and the net benefit from tax reform that I discussed earlier with respect to the fourth quarter.

Earnings per share was $1.84 for fiscal 2017, an increase of 41.5% or a 38.5% increase on a 52-week basis versus earnings per share of $1.30 for fiscal 2016.

Diluted earnings per share includes a $0.05 benefit from share-based compensation accounting and a $0.01 net benefit from the net impact of tax reform.

Also included in diluted earnings per share was a $0.03 benefit from the extra 53rd week which was included in our guidance.

We ended the year with approximately $272 million in cash, cash equivalents and short and long-term investment securities and no debt.

This is an increase of approximately $108 million versus the end of fiscal 2016.

We continue to generate strong free cash flow from our powerful economic model that delivers a payback on average of our new store investment of less than 1 year.

As Joel mentioned, today, we announced a $100 million share repurchase program.

Shares may be purchased from time to time on the open market, and we will report repurchases, if any, made during a quarter in conjunction with the next quarter's earnings.

Inventory at the end of the year was $187 million as compared to $154.4 million at the end of fiscal 2016.

Ending inventory on a per-store basis increased approximately 1% year-over-year.

Now I would like to turn to our guidance.

For fiscal 2018, sales are expected to be in the range of $1,495,000,000 to $1,510,000,000, an increase of 18.4% to 19.6% on a 52-week basis.

The comparable sales increase is expected to be 1% to 2%.

In 2018, we plan to open approximately 125 new stores and expect to end the year with a store count of 750.

We expect to open approximately 45% of our new stores in the first half of 2018 compared to 60% of new stores opened in the first half of 2017.

The majority of new stores will be in existing markets and states, and we will add Arkansas to our state footprint and expect to finish 2018 operating in 33 states and the District of Columbia.

For the full year, our guidance assumes an approximate 50-basis-point impact to operating margin from the partial reinvestment of our tax reform-related benefits.

As Joel mentioned, we plan to use a portion of the income tax benefit from tax reform to reinvest in associates, the customer experience and systems and infrastructure as well as our communities through the funding of the Five Below Foundation.

All of these investments impact SG&A.

We expect a full year effective tax rate of approximately 24.5%, which is approximately 13 percentage points lower compared to our normalized tax rate due to the benefit of tax reform.

Net income is expected to be in the range of $133 million to $136 million, representing a growth rate of approximately 31.7% to 35.2% over 2017 on a comparable 52-week basis with diluted earnings per share in the range of $2.36 to $2.42.

We are flowing through approximately 75% of the benefit from tax reform to EPS, benefiting our shareholders with the remainder to be reinvested in the business as we discussed earlier.

With respect to CapEx, we plan to spend in total approximately $137 million in 2018 in gross CapEx, excluding the impact of tenant allowances.

This reflects the opening of approximately 125 new stores, building a new distribution center in the Southeast and investing in systems and infrastructure.

For the first quarter ending March 31, 2018, net sales are expected to be in the range of $290 million to $294 million, an increase of 24.5% to 26.2%.

We plan to open approximately 30 new stores in Q1 this year as compared to 31 stores opened in the first quarter last year and are assuming a Q1 comp sales increase in the range of 3% to 4% versus the 2.6% comp increase in Q1 2017.

Diluted earnings per share for the first quarter of fiscal 2018 are expected to be $0.31 to $0.34 versus $0.15 in diluted earnings per share in the first quarter of 2017.

Given the planned cadence of comps in 2018 as well as the timing of our new store openings and our reinvestments, there are notable differences in the level of expected top and bottom line growth by quarter throughout the year.

While it remains our practice to guide for the full year and one quarter out, I will provide some directional comments on how we are currently thinking about the year.

First, as you can see from our Q1 outlook, we expect substantial year-over-year operating margin expansion in the first quarter given expected leverage on the 3% to 4% comp as well as leverage in G&A versus last year when we absorbed higher incentive compensation costs as well as costs for our initial entry into California.

Second is our comp leverage threshold.

Keep in mind that we would expect to leverage our fixed cost with a comp of approximately 3%.

Therefore, at a flat or close to flat comp, we would expect to see deleverage on our fixed expenses.

Third is the timing of our tax reform-related reinvestments, which begin to ramp in Q2 and into Q3, representing headwinds to SG&A and operating income, further exacerbating the fixed cost deleverage.

Therefore, our current outlook assumes year-on-year EPS growth is lowest in Q2 and does not assume that we deliver EPS growth in Q3.

As a reminder, this guidance does not include any impact from the share-based compensation accounting standard.

We will report the impact, if any, of the standard with our quarterly results.

Our guidance reflects our current understanding of tax reform and assumes no material change in the legislation.

For all other 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?

Yes.

Thanks, Ken.

2017 was a great year for Five Below.

Our teams accomplished a lot throughout the organization.

We provided broad-based newness and amazing values across our 8 worlds and quickly executed and successfully managed hot trends.

We enhanced the already unique store experience with our new refreshed format.

We successfully entered California with 15 new stores.

We achieved a record estimated $2 million in average unit volumes for the class of 2017.

We increased our brand awareness and digital mobile/social presence.

We optimized our store leadership structure and rounded out our executive leadership team.

We crystallized our purpose, and we moved into our new home office at the end of January.

Associates are loving the look and feel of the new space, and it is generating new energy and collaboration throughout the organization.

We did all of this while delivering outperformance with strong top and bottom line results throughout the quarter and the year, and we look forward to building on this progress in 2018.

Before I close, as you may have seen in our press release, our Co-Founder, Tom Vellios, will be transitioning from his current role as Executive Chairman to Chairman of the Board of Five Below in connection with the Annual Shareholders' Meeting in June.

I must say, Tom's imprint on our company and culture is indelible.

And on behalf of the entire Five Below family of associates and customers, I want to personally thank him for all his contributions as well as express my gratitude to him for his partnership and commitment to me.

He is truly a visionary leader, and I look forward to continuing to work closely with him in the coming years.

I'd also like to thank all of our associates who worked tirelessly throughout the fourth quarter and the year to make Five Below so special for our customers.

We believe that the unique combination of our value offering and our fun, differentiated store experience has driven our success as a leading high-growth retailer, and will continue to do so in the future.

We are on a mission to make life better for our customers so they can simply let go and have fun.

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

Operator?

(Operator Instructions) And our first questioner today will be Edward Kelly with Wells Fargo.

This is actually Anthony Bonadio on for Ed.

So real quick just on tax reform, you guys are obviously a big beneficiary.

Can you just walk us through the thought process in terms of how you chose to allocate the savings?

Obviously, you have a lot of peers investing in labor.

How are you thinking about the balance between the gross and the SG&A line?

Yes.

This is Joel.

Clearly, we're really confident in our current model and believe that the focus should be on our associates first.

And that's where the main focus was as well as some investments in our infrastructure and systems.

As we said in our prepared remarks, 75% of the investment though -- or 75% of the tax reform benefits will flow through to our shareholders, but the large majority of the investments were focused on our associates.

And it's important to note that 100% of the added investments will hit the SG&A line, not the gross margin line.

Ken, anything to add?

Yes.

Anthony, I was just going to add there, from the geography standpoint, Joel mentioned that 100% goes to SG&A.

And as we mentioned in our prepared remarks, that total amount of the tax reinvestment drives about a 50-basis-point deleverage in our operating margin in 2018.

Helpful.

And just as a quick follow-up on the gross margin line, the past 10 quarters or so have been pretty impressive in terms of incremental improvement.

And given the comparisons you guys are up against this year, what are your expectations?

And can you just walk us through the different levers you're thinking about in terms of driving continued improvement?

Yes.

I think when you -- Anthony, you're asking about 2018?

Yes, sir.

Yes.

As we look at our guidance and as we said in the past, we don't expect to see merchandise margin leverage as we move forward.

As we continue to scale, we're plowing that back into the product, which helps to drive newness with our customers.

So we'll continue to expect to see that as we go forward.

I think I mentioned also in the prepared remarks that we, on average, start to see leveraging of our fixed costs around that 3% comp range.

And given our guidance of a 1% to 2% for the year, that would obviously imply no leverage there from fixed costs.

So we would expect on an overall basis gross margin will remain relatively flat as we move forward in 2018.

And operator, before we go to the next call, this is Joel, just remind everyone, we had pretty lengthy and gave you some pretty detailed information about our plans for '18.

(Operator Instructions)

And our next questioner today will be Chuck Trom (sic) [Chuck Grom] with Gordon Haskett.

On the brand awareness front, Joel, down at ICR you guys talked about how you've seen a nice improvement in the top 50 markets.

I think you said brand awareness going from 45% to 60%, which I think is the first time you've disclosed that.

And I'm just wondering, stepping back, when you look at the comp performance in 2017, obviously, much stronger year-over-year, and I think the spinners certainly helped out, but I'm just wondering if you can reflect a little bit back on what you think about what you've done from a brand awareness perspective to improve your comps and how sustainable that is looking ahead.

Yes.

Thanks, Chuck.

We did disclose that at ICR.

And I think it was important we got that out for you.

And in fact, I'd remind a lot of the investors, and it's out on our website, there's a lot of information that we shared at ICR.

In terms of brand awareness, there's a lot of things we've been doing.

One's been the densification of our real estate strategy.

Secondly, on the marketing front, we were largely, 4 years ago, solely paper circulars that hit 15 times a year.

And then since then, we've really invested in TV.

We've invested in mobile/social.

Our entire digital marketing efforts are really making a difference.

And I think you combine all those together with the fact that our merchandise continues to get better and better, we just got a great story to tell, and it's allowed us to really accelerate.

And I think all of those contribute to the increase in our brand awareness.

And our next questioner today will be Sean Kras with Barclays.

The last couple of quarters, the performance had been pretty robust across categories.

I'm just wondering what you saw in the fourth quarter and to the extent that you're willing to comment on it, what you're seeing so far in the first quarter.

Yes.

Well, clearly, the fourth quarter was very strong across nearly all 8 worlds.

I mean, I think I called out 5 of 8 and probably could have named all 8, but we're trying to really focus on the outperformance of a broad-based successful 2017.

As we go into '18 here, we continue, as I said, to see momentum across many, many of the worlds.

And I think it's a combination, as I said in the last question to Chuck, the merchandise assortment continues to get better.

We're benefiting from the craze trends of last year as it exposed new customers to Five Below.

And those customers came in to buy spinners, as an example, liked what they saw and many of our surveys have said they continue to come back.

So I guess net-net, the broad-based success we saw in Q4 has continued here into Q1.

And our next questioner today will be John Heinbockel with Guggenheim.

So 2 things.

Joel, when you think about the investments in labor in the store, so is that -- maybe disaggregate that between increase in hours and increase in wages and benefits.

And then secondly, maybe for either you or Ken, any -- what's your thought process now on ownership versus leasing DCs and what you might do going forward?

Yes.

I'll take the first one and hand that over to Ken.

Thanks, John.

In terms of the investment in the stores, the majority of that investment is in the form of increased wages.

However, if you did pick up in my comments, there's a big effort on improving productivity and the training programs we're giving the stores with the addition of George joining us last year and now that he's been through a holiday and really having gotten his arms around the organization.

He's making a material impact on the amount of training we're doing in our stores, the consistency we're delivering.

So the dollars are in wages.

The effort is in training and development of our people from the tax reform aspect of it.

Ken, DCs?

And then, John, on the DC, I mean, you've known from the past, in earlier stages of our company where we grew very quickly, it didn't really make sense for us to purchase property.

Now that we're bigger, more stable, have more experience, you're seeing we're feeling a little bit more comfortable in terms of allocating those resources, especially around a distribution center and especially one that is strategically placed in areas where we're growing and will have a presence for many years to come.

It helps us from a sense of control and also flexibility.

And then also financially, it's a good decision for us to make.

So you see us doing that with the Southeast distribution center.

We're going to review that potential for us and then we'll continue to analyze that as we move forward with future DCs.

And the next questioner will be Paul Trussell with Deutsche Bank.

I wanted to circle back on comps.

Obviously, a strong quarter and year, but I wanted to ask about the comp cadence and the guidance going forward.

I think a number of investors are noting here that post the holiday, it looks like sales did slow a little bit in January.

You have a combination of bad Northeast weather, an earlier Easter and very tough compares against spinners upcoming.

So if you could just walk us through the drivers of confidence on your first quarter and your full year comp guide, perhaps any trends worth highlighting that you're seeing in certain categories that's driving traffic today and can continue to do so in the months ahead.

Yes.

Paul, it's funny you bring up weather because I'm looking out my window and all I see are snowflakes and white trees.

And I think we're on the first day of spring here.

So it clearly weighed on the first quarter, and there has been several Northeast storms roll through the quarter.

In terms of answering your question, though, clearly, the guidance we gave you that we updated for the ICR conference contemplated January sales.

We were in the middle of a storm.

Many people were late and didn't even make ICR because of the storm that was going on.

So all that was contemplated when we updated and said, we finished the quarter near the high end of our range.

And it exactly played out that way.

It was mostly weather-driven in terms of that guidance.

And we also knew we were up against tougher compares from '16.

'17, it's continued in the first quarter.

There's been a number of named storms.

I think we're in our fourth one in 4 weeks here.

But you know what, you can obviously tell from our guidance, 3 to 4 customers are finding Five Below.

They like Five Below.

In between breaks in the weather, we're seeing great traffic in our stores.

You can look at the ad we just had this Sunday.

You can see a lot of newness in the product.

And we continue to see a strong success out of our core business.

It's very strong.

And we have no reason to expect that not to continue into Easter and then the start of April.

Obviously, we're not looking forward to -- or wouldn't like to see a storm next week leading into the Easter weekend, but business is strong in between storms, and we're really pleased with the quarter we're having.

That's very helpful.

Really quick follow-up just to clarify a comment you made, Ken.

I think you said the second quarter will have the lowest EPS growth.

Is that still to be positive or negative given you said the third quarter is to be, I think, flattish?

Yes, it was more around just the Q2 would have the lowest growth.

I didn't mention the word negative there, but the lowest growth out of Q2 and to not assume that we deliver EPS growth in Q3.

And our next questioner will be Michael Lasser with UBS.

The first quarter guidance implies a substantial increase in your operating margin rate.

Is that because of the earlier Easter?

And how much are you expecting the earlier Easter to add?

And then, Ken, just to clarify, you mentioned a flat or near-flat comp.

So should we expect comp in the second and third quarter as you anniversary the spinner trend from a year ago to be negative potentially?

Yes.

Thanks, Michael.

I'll take the first one around operating margin for Q1.

Really, the drivers there, you got -- you have 2 things going on.

You have the 3% to 4% comp, so that's providing operating margin leverage on our fixed costs.

And then we're up against some costs from last year Q1 around some incentive-based compensation that was recorded and also California entry costs.

So those are really the key drivers in terms of the overall -- that significant leverage that you're seeing in Q1.

With regards to -- your second question, I guess, was around the comps, you mentioned a flat comp.

You -- I think you said flat or near flat.

So does that imply it could be negative in 2Q and 3Q?

Yes.

The guidance that we provided for the year, the 1% to 2%, obviously includes what we're giving out for Q1.

And it provides a range of outcomes assumed as you move forward in Q2 through Q4.

And it does assume a potential -- and we understand we're up against some significant comps in both Q2 and Q3.

And within that range of outcomes, it would assume a potential negative comp, then be able to hit the annual guidance of a 1% to 2% comp.

Yes.

I think, Michael, Q2, obviously, give that guidance on the first quarter call.

Right now we're focused on Easter, which really drives Q1.

And the team's putting together a great lineup for Q2 that we're excited about, but we're realistic on the spinner trend.

And I think what's been great about the spinner trend and every trend at Five Below is, it's just introduced a wealth of new customers.

It's why you continue to see such strong comps from us.

We'll go through the height of it here in May and June, but the number of new customers really gives us confidence it's going to be a great year.

And we just finished our 12th consecutive year of positive comps.

You can tell by our guidance, we expect this to be our 13th.

And you get some ups and downs in the monthly and quarterly cadence, but it's going to be a great year.

I'm really looking forward to '18 here.

And the next questioner will be Alan Rifkin with BTIG.

Joel, I have one question.

Relative to the corporate average, how much are both the refreshes and California contributing to those averages?

And what will each of those metrics look like for 2018?

You're talking about the overall company average volume on our store base?

Yes.

I mean, how much above the corporate average or how much are the refreshes contributing to the corporate average?

And relative to your new stores and you talked about the $2 million average revenue for the class of '17, how much of a contribution is California making towards that?

And then the second part of the question was, how many new stores in California in '18?

And how many refreshes will there be?

Yes.

In terms of the refresh, what I'd tell you is, even if you pulled California out of the mix, the class of 2017 would still be above $2 million.

So you can tell, there's very, very little differentiation there between the 2. So just want to get that out there.

To answer your question about how much is the refresh contributing, Alan, it's hard to gauge that because they're all noncomp stores.

So you're making your best guess.

Hopefully, what you can tell from our prepared remarks though is, we're pleased with the 5 stores we remodeled last year.

We're going to remodel a couple handful more in '18 and really perfect it.

And by perfect it, I mean, take the costs out, understand the cadence, the timing, what do you do in Phase 1, 2, et cetera.

And then our goal, really, is to have a formal remodel program in 2019.

Having a great store experience is something near and dear to my heart.

We got to keep our stores fresh.

Thriving retail chains do that.

And I think what I'm saying about all of this is, we believe in the refreshed stores.

It's working.

When we do remodel a store, we see a nice lift.

And now we got to kind of quantify that here in '18 so that we can really get that formal program going in '19, which should be really exciting for the company.

But we'll give you more details on that as we get through the next couple of quarters.

And then I think -- oh, in terms of the number of stores for California, we're probably in the 15-ish range or so for '18 here.

So about the same as last year.

And the next questioner today will be Dan Binder with Jefferies.

My question is around product trend and Toys"R"Us.

Obviously, a very sort of unique opportunity and recognizing what you sell is $5 and below, I would imagine there's still some opportunities.

Just curious what you're doing to go after that.

And then just in terms of the emerging trends, just some kind of cool stuff out, nothing as big as spinners, but curious to hear what you think is -- potentially got some legs.

Yes.

Obviously, there's a lot of disruption happening in the toy space.

I'll tell you on a personal level, having worked there 12 years, nearly 1/4 of my life, it's sad to see that happen.

I think as it relates to Five Below, we're winning because of value.

We're winning because of the store experience.

And we're winning because of the product that we continue to bring to life.

And I'm not going to speculate on any trends we see emerging for competitive reasons, but I will tell you, I like what Michael and the merchant team are bringing forth.

We continue to stay very relevant.

And I think what we're getting so good at is speed to market.

And what you saw us do last year with -- pick one of the S trends, but we were one of the first to have the spinners out there.

We nailed it with squishy.

Slime's been a long-standing success for us.

So that's what you should continue to see us do.

We identify them.

We don't create the trends, but then the team really goes after it with speed and accuracy.

And that's what you'll see more from us, Dan.

And I'm really excited about what's coming for -- in Q2.

And I think if you looked at our recent ad, you saw a lot of newness in there as well.

But nothing -- you're right, the spinner trend, don't expect that every year.

Those are kind of -- those crazes don't happen that often, but they also come and go pretty quick.

Just as a follow-up to that, what does this imply about your global sourcing plan for this year as a percentage of total?

Yes.

You shouldn't see that move too much on us.

It's relatively flat year-over-year.

As we look at it, it might move up a percent or 2, but it's going to be pretty flat to last year.

It's about 1/3 of our business total.

And our next questioner will be Jeremy Hamblin with Dougherty & Company.

I wanted to ask about your comment on the additional distribution center added in 2021 in the Midwest.

You noted, Joel, in your comments about kind of the pace of store openings, and you've had a long-standing plan to -- for kind of 20/20 to 2020 (sic) [20/20 by 2020].

Should we be thinking that, that comment is really extending the 20% -- relatively close to 20% unit growth out beyond 2020?

Or is the comment more related to potentially even a little bit higher than 20% unit growth over the next few years?

Yes.

I wasn't trying to get you to overthink or over-guess me on that one, but what I was trying to get you to do and you picked up on it is, how important new stores continue to be for us.

And we are committed to new stores.

We believe our runway is even greater than it was before.

As we announced at ICR, 2,500 instead of 2,000.

And the best foreshadowing of that is, what's our distribution strategy.

We wouldn't be announcing 3 DCs in 3 years, plus a 3PL if we didn't feel strongly about the runway that we're at with new stores.

It's too early for us to speculate beyond the 2020.

But rest assured, as we get closer to 2020, we will certainly be in a position to kind of give you guys some long-range plans.

We've always said this is a long-range opportunity.

And we'll guide long range.

But right now, we've got to get that infrastructure in place.

Not only will it get the assets there, but it will help us on speed to market.

It will help us on our freight costs.

And it should, as you picked up on, signal that there's no slowing down on the number of stores we're going to open.

And our next questioner today will be Scot Ciccarelli with RBC Capital Markets.

It's Beth Reed on for Scot.

Given challenging gross margin comparisons this year as sales trends kind of normalize, how are you guys thinking about potential freight and transportation headwinds which some other retailers have called out and then any potential levers to offset that?

Yes.

I know you're focusing on comp, but don't forget that we're opening 125 new stores.

And so as we go to negotiate freight transportation or any other contract for that matter, those -- they're not looking at comp store sales.

They're looking at total increase.

And I think as we continue to be a high-growth value retailer, that really gives us some leverage to make sure those costs stay in line.

So while there is some upward pressure out there, largely -- we largely mitigate a lot of that with our excessive growth opportunity.

Ken, anything to add?

Yes.

And then Beth, just to add to that.

I mean, obviously, we're in a period here of inflationary freight cost, whether it's deliveries to stores or whether it's import through container costs.

We have factored our estimates into the guidance for this year that we provided.

And to Joel's point, our growth and scale really benefit us as they have in the past, and they'll continue to as we move forward to offset increases like this.

And our next questioner will be Vincent Sinisi with Morgan Stanley.

Most of the questions have been answered, but I guess 2 fast things.

First, as we all on the phone, I'm sure, have been getting asked, just any initial thoughts to any potential tariff changes, what would be your response to that?

And then just really more of the fundamental question here, as you're continuing to refine your brand awareness, various mediums, advertising, et cetera, what seems to kind of be, in your opinion, kind of the greater rate of change?

What mediums will you be investing in more or less versus the past?

And should we think of kind of as a percent of sales, does that kind of stay relatively flat on a year-to-year basis?

Yes.

I'll take the first one.

And Ken, if you got some thoughts.

Look, the tariff situation is a very fluid situation right now.

A lot to come later this week on that.

I think like Border Adjustment Tax, the retail industry is very united and will share their thoughts as a united front.

And I think like BAT, once the facts were provided, cooler heads prevailed.

And we tend to believe that as well as this.

It's not positive for the consumer.

And we need to get that message out to the consumer regarding any tariff changes that may happen.

As it relates to what does it mean for Five Below, it's too early to speculate on that.

And our next questioner today will be Alvin Concepcion with Citi.

Just wondering if you could talk about real estate opportunity.

You've talked about your increasing scale, so I'm wondering if you've seen improvements in your ability to negotiate leases or find more attractive sites that can improve your new store model returns.

Yes.

Thanks, Alvin.

I think the biggest thing we've seen is, as the brand awareness has gotten stronger is the landlords are coming to us rather than we used to have to chase them down.

And so landlords want to be in a vibrant center -- want a vibrant center as bad as we want to be in a vibrant center.

They see us as somebody that brings traffic to their centers.

They see us as somebody that brings young, youthful traffic to their centers.

And so really the opportunities are growing for us as redevelopment of centers happens or there's new centers being built.

So we're usually in the mix right upfront.

We got a great real estate team.

They're spread out across the country and are just doing a great job bringing in more and more opportunities to us and have done a great job on keeping the prices in check.

And it's been relatively flat over the last few years.

And we don't see any unusual upticks in terms of real estate rates.

And the next questioner will be Chris Prykull with Goldman Sachs.

I just had 2 quick follow-ups to earlier questions.

I think, Ken, you had mentioned gross margin flat year-over-year, correct me if I misheard that.

And just walk me through the puts and takes there, again, if you could, I would appreciate it.

You mentioned freight headwinds.

You're lapping some of the margin lift from spinners last year.

Do you hold on to that or give that back?

And then occupancy, I would assume, deleverages on a 1% to 2% comp.

Just walk me through how we're getting to flat.

Sure.

Again, Chris, we don't normally guide to gross margin and operating margin levels, but implied in the guidance, the full year guidance that we provided was relatively flat gross margin levels.

And obviously, from the guidance we provided for Q1, there's significant leverage, both on gross margin and SG&A driving that overall operating margin leverage.

And then as we work our way through the rest of the year, really, 2 things there.

It's obviously the comps, the implied comps as we go from Q2 through Q4, getting us to the 1% to 2% comp guide for the full year and then the tax reinvestment, which are really ramping up in Q2 and Q3 as we go through the year.

So that's really -- those are the 2 key drivers as we work our way through the rest of the year to get to our overall guidance.

And then just keeping in mind that those tax reinvestments I mentioned on a full year basis, we estimate they'll provide about a 50-basis-point deleverage from an operating margin standpoint.

And 100% of those reinvestments are at the SG&A level.

Great.

That's helpful.

And then just one clarification, your EPS guidance, does that take into account any accretion from share buyback?

It does not.

Obviously, we announced the authorization today, but that we don't know the timing or the amount of those going forward.

So that is not included in our guidance.

And this will conclude our question-and-answer session.

I would like to turn the conference back over to Joel Anderson for his closing remarks.

Yes.

Thank you, operator, and thanks, everybody, for joining us today.

We'll all look for warmer weather and less white flakes out our respective windows.

We look forward to speaking with you again on our first quarter call.

Thanks, everybody, and have a great evening.

Appreciate the support.

Good night.

And the conference has now concluded.

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