Five Below Inc (FIVE) 2018 Q1 法說會逐字稿

Good day, and welcome to the Five Below First Quarter Fiscal 2018 Earnings Conference Call.

(Operator Instructions) Please note, this 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, Gary.

Good afternoon, everyone, and thanks for joining us today for Five Below's First Quarter 2018 Financial Results Conference Call.

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.

One quick housekeeping note, last year was a 53-week fiscal year which shifted this fiscal year's quarters by 1 week.

Ken will review the shift in his remarks, and please see our press release for more information.

I will now turn the call over to Joel.

Thank you, Christiane, and thanks, everyone, for joining us for our first quarter earnings call.

I will review the highlights of the quarter before handing it over to Ken to discuss our financials and our outlook, and then we will open the call for questions.

We are very pleased with our first quarter performance as we delivered both sales and earnings above our guidance ranges.

Sales increased 27% to $296 million, driven by continued outperformance of our new stores and a healthy comp of 3.2%.

This sales performance was accompanied by strong gross margins, SG&A leverage and tax rate favorability, resulting in net income of $22 million and earnings per share that more than doubled from last year to $0.39 a share.

During the quarter, we opened 33 new stores in diverse markets in 18 states.

6 of these stores made our top 25 all-time spring grand opening list.

These stores are located in: Pooler, Georgia; Janesville, Wisconsin; Middletown, New York; Indianapolis, Indiana; Hinesville, Georgia; and Florence, South Carolina, demonstrating the broad universal appeal of Five Below.

New stores continue to achieve very high levels of productivity, driving our industry-leading less than 1 year average payback period on our new store investment.

Year-to-date, we have now opened 42 stores and are on track for our approximately 125 planned store openings in 2018, all in our refreshed store look and feel, and we expect to end the year with approximately 750 stores.

And with this growth comes increasing benefits of scale throughout many facets of the organization.

Our Q1 comp of 3.2% was within our guidance range and driven by average ticket.

As expected, transactions were down slightly, largely due to the unusually cold and wet weather during the quarter and lapping the spinner craze, which began to ramp in mid-April last year.

With regards to merchandising, our teams continue to do an excellent job generating newness across all 8 worlds as our Easter and spring sets reflected.

Tech, Room, Seasonal, Style and Create performed well, demonstrating again the broad-based strength of our business.

And slime, smiley, squishy, spa and mermaid trends continued to be popular.

Through our edited assortment of products relevant to our customers, we make it easy for them to simply say yes and get those items they've just got to have.

On to marketing.

We remain focused on increasing our brand awareness and continue to shift our program toward broader digital efforts.

We are excited to announce the launch of our summer TV campaign, which features a broad mix of products for outdoor fun.

You will recall we first tested Q2 TV in 2015 across 15% of our store base, and we continued to test and learn for the 2017 season.

This year, our Q2 TV will reach approximately 40% of our store base, a significant increase from the last 3 years.

Additionally, we are making further investments in mobile/social media campaigns designed to promote interest and brand awareness at a local level in many of our markets.

Our growing e-commerce channel is also aiding awareness throughout the country.

Finally, print circulars continue to play an important role for us, especially around key seasons throughout the year.

Our most recent circular was distributed last Sunday and featured fun products for all things summer, such as a giant llama pool float, make your own squishy toys and a new jumbo umbrella tent perfect for the beach.

In addition to merchandising and marketing, we continue to focus on our other strategic initiatives, namely people, systems and infrastructure.

As we've done for years, we are investing in these areas to continue building the foundation to support the growth that lies ahead.

With respect to systems, the implementation of the new POS system we discussed on our last call is on track to be deployed in our stores this year.

This new system delivers the scale needed to support our more than 2,500 U.S. store opportunity and provides the functionality and flexibility for future features such as the loyalty program and omnichannel capabilities.

On to infrastructure.

In order to continue to support our long runway of significant store growth and effectively service our loyal customers, we plan to open 3 new DCs over the next few years.

Today, we are excited to announce that we recently signed a purchase agreement to initially build an approximately 700,000 square-foot distributions facility just south of Atlanta, which has the ability to flex up to about 1 million square feet.

We expect this DC to become operational in the spring of 2019.

This is the first facility built entirely to our specifications, and owning the building will provide us with the control and flexibility as we grow our footprint throughout the Southeast.

This DC, together with our plan for additional new DCs, demonstrates our commitment to supporting our rapidly growing store base through disciplined infrastructure investments.

Now a few words about Q2.

As you know, we are cycling a very high transaction-led comp from last year due to the spinner craze, and we have reflected this in our Q2 outlook.

I am very proud of the efforts our teams have made to prepare our stores for Q2.

We have edited a high-quality, coordinated, trend-right merchandise lineup, increased our marketing and added several in-store initiatives as we continue to innovate the store experience.

After the long winter and cool spring, our customers are ready for summer, and our stores are set to provide them with many awesome products to help them simply let go and have fun, from beach chairs and towels to boogie boards, shorts and flip-flops, all at incredible value of $5 and below.

In summary, we are very pleased with our first quarter performance.

The year is off to a strong start, and we remain firmly focused on executing against our key priorities to support the long runway of growth that lies ahead for Five Below.

With that, I'll turn it over to Ken.

Ken?

Thanks, Joel, and good afternoon, everyone.

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

Before I review our results, I will provide more color on this year's calendar shift due to fiscal 2017's 53rd week.

As we stated in our press release, our first quarter ended 1 week later this year versus the first quarter of fiscal 2017.

With regards to comparable sales, results on a quarterly and annual basis will be reported using the NRF's restated calendar, which compares similar calendar weeks.

While the impact of this calendar shift will continue to affect year-over-year quarterly comparisons, the full year impact is not material.

With that said, it is important to note that any impact of this shift is contemplated in our guidance as it was when we gave our initial Q1 guidance on our last call.

Now I will review our first quarter results in more detail.

Our sales in the first quarter of 2018 were $296.3 million, up 27.2% from $232.9 million reported in the first quarter of 2017.

The impact of the calendar shift I just reviewed added approximately $6 million to sales as we gained a higher volume week ended May 5 and lost the lower volume week ended February 3.

We opened 33 new stores during the quarter compared to 31 opened in the first quarter of 2017.

We ended the quarter with 658 stores, an increase of 105 stores or 19% versus 553 stores at the end of the first quarter of 2017.

As Joel mentioned, our new stores generated another quarter of very strong performance.

Comparable sales increased by 3.2% for the first quarter of 2018.

The comp increase for the first quarter of 2018 was driven by an increase in comp average ticket with a slight decrease in comp transactions, which was primarily driven by the unseasonably cold start to spring and also the beginning of the spinner trend last year.

As I mentioned on our last earnings call, we expected substantial year-over-year operating margin expansion in the first quarter, and we saw this play out.

This was driven by overall fixed cost leverage on our 3.2% comp as well as leverage versus last year when we absorbed higher costs associated with incentive compensation and our initial entry into California, both of which impacted gross margin and SG&A.

Gross profit increased 31.8% to $97.2 million from $73.8 million reported in the first quarter of 2017.

Gross margin increased by approximately 110 basis points to 32.8%.

As a percentage of sales, SG&A for the first quarter of 2018 decreased approximately 170 basis points to 24.5% from 26.2% in the first quarter of 2017.

Operating income increased 93.3% to $24.7 million or 8.3% of sales from $12.8 million or 5.5% of sales in the first quarter of 2017.

Our effective tax rate for the first quarter of 2018 was 15.4% compared to 35.9% in the first quarter of 2017.

Our tax rate was favorably impacted by lower rates from tax reform, which was included in our guidance, and the accounting for stock-based compensation, which as is our practice, was not included in our guidance.

The impact of the stock-based compensation accounting was an increase in earnings per diluted share of approximately $0.04.

Net income increased 159.8% to $21.8 million or $0.39 per diluted share from $8.4 million or $0.15 per diluted share last year.

We ended the first quarter with $277 million in cash, cash equivalents and investments and no debt.

Inventory at the end of the first quarter was $215.4 million as compared to $180 million at the end of the first quarter of last year.

Average per-store inventory at the end of the first quarter of 2018 was 0.6% higher versus the first quarter last year.

Now I would like to turn to our guidance.

As a reminder, our guidance does not include any impact from stock-based compensation accounting or share repurchases.

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

For the second quarter ending August 4, 2018, net sales are expected to be between $332 million and $335 million, an increase of 17% to 18% over Q2 2017.

This sales assumption includes the opening of 33 new stores as compared to 31 new stores in the second quarter of 2017.

We are assuming approximate flat Q2 2018 comp sales versus the 9.3% comp in Q2 2017.

With regards to operating results for Q2 2018, we expect deleverage on fixed expenses from the lower comp and the timing of the $7.5 million in tax reform-related investments, which begin to ramp in Q2.

Accordingly, we expect to see about 100 basis points in operating margin deleverage in Q2.

While we typically do not comment on future quarters, I want to point out that we expect operating margins to continue to delever in Q3 and Q4 by approximately 200 and 100 basis points, respectively.

Net income for Q2 2018 is expected to be in the range of $20 million to $21.2 million, an increase of 19% to 26% over Q2 2017.

Diluted earnings per share for the second quarter of fiscal 2018 are expected to be $0.36 to $0.38, an increase of 20% to 27% over Q2 2017.

For the full year 2018, we are raising our sales guidance by $7 million to be in the range of $1,502,000,000 to $1,517,000,000, an increase of 19% to 20% over 2017 on a comparable 52-week basis.

Comp guidance for the full year remains in a range of a 1% to 2% increase.

We continue to expect to open approximately 125 stores and end fiscal 2018 with approximately 750 stores, an increase of approximately 20% as compared to our 2017 ending store count of 625.

We now expect to open approximately 50% of our stores in the first half of the year compared to 60% in the first half of 2017.

We now expect an effective tax rate of approximately 23.5% for the year, which includes a normalized quarterly tax rate of 24.5%, excluding the impact of stock-based compensation accounting.

Our net income outlook has increased and is now expected to be in the range of $136.5 million to $139.9 million or growth of 36% to 39% over 2017 on a 52-week basis.

Diluted EPS is now expected to be in the range of $2.42 to $2.48 or growth of 34% to 37% over 2017 on a 52-week basis compared to our prior guidance range of $2.36 to $2.42.

With respect to CapEx, we plan to spend in total approximately $137 million, gross, in 2018, reflecting the opening of approximately 125 new stores with the remainder projected to be spent on our new Southeast distribution center, our existing store base and corporate infrastructure.

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?

Thanks, Ken.

The year is off to a strong start as our Q1 results illustrate.

Our teams are working harder and more cohesively than ever, which in combination with our growing scale, is resulting in improvements across the organization.

We remain focused on opening new stores, sourcing the most amazing merchandise, increasing our marketing reach, hiring the best associates, expanding our distribution network and installing new technology, all areas that drive the wow factor and elevate the customer experience to keep our customers coming back.

We are uniquely positioned as a high-growth value retailer to capitalize on the opportunities that lie ahead for Five Below and achieve our previously articulated strategy of 20% top line growth with 20%-plus bottom line growth through 2020.

Looking out longer term, with our continued and consistent success as we expand our store footprint and build out our distribution network, our conviction in the 2,500-plus store potential for Five Below only grows.

In closing, I'd like to thank all of our teams for working so hard in preparing Five Below to be the go-to destination for all things summer.

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

Operator?

(Operator Instructions) Our first question comes from Judah Frommer with Crédit Suisse.

I was hoping maybe, first, you could help us with a housekeeping item.

The new store productivity in the quarter does look unusually high because of the calendar shift.

Would you be able to help us with kind of your internal calculation there?

It sounds like new markets continue to do really well, but just some gauge would help.

Sure.

Judah, if you're calculating it based on an average store opening and using our reported results in our press release, you're probably coming up to new store productivity of about 124%.

If you look at that and if you adjust it for the timing of openings during the quarter and the benefit of the calendar shift that we discussed in our prepared remarks, the new store productivity would still be north of 100%.

Okay.

That's helpful.

And then changing gears a little bit.

The tax reform-related reinvestment you're talking about, the $7.5 million, has anything changed in terms of what you would say the labor or wage environment that causes you to maybe reassess where that investment needs to be?

Or do you feel comfortable with the investment you're going to make in both store labor but maybe even as you're rolling out new DCs, there are some wage pressures there as well?

Yes, thanks.

I'll take that.

For the year, nothing's changed.

We continue to watch wages in all our markets, and we remain competitive in every market we compete in.

And I think as we get into '19 and '20, we'll take a look at if we need to make any adjustments.

But as we sit here for the foreseeable future, we think the changes we made and announced at our year-beginning call accurately reflect where we need to go with wages.

The next question comes from Matthew Boss with JPMorgan.

Joel, so the last 3 calls, you've actually called out close to, I think, 5 worlds if I'm counting right in terms of strength, which has more than doubled over the past couple of years, calling out a couple.

I guess can you talk about how the team is diversifying their performance across the box, maybe outside of the craze trends and opportunities you see to continue the momentum on that front?

Yes.

Thanks, Matt.

I know you've recently just started following us.

And if we go back several quarters ago, we kind of laid out trends in quite a bit of detail for everybody, and I'll just reiterate that.

We bucketed trends, really, in 3 different buckets.

We call them craze trends, licensed trends and then relevancy trends.

And I think what you're highlighting there is really the outstanding job the entire merchandising team has done on being relevant.

And Michael leads that team, and they've really done a great job across all 8 worlds.

And I think it's the 8 worlds that gives us the flexibility to be relevant in a lot of different areas.

And you're seeing that play out, as we called out, as you accurately said, 5 different worlds on this last call.

But that's really a factor of that third trend and what a great job the merchant team is doing on staying relevant.

Great.

And then just a follow-up maybe for Ken on unit growth.

So as we think about your annual high-teens growth pace, I guess any governors that you see as we think forward regarding the number of stores the team could open in a given year?

And just thinking larger picture, about some of the hires that you've made, maybe such as George Hill or some foundational investment, I guess what gives you the confidence that you can build the scale and maybe kind of touch on some of the investments or the hires as we think about the opportunity on an annual basis going forward?

Sure.

Thanks, Matt.

I'll take a piece of that and then kick it back over to Joel.

As we've said over the last couple of years, we'd laid out the kind of the game plan for us through 2020, which included 20% top line growth.

And the key driver of that growth was obviously the unit growth, and you continue to see that as we look back and as we look forward.

We feel really confident about our ability to open up new stores.

Joel called out on this call the -- some of the records we saw from stores that we opened up in the first quarter that were grand opening records of all time for us.

So again, we continue to open up more stores.

We continue to open up these stores very positively.

And as you've seen from our performance in prior classes, we maintain that really positive performance.

So we feel confident about our ability to deliver on that mission that we've carried out through 2020 and that we have the appropriate resources and support to be able to continue to do that.

And I'll kick it back to Joel just to talk about some of those things that we've put in place here to be able to continue that path.

Yes.

I think that's exactly why we called out those 6 diverse stores that just really continues to give us confidence and demonstrates to all of you that follow us how universally appealing the brand is.

And so at this point, Matt, we really haven't reached any type of limiting factors that is slowing down our growth.

Obviously, the expansion of our distribution centers is another example, the belief in our growth.

And then I think the other piece you called out is people.

And really, when you're a high-growth company like we are, people, systems and infrastructure are the 3 areas we spend a lot of time on.

And bringing somebody like George on the team a little bit, a year ago is a great example.

He came to us from a much higher-volume retailer.

He's been through go-go growth years of other retailers.

And like Michael did when he got into the merchandising organization, as he gets into year 2 and certainly in year 3 next year, we'll continue to get stronger and stronger on delivering a great store experience.

So we welcome what George has done and he's been a great addition to the team.

Thanks, Matt.

Thanks, Matt.

The next question comes from Edward Kelly with Wells Fargo.

Can I just start?

I want to ask about second quarter comps.

Joel, I think if I remember correctly, you had at least sort of opened the door to, hey, it's possible that comps could be negative in Q2 and Q3.

Obviously, you're guiding to flat.

If we think about where Q1 came in, that's an improvement on a 2- and 3-year stack basis.

I was just wondering could you just give us a little bit of color around your confidence in the Q2 comp as you lap.

I don't know.

You're probably seeing how you're lapping spinners currently.

Maybe you could give us some color there as well in terms of like how you're doing against that comparison at the moment.

Yes.

Clearly, we're obviously right in the middle of lapping it right now.

We like the progress we made in May.

I think the important thing on what's giving us that confidence, Ed, we've talked about it a number of quarters, as we've done some of our marketing studies, we saw that the data showed us that 50% of the customers that bought spinners last year were new to Five Below.

And we've shared many of times that we love all trends.

And so the spinner trend was an example of a lot of new customers got introduced to Five Below, and then it was really on our shoulders to keep those customers.

And I think it's combination of our store experience continues to get better, the marketing team has captured those customers and then the merchants continue to bring relevant product to it.

So it's really been a broad-based performance of our -- all our merchandising categories, what I was talking about earlier with Matt, that has given us the confidence that as we get through Q2 here that we're tracking towards a positive comp.

And we're excited to do that and pleased to share that with all of you today.

Great.

And just a quick follow-up.

I want to ask something a little bit more longer term, I guess.

But as you think about customer loyalty, you've talked now about the new POS system coming in this year, what it would allow you to do from a loyalty standpoint.

I guess how far are you from actually having a program that you think could be rolled out?

And how important could this be to the business over time?

Matt (sic) [Edward], we haven't -- honestly haven't even started.

I think the first focus is getting that POS system in place before we take those next steps.

It's too early to speculate on what it means.

We're pretty disciplined in everything we do, just as we took several years to test out TV until we got it right.

And same is true with many of the other things we've done and as we've continued to expand our digital marketing efforts, and that's the same way we're going to approach loyalty when we get to that point.

But we do believe it's something you'll see from us in the future, and it will only continue to enhance the loyalty we have with the customer.

But I will -- let's not lose the fundamentals.

The fundamentals of what makes this stock and this company so great is that we had a great store experience, coupled with delivering wow product in a value atmosphere, and that's at the heart of what is the foundation Five Below was made on.

And then as you add loyalty programs and things like that, it's just icing on the cake, but it's not the foundation.

The next question comes from John Heinbockel with Guggenheim Securities.

So, guys, I want to start with the infrastructure development here over the next couple of years.

What's the thought process in terms of cost of the facilities, the degree to which they're automated?

And is the -- and the -- how many stores will these ultimately support, right, in your push toward 2,500?

Yes.

I'll take that, and, Ken, if you want to add any color on costs, we can do that, too.

What -- first and foremost, John, the strategy is that we need to expand our infrastructure out there.

And right now, we're -- our store operations base has probably outstretched our distribution network.

And so the immediate strategy is to get those 5 nodes across the country, and that's what we're focused on to continue to support that.

What you should take away from it, there is no backing off from our side.

There's no concerns we have on what our store growth can and will be, and that's really what the main focus is.

In terms of the number of stores they can service, that's really a fungible answer in the sense that if you take the one I just explained on the call today, we're going to build that at 700,000 square feet.

Over time, that can expand to 1 million.

Alternatively, we might decide to build another DC in the Southeast and may never touch the size of that.

So there's really a lot of different ways in which we'll ultimately build out that network of stores.

And right now, by building each of these next 3 a little smaller but having the footprint to grow them a lot bigger gives us really the ultimate flexibility, John.

But it's safe to say that as we get those 3 built out between what we initially build and their potential to expand, it will certainly cover well, well north of 1,000 stores and will -- and it will play out by what we end up with size.

Sure.

And then, John, just from a cost perspective, we historically have leased all our assets, whether they be store locations, distribution centers, home office.

It made sense for us and this decision to go ahead and build this facility, to Joel's point, to give us that control, the building that's being built to our specifications, and it also gives us flexibility down the road.

From an overall cost perspective, I called out the total CapEx for this year is $137 million.

And really, the incremental increase year-over-year, the big push or a big part of that was being driven by the cost of the distribution center and a combination of obviously the building costs and then our typical material handling equipment can vary in sortation that we're going to put in the facility.

So again, we'll look at that as we move forward, and the future DCs that we put in place will determine what's the right decision there.

But at this point, it made sense for us to build this location.

All right.

And then just secondly, Joel, you talked about scale.

What -- are you yet seeing the benefit?

And I'm not talking about procurement scale but more availability of product from vendors that you might have -- might not have had before.

You and Michael, are you seeing that increase sort of geometrically here?

Or we still have yet to hit a sort of a tipping point on that topic?

Yes.

We're clearly seeing it grow and expand in many ways.

We've launched some of our first-ever direct-to-retails, DTRs, as I recall, as an example.

We've been introduced to several new vendors as the Toys"R"Us transition is taking place, and so I think we'll continue to see that grow, John.

I don't know if exponential is the right word, but it's certainly kind of up and to the right and no signs of slowing down.

And we're very prudent with the vendor network we currently have and are seeing as new ones.

Thanks, John.

Thanks, John.

(Operator Instructions) The next question comes from Vincent Sinsini (sic) [Sinisi] with Morgan Stanley.

Wanted to ask about the 2Q marketing campaign.

Nice to see that it seems like gaining some further traction, as you said, kind of the most store coverage that you've had.

So I guess my basic question in sort of 2 parts, one kind of more near term and one longer term.

But first, anything further you could share at this point about the campaign itself?

And is it going to be concentrated seemingly in basically all you're more dense markets?

Or might you be testing some of the newer less dense ones as well this year?

And then the longer-term part of it is with what you are seeing from 2Q specifically, do you think longer term that you'll see a meaningful shift of kind of the weightedness of 4Q as kind of percent of the year?

Yes.

Thanks, Vinnie.

As I see it, clearly, we've been very methodical about our ramp of TV in Q2.

This is actually our fourth year.

Taking it up to 40% is a significant increase from last year to show you the confidence we have and what we learned from the last 3 years.

But strategically, nothing's changed.

We talk a lot about our real estate strategy and the further densification of existing markets.

You'll notice this year, we're only entering one new state.

California is an example.

We're staying focused firmly in Southern California.

Those are all examples of the discipline we have about making sure we densify the markets.

And as we densify, it makes it easier for our operators.

It makes it easier for our distribution teams.

And then it certainly makes the ROI, that A to S spend, advertising-to-sales spend, from a marketing perspective start to make a lot more sense.

So strategically, it is largely -- remains focused on our denser markets.

We're not bringing TV into our newer markets.

That's not the plan.

And in terms of longer piece, look, Q4 is always going to be important to us.

We don't shy away from it.

I actually think it's what continues to strengthen the moat around the concept is that as we get better and better at Q4, it gets harder and harder for that to be replicated.

Having said that, we welcome continued increase in Q2.

It is our second strongest quarter.

The teams continue to deliver amazing summer products.

And as we get the word out as that we're not only a Q4 destination that we're truly an all-season destination, I think it's only going to make it stronger.

And it -- but I don't think Q4 goes away as being our biggest quarter.

Just as our base gets bigger, it gets easier to have the other quarters be more profitable.

But Q4 will always be the most important.

Thanks, Vinnie.

The next question comes from Anthony Chukumba with Loop Capital Markets.

So I just had a quick question.

Obviously, there's a lot of retails that talked about the weather and doesn't -- well, it seems like it impacts you maybe not to the same extent.

But I guess, do you think that your Q2 sales might benefit from some people who may not have bought summer and outdoor product in Q1 going ahead and doing that in Q2 and/or it's a shift out of Q1 into Q2 given the unseasonably cold weather in March and April?

That's a lot of speculation there.

And I think when you look at the results we had in Q1 and you look at our guide for Q2 and you put the 2 quarters together, it's honestly a heck of a first half of the year for us up against some really tough trends from last year.

I think what's more important is how successful we've been, Anthony, in so-called monetizing those new customers that we acquired last year throughout that whole spinner trend.

And let's not forget as our store base continues to move south and west, there's less and less impact on the weather piece of it.

So if what you called out is -- happens, it will happen mostly in our Northeast stores.

And if you go back 5 years ago, that would have been a much bigger piece of our business.

But we continue to kind of look at it in totality, and we'll always have weather shifts.

Clearly, I think if that weather shift hadn't happened in April, we would have seen slightly higher comps.

But we're overall really pleased with the Q1 performance, and that's kind of how we take a look at it.

The next question comes from Dan Binder with Jefferies.

I was wondering if you could comment a little bit more on your remodel performance since you last updated us, how that's progressing, how good you feel about potentially ramping that for next year.

And then just on the topic of marketing, it seems like brand awareness moving up is certainly helping both new and older stores.

I'm just curious if you can give us sort of a point of reference on where that was maybe 2 or 3 years ago and where do you think that is today.

Yes.

Dan, on the remodel piece, we're still on track this year to remodel, give or take, 10 stores.

And what our plan is, is to use the learnings from 2018 to then put in place a formal remodel plan and program for 2019.

If you recall, we did about 5 last year.

We were really pleased with the initial results.

What we weren't pleased with or I shouldn't say not pleased with, but what we have to work on this year is not closing the stores, bringing the costs down and getting it down to a respectable ROI.

But I can tell you the operating teams have done a great job with the initial ones that have gotten out the door.

We'll finish up the rest of them here in Q2 and early Q3.

And we're still on track to be ready later in the year, end of the year, call it, the latest to kind of outline for you what our remodel plan is.

But safe to say, you should expect us to have one formalized for 2019.

And then as far as brand awareness goes, our last ICR deck is the last time we updated it.

And Ken, I don't know if you can pull the numbers off the top of your head, but I think we're up about 15...

15 percentage points from the last time we did it.

I think it was a couple of years ago, 2 years...

That's in markets where we've been opened at least 2 years.

We're in market right now with one.

We just haven't gotten the results yet back that we've just been in for May, and so we don't have those results yet.

The latest ones we have are the ones we've got posted on the -- our website.

And it continues to move up and to the right there as well and that's really good news, and we're pleased with the results on awareness.

The next question comes from Kelly Crago with Buckingham.

Could you talk a little bit more about the California stores?

As the first stores opened there are just now entering the comp base, how are they trending relative to your typical store model in year 2?

And my second question is related back to new store productivity and what is embedded in 2Q sales guidance.

Should we assume you're picking up another more productive back-to-school week at the end of 2Q?

And if so, should it look similar to what you saw in the first quarter?

Because it looks like your 2Q sales guidance is embedding a pretty meaningful step-down in new store productivity relative to the first quarter, even after you adjust out that $6 million benefit.

Yes.

California stores.

Just to remind you, Kelly, we don't go into comp until the 15th full month, so we've still got about 2 or 3 months until they -- I think they go in...

They go into the next one.

July or August base, and so too early to tell on that.

But we are opening a number of California stores this year.

We are very pleased with California.

There's been no signs that California is not going to be a very successful state for us.

It will, over time, be our largest state with hundreds of stores.

And strategically, though, we're staying focused in Southern California.

We'll enter San Diego county, but that's about the only new county that we'll enter this year.

And we're pleased with how California is going.

Ken, you want to talk about NSPs?

Yes.

On -- Kelly, on the new store productivity, we do expect the benefit from the calendar shift in Q2 similar to what we saw in Q1.

And you're right.

There is some distortion if you're looking at new store productivity just based on our reported guidance.

But if you take into consideration the benefit from that calendar shift, plus you assume a similar year-over-year store opening timing, the implied new store productivity is still north of 90%.

We've got several stores -- we have several stores, Kelly, opening late in the...

Late in the quarter.

Late in the Q2, so that might be what you're seeing different there.

Yes.

The next question comes from Chuck Grom with Gordon Haskett.

On the customer acquisition front, as you guys said, half the spinner buyers, I think, were new customers to Five Below last summer.

And I believe in November of last year, you said 90% of those customers had shopped again at Five Below.

I guess I'm curious if you revisited that study in the first quarter.

And then bigger picture, as your brand awareness continues to grow, what you think the long-term outlook could be for store volume, which I think is around $2 million today?

Yes.

We haven't updated that study since then.

And if you recall, several questions ago, I think Ed Kelly was asking about customer loyalty programs.

We don't have one today, so we have to do studies and get implied data back from the customers who don't have a loyalty card, so it's really hard to track that ongoing.

Obviously, when you see us guide to a flattish comp for Q2, it demonstrates a lot of those customers continue to come back, and there's no sign of that piece slowing down.

What was the second part of that, Chuck?

Just in terms of brand awareness, where you think store volume -- I think a few years, store volume were at $1.5 million.

Now you're a little bit north of $2 million.

I think the rub historically on the Five Below is that there really is no maturation curve.

But in essence, you kind of do have one.

And I'm just -- I guess I'm thinking when you look out multiple years, what you think the average volume could potentially be.

Yes.

It's really hard to speculate that at this point, Chuck.

I mean, I think for models and looking at it, I would hold with what we're doing.

And the reason I say that is another scenario is we could build more stores.

And we've already shared with you the increase earlier this year from 2,000 to 2,500.

And implied in all of these stores that we opened, we are tamping down the growth potential on a lot of stores to go higher.

So our strategy ultimately will be about market share and not necessarily about just taking all our stores from $2 million to $3 million or to $2.5 million, so there's a lot of different ways we'll look at this over time.

But right now, I think it would be too early to be starting to speculate on a much higher average store volume.

I think it'd be more important that we focus on market share.

The next question comes from Paul Trussell with Deutsche Bank.

Wanted to just touch on the first quarter.

Even if we were to back out, right, the lower tax rate related to the stock-based compensation, I believe it would have still ended up at the very high end of the earnings range that you provided despite comps not being at the high end of the range.

Just wanted to know if there were any other kind of puts and takes we should keep in mind as it relates to margin performance in 1Q and whether there has been any adjustments made to the margin thought process going forward since the year started.

Sure.

Thanks, Paul.

We -- as I mentioned, we finished Q1 pretty much in line with our expectations from an operating margin performance, pretty meaningful expansion as you noted.

And it was really due to those areas that we had expected to see it in based on the guidance going into Q1, right.

So we've got -- we had some leverage on the 3.2% comp and then also the benefit of lapping some onetime costs last year.

You had the expenses around the California entry and also some incentive-based compensation that was recorded in Q1 of 2017, so nothing really changes our outlook and expectations as we move forward.

And as I mentioned in my prepared remarks, to lay it out for Q2, our guidance implies about 100 basis point deleverage in operating margin; and then larger in Q3, about 200 basis points; and then Q4, another 100 basis points.

And again, that's a combination of the delever on the lower comps, and then also we have the tax investments that really started kicking in, in Q2.

Got it.

That's helpful.

And just very quickly, Joel, you mentioned adding several in-store initiatives.

Could you just elaborate?

Since George has come onboard, what you should start to see in our stores is we're doing a much better job at welcoming our customers, being friendly.

We do, I think, all win the weekend.

There's a lot of different demos and interactions with our customers, sidewalk chalk paints.

Over the Memorial Day weekend, we had an inflate-while-you-wait program on floats.

And the customer just loves our stores, and that just continues to drive up the store experience and come on in and let go and have fun.

Thanks, Paul.

Thanks, Paul.

The next question comes from Scot Ciccarelli with RBC Capital Markets.

Scot Ciccarelli.

So I think it was Ken that mentioned that you guys had several all-time highs in terms of grand openings this quarter.

So I guess the question is did you see these records occurring in what would you view as new markets or existing markets?

And related to that, what would you attribute it to?

Is it better real estate?

Is it the new store format?

Is it the branding recognition people have been asking about?

If you can help us with that, that would be great.

Yes.

Of the stores we opened this year in the first quarter, 31 of the 33 were in existing markets.

Is that the right...

Correct, yes.

Only one new market.

New market.

And there were 2 stores in that market.

So the large piece of it, Scot, was in existing markets.

So that's part of our overall densification.

I think what we called out for you in sharing those 6 different markets is how widely spread out they were throughout the United States and how they were not concentrated in our hometown or high-dense markets like New York and New Jersey, so that really just shows you the universal appeal.

In terms of what's driving it, it's really a combination of everything you just said.

Awareness is getting stronger for the brand.

The new refresh format is working.

The customers like it.

The store is brighter, and we continue to see progress in that area.

So it's a combination of all those things.

And I think it was important that we be transparent and share with you how universally appealing the new store success has been.

The next question comes from Michael Lasser with UBS.

So, Ken, if you assume a pro rata portion of that $6 million benefit from the calendar shift is from your existing stores, that implies that you got about 200 basis points of comp from that shift.

So, a, is that correct?

And, b, it looks like you might be in that range, maybe slightly less, from your suggestion for the calendar shift in 2Q.

And then as part of that, you're guiding to a 350 basis point acceleration in your 2-year stack comp from 1Q to 2Q.

Should we think about that as the contribution from fidget spinners last year, and that's what's really going to drive the acceleration in your 2-year stack comp trend?

Thanks, Michael.

You had a lot in that question there.

A lot, but there's a lot going on in your comp.

Yes.

No, no.

I understand.

We'll -- I'll try to take it a piece at a time here.

First, I just want to mention to you, on a full year basis, we talked about the calendar shift.

That impact on a full year basis is immaterial, right.

But looking at it by quarter with regards to total sales, as you heard we noted in -- on the call, the benefit that we saw in Q1, we expect to see a benefit in Q2, but that's going to reverse in Q3 and Q4, negative impacts in those quarters.

And that's around the weeks that are coming in and out of those quarters, and it also was driven by our overall seasonality.

We also noted that our comp sales calculation is based on the NRF restated calendar.

So there's -- we line up similar weeks when we're reporting our comps.

So we feel that that's the best way to report our comps.

It sounded like you were trying to link maybe the calendar shifts in the comps.

Again, what we would see normally is that the shift that's taking place in total sales, if it's a benefit, it's probably a detriment to overall comps.

But again, we look at it on a comparable calendar year basis from a comp perspective.

And all of this, by the way, has been included in our guidance.

So we've given it to you for Q2, so it's all embedded in the numbers that we're providing to you.

And then the 350 basis points implied to your stack acceleration, is that the fidget spinner?

Well, Michael, there's a lot of puts and takes in there.

You look at last year when we got through the 9% plus comp quarter, a lot of people said, how much was it attributed to spinners?

And we put a lot of numbers in that 300 to 500 basis points number, and it's always hard to put an exact number on that because do you only look at the spinner sales themselves?

Do you look at spinner transactions?

Do you take the whole transaction?

Do you take a piece of the transaction?

So there's a lot of puts and takes that go into that.

I think the better way to look at it is as you come into Q2 here with a flattish comp guide and a 9.3% last year, we continue to be 3% to 4% annual comp.

And you look at that, it's slightly above that.

A piece of it is spinners but it's a really, really healthy comp.

I called out 5 different worlds.

I mean, we're feeling really, really good about where the business is at.

And as we go into Q2 here, what the marketing team has done, what the operators are doing to make the store experience, and most importantly, the -- when you see the merchandise calling out 5 of the 8 worlds, it just shows you how broad based and how relevant we continue to stay.

And it bodes well for having a great Q2 and then leading that into Q3 and beyond.

And can you just clarify one last point?

You raised your annual sales guidance by $7 million.

You beat the high end of your 1Q guidance by $2 million.

So there's an incremental $5 million.

You've reiterated the same comp growth.

So were some stores opening earlier than you had previously thought?

Or are the stores -- was the upside all due to the new stores producing more sales than you originally thought?

Yes.

I think you heard.

It's really the new store productivity.

As we said, we're really pleased with that very positive performance coming out of Q1.

And you're right.

That increase in the overall annual sales guide is coming from the beat to our high-end guidance from Q1 and then obviously the implied guidance for Q2, yes.

We're going to have to wrap here, Michael.

But I think a lot of people try and understand Five Below, this is a great quarter to really show you the power of what we have planned in the next 5 years with new stores and the impact they make positively on the overall concept.

With that, we've -- we're going to have to close.

I want to thank everyone for joining us today.

Have a great summer.

I expect to see you in the stores, just get in there, let go and have fun and enjoy Five Below.

Thanks, and we'll see you later in the year in our Q2 call.

Thanks, everybody.

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