Five Below Inc (FIVE) 2019 Q4 法說會逐字稿

Good day, and welcome to the Five Below Fourth Quarter 2019 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, operator.

Good afternoon, everyone, and thank you for joining us today for Five Below's Fourth Quarter and Fiscal Year 2019 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 in 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 thoughts on 2020 before handing it over to Ken to discuss our financials in more detail, and then we will open the call for questions.

Before I speak to our results, I want to offer our thoughts on COVID-19.

This outbreak has impacted the world and reminds us how truly we are a global community.

Our thoughts and prayers are with everyone impacted.

Our priority is the health and well-being for our associates and customers.

And earlier today, we announced the closing of all stores effective tomorrow evening at 7:00 p.m.

It is very difficult to determine the extent and duration of this rapidly evolving situation, so we will not be providing specific first quarter or full year guidance at this point.

We continue to be focused on managing the business with great discipline and maintaining our financial strength.

Now turning to the fourth quarter.

Our Q4 results were in line with the revised expectations announced in conjunction with our holiday sales release.

Our results were driven by strong performance from new stores, which remain our most significant growth opportunity.

We opened 150 new stores in 2019, of which 6 opened in the fourth quarter.

We ended the year with 900 stores, which represents a little over 1/3 of the 2,500-plus potential we see in the United States.

As previously stated at the January ICR conference, the periods between Thanksgiving and Christmas were relatively on plan, while the period from Thanksgiving leading up to Christmas was impacted by the shortened holiday selling season.

Our key selling periods were positive on a shifted comp basis, but were not enough to make up for the lost holiday selling days.

From a merchandise perspective, we saw strength in our Create, Candy and seasonal or what we call Now world and other trends like journaling, while gaming continued to be strong.

As expected, the large trend for the fourth quarter was Frozen 2. Our lineup of Frozen 2 products was amazing and included many items exclusive to Five Below.

On the marketing front, we continue to shift towards digital, and we increased our TV reach to approximately 60% of our stores.

Overall, 2019 was a transformative year for Five Below, considering the impact of -- tariffs had on our business and our decision to break the $5 threshold for the first time.

The tariffs were a fluid situation throughout 2019 and required a multipronged response with significant changes on many fronts, including vendor negotiations, pricing and corporate efficiencies as well as making sourcing changes for 2020 and beyond.

I want to acknowledge the support we got from our vendors and thank them once again for their collaboration.

The pricing changes above $5 required extensive testing and analysis before implementation.

And I am pleased that the results were in line with our expectations.

I want to thank the many teams throughout the organization for all the work they did to make sure these changes were well executed.

Regarding new sources of production, our merchant and sourcing teams diligently research new opportunities and successfully made and continue to make changes on that front.

We enter 2020 expecting to fully mitigate all known tariffs.

Turning to 2020.

We are focused on successfully managing Five Below through these unusual times associated with COVID-19.

To say this is a once in a lifetime event would be an understatement.

I remind you that we are an extremely healthy company with no debt and strong cash reserves.

In addition, our extreme value offering will be even more important to our customers when we reopen as they seek ways to spend even more wisely.

While not our usual practice, I'd like to share an update on our quarter-to-date performance so you better understand the underlying base of the business.

Our comps through Wednesday, March 11, the day the World Health Organization declared COVID-19 a pandemic, were up 2.9%.

Through yesterday, they were up 0.4%.

I'd also like to give a shout-out to our associates.

They have been amazing and have rapidly adjusted to a new working environment.

As we navigate through this period, we also remain focused on 3 strategic areas: experience, product and supply chain.

Through innovation, we will continue to elevate the experience for our customers and associates.

And as a merchant-driven organization, we will continue to deliver even better WOW trend-right products.

Our supply chain is key to ensuring products are in the stores and on the shelves in a timely and cost-efficient basis, and we are building out our DC infrastructure to make these enhancements possible.

In addition, let me give you a further update on Ten Below and the overall impact it will have on our store experience going forward.

We finished 2019 with 25 Ten Below test stores and learned a lot from the holiday Ten Below Gift Shop that was displayed throughout the chain.

We have decided to move forward with an enhanced store prototype that expands our offering in the Tech and Room worlds to include new products in the $6 to $10 range.

This new prototype allows us to provide all the benefits of our previous fresh format without having to increase our total square footage or reallocate space from other worlds.

The rest of the store will remain priced at $5 and below.

We expect nearly all of our new stores and remodels to open in this format.

In addition, on the IT front, we are working on several strategic initiatives to support our growth, including modernizing our supply chain technology with new distribution and transportation management systems, digitizing vendor transactions, implementing our core merchandising platform and rolling out a cloud-based data and analytics platform for demand forecasting to drive inventory optimization.

Additionally, we are migrating to the Hollar e-comm platform, which will accelerate our digital capabilities.

Hollar.com is a digitally native brand with better technology capabilities and lower customer fulfillment costs than we have.

Having these robust systems as well as our DC configuration in place will serve us well and support our future growth.

In summary, we are pleased with our 2019 performance.

These are unprecedented times, and we are navigating them with our customers and team members at the center of our decision making.

At the same time, we continue to work on a number of strategic initiatives across experience, product and supply chain as we further innovate and support our future growth.

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

Ken?

Thanks, Joel, and good afternoon, everyone.

As Joel said, we are operating in an environment that is rapidly changing, and we are adapting quickly.

With regard to our financial health, we have the benefit of a strong balance sheet, and we are managing the business and our assets with discipline.

Now I will review our fourth quarter and fiscal 2019 results and then discuss fiscal 2020.

Our sales in the fourth quarter of 2019 were $687.1 million, up 14% from the fourth quarter of 2018.

We ended the quarter with 900 stores, a year-over-year increase of 150 new stores or 20%.

Comparable sales decreased 2.2% for the fourth quarter of 2019 versus a 4.4% comp increase in the fourth quarter of 2018.

The comp decrease for the fourth quarter was driven by a 3.6% decrease in comp transactions, partially offset by a 1.4% increase in comp average ticket.

Gross profit increased 18.5% to $289.1 million from $244 million reported in the fourth quarter of 2018.

Gross margin finished at 42.1%, increasing 160 basis points from 40.5% last year.

The improvement in gross margin was due to improvement in merchandise margins, lower incentive compensation and distribution efficiencies, partially offset by deleverage in store occupancy costs on the negative comp.

SG&A as a percentage of sales for the fourth quarter of 2019 decreased to 21.1% from 21.2% in the fourth quarter of 2018 as lower incentive compensation was offset by deleverage of fixed costs.

Our operating income increased 23.7% to $144.1 million.

Operating margin increased approximately 165 basis points to 21% of sales.

Our effective tax rate for the fourth quarter of 2019 was 23.6% compared to 24.4% in the fourth quarter of 2018.

The decrease in the effective tax rate was driven by discrete items, which included a benefit from share-based accounting.

Net income for the fourth quarter increased 23.7% to $110.4 million or $1.97 per diluted share from $89.3 million or $1.59 per diluted share last year.

Diluted earnings per share included a $0.01 benefit from share-based accounting in both years.

For fiscal 2019, total net sales were $1.847 billion, an increase of 18.4%.

Comparable sales increased 0.6% versus a comparable sales increase of 3.9% in 2018.

This comparable sales increase was driven by a 1.1% increase in comp average ticket, partially offset by a 0.5% decrease in comp transactions.

Gross profit for the full year increased 19.3% to $674 million.

Gross margin increased by approximately 30 basis points to 36.5% driven primarily by increased merchandise margins in the fourth quarter, partially offset by deleverage of occupancy expenses on the lower-than-expected comp.

SG&A as a percentage of sales for the year increased 50 basis points to 24.7% from 24.2% in 2018, due primarily to deleverage of fixed costs, depreciation on the new Southeast distribution center and the new lease accounting rules, all of which were offset in part by lower incentive compensation.

Operating income of $217.3 million increased 16.1% in 2019.

Operating margin of 11.8% decreased approximately 20 basis points from last year's operating margin of 12%.

Our effective tax rate for the year was 21% compared to 22% in 2018.

The decrease in the effective tax rate for the year was due primarily to the benefit of share-based accounting.

Earnings per share was $3.12 for fiscal 2019, an increase of 17.3% versus earnings per share of $2.66 for fiscal 2018.

Diluted earnings per share included a $0.14 benefit from share-based accounting in 2019 and a $0.09 benefit in 2018.

Excluding the impact of share-based accounting on the tax rate in both periods, EPS for fiscal 2019 grew approximately 16% to $2.98 versus last year.

EPS included an approximate $0.01 negative combined impact from both the Nerd Street Gamers and Holler.com investments.

We ended the year with approximately $262 million in cash, cash equivalents and short-term investment securities and no debt with $50 million available under our revolver.

For fiscal 2019, we made share repurchases of approximately $37 million or 338,000 shares, which contributed approximately $0.01 to EPS.

Inventory at the end of the year was $324 million as compared to $243.6 million at the end of fiscal 2018.

Ending inventory on a per-store basis increased approximately 11% year-over-year due to the lower-than-expected sales and the timing of receipts as we pulled forward tariff-related merchandise.

In Q4, we had a high sell-through on our seasonal Now world merchandise, and we are pleased with the level and quality of our inventory going into 2020.

With respect to CapEx, we spent $212 million in gross CapEx in fiscal 2019, excluding tenant allowances.

This reflected the cost of opening the new Southeast distribution center and payments on the new Texas distribution center, opening 150 new stores, completing 50 remodels and investments in systems and infrastructure.

Now I would like to turn to 2020.

As Joel mentioned, given the uncertain nature of the future events and financial impacts of COVID-19, we're unable to provide first quarter and full year sales and earnings guidance for 2020.

However, I will discuss what our outlook for fiscal 2020 was prior to the COVID-19 situation.

Until last week, we were prepared to provide an outlook for fiscal 2020 that was in line with our longer-term 2020 until 2020 vision with top and bottom line growth of 20%.

We assume the current tariffs would remain in place throughout 2020, the impact of which we expected to fully mitigate as we did in 2019.

Excluding the future financial-related impact to COVID-19, our sales and income outlook was as follows: 20% sales growth based on approximately 180 new store openings and comparable sales in the low single-digit range.

Included in our comp estimate was the cannibalization impact from new stores of approximately 100 basis points.

Our full year effective tax rate was expected to be approximately 24.5%, excluding the impact of share-based accounting.

As you know, our practice is to update the tax rate outlook quarterly with actual results when we report earnings.

Diluted earnings per share was estimated in the range of $3.33 to $3.47, which included $0.08 related to Holler.com integration costs in the first half of the year and the accounting impact from the Nerd Street Gamers investment.

Excluding the impact of share-based accounting in 2019 as well as the impact of the Holler.com integration and the Nerd Street Gamers investment, EPS growth for 2020 was approximately 20%.

And finally, we expected gross capital expenditures of approximately $270 million, excluding the impact of tenant allowances.

This reflected approximately 180 new stores and 45 remodels, opening a new distribution center in Texas, making initial payments on distribution centers in the Midwest and West and investing in systems and infrastructure.

Again, this discussion was designed to give you some additional information about 2020, but it is not our guidance.

For all other details related to our results, 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.

2019 was a very productive year for Five Below as our team successfully mitigated tariffs while advancing our strategic objectives around experience, product and supply chain.

Across the world, people are living through a very challenging period right now.

Here at Five Below, we are drawing inspiration and strength from our favorite customer, kids.

We're embracing their unmatched resiliency and ability to grow from challenge.

And we're certain that together, we will come out of this a stronger community.

I want to thank all of our associates for their hard work and dedication to making Five Below what it is today and for their commitment to our customers.

Even as we make decisions to adapt to the rapidly changing environment, our long-term focus and goals are still to continue to innovate, be relevant, deliver WOW products at incredible value and provide an amazing, differentiated experience to our customers.

We believe we are well positioned and capitalized to continue our growth in the future.

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

Operator?

(Operator Instructions) The first question is from Paul Lejuez with Citi Research.

Wondering if you can maybe talk about how you're going to change your marketing efforts.

Any stepped-up e-comm efforts now that you're going to be dealing with some store closures for a while?

And also, how does that change how you manage your TV marketing in this sort of environment, customer outreach in general?

And then also curious about the number of store openings.

I think you laid out what your plan was going to be, and then kind of said that those are no longer in place.

I didn't know if that applied to your store openings and CapEx as well or if you're going to pull back on that.

Right.

Paul, thank you.

So let me just discuss the marketing efforts.

As it relates to first quarter, and that's really the only place we've made any changes at this time, we have pulled back on TV and the circular that will not run for Easter this year.

We are leaving in place our digital efforts and are focused on our e-comm in that case.

We are seeing an increase in e-comm business and are having no problems keeping up with it.

As for the 180 stores, that is still our plan and -- although, at this time, you should -- you'll certainly should expect a change in cadence on those stores.

And it's too early for us to give you guidance on what that new cadence would look like.

Thanks, Paul.

I'd just remind everyone, if you could try and keep it to one question that would be great, so we can get through everybody here.

Thank you.

The next question is from Edward Kelly with Wells Fargo.

So a question for you first just is, what would you need to see to open stores again?

And then beyond that, as we think about the cost structure, help us out with what's fixed, what's variable.

And if stores are closed for an entire quarter, how much of the cost structure is going to stick with you?

Yes.

And Ed, what was that question about the closed store?

Well, just initially, what would you need to see to open stores again?

Yes.

Yes.

And then beyond that, the cost structure and how much stays with you?

Yes.

Look, we're shutting stores down this week.

And while it will be customer-facing tomorrow, our associates will remain in the stores Friday.

Not open to the customers as we -- as you can imagine, had a lot of freight in route to the stores.

And so we're taking all that in, so it doesn't get trapped in any supply chain disruption, should there be any, and preparing the stores to open.

And so to that point, we will be able to open at a moment's notice.

But it's honestly too early to speculate what it will look like.

I mean I think at this point, we'll turn to take guidance from local, state and national as far as when it's safe to start to resume opening stores back up, but we want to stay in compliance with that.

And then, Ken, I'll turn to you.

Yes.

And Ed, just around the cost structure, as you would guess, a majority of cost of goods sold is obviously variable related to merchandise cost.

But there is some fixed cost in there because we record occupancy cost up in the cost of goods sold and some buying costs there, too.

And then when you look at SG&A, about 40% of our SG&A costs are fixed.

So again, just to give you kind of an idea of the cost structure based in our P&L.

The next question is from Matthew Boss with JPMorgan.

Look, while there's not really a compare for the near-term closures, maybe if you took a step back, can you just speak to how the model has held up during times of past economic stress?

Trying to get a sense as we maybe come out of this on the other side if unemployment is higher or there's changes to your core consumer.

Just how you see your value proposition positioned today relative to peers.

And anything you could do to bolster that coming out on the other side of this?

Yes.

And I might let Ken give a little more color.

He was actually here back in '08 and '09.

But as you look back to my prepared remarks, certainly, if you speculate that customers might tighten their belt initially coming out of this, as it was in '08 and '09, during the financial recession, we were very successful coming out of that.

And I think this will be a place where customers are going to turn to us as they look for value and stretch their dollar until things get back to a more normal type of period.

I don't know, Ken, if you had anything to add real time of -- back in '08.

No, Matt, I think Joel answered it.

I was here during that time period going through '08 and '09, and obviously, there was that initial shock from a traffic perspective.

I think all retailers were impacted right out of the gate.

But we did see ourselves come back.

It felt quicker than other retailers.

And I think to Joel's point, I think it was customers out there who really discovered the value that we were able to offer because we were another choice at the end of the day.

So it ended up being somewhat positive for us as we came out on the other end of that and came out relatively quickly.

The next question is from Simeon Gutman with Morgan Stanley.

My question is the decision to close, and you gave out those numbers, which was helpful, which I think means business was down somewhere closer to 20-ish percent.

But can you tell us, was that getting progressively worse each day?

Or was it leveling off?

And Ken gave some helpful numbers on the cost, fixed cost and SG&A and gross margin.

I don't know if you've done this math, but how long can you record no revenue without needing any liquidity?

Do you know what -- the number of days?

I guess you're going to get us to the conclusion of doing that math quicker than we could do it ourselves.

I think on your initial math there, you're in the right ballpark.

It's -- it might be a little high in terms of what it was down, but it was pretty consistent through that period of time.

And I think it was important for us, while we can't give you guidance, to be, as we always try to be, extremely transparent on how the quarter was shaking up.

And as many of you expressed concern about our negative comp during the holiday and whether it was true to the shorter days, I think this return to low single digits on the upper end of it, to that matter, is what we really wanted to share with you.

And Simeon, it's too early to do that scenario planning.

Obviously, that's where we'll focus right now.

Ken gave you a lot of color commentary on our balance sheet.

It's very strong, and we'll start to look at that.

But at this point in time, it's too early to kind of lay out every scenario.

Ken, do you have anything to add?

Sure.

I agree with what Joel mentioned, Simeon, in terms of the go forward.

But I will remind everyone, I mean, we are an extreme value retailer.

And one of our core values has always been around operating discipline and cost efficiency, and it's really who we are.

And as we even -- and as Joel mentioned in this call, we were faced with a similar situation with mitigating tariffs in terms of the challenge that was put in front of us, and we were successful in doing that.

But we'll take the appropriate actions across the business as the situation evolves, obviously, to maintain our financial health and our future growth.

Yes.

I honestly think some of -- yes, thanks, Simeon.

Some of that, that we went through with tariffs last year probably made us a better, stronger company.

As that number approached $100 million, we had to get pretty creative to manage and mitigate all those tariffs and that discipline will serve us well as we go through this as well.

The next question is from Chuck Grom with Gordon Haskett.

If you think about the quarter progression on comp, and if we assume business is going to be closed for the next 2 or 3 weeks, it's probably realistic you're going to comp down, say, close to 50% in the first quarter.

And it sounds like, to your question earlier, that the SG&A cost structure, 40% is going to be fixed.

So it seems like earnings are probably going to be probably close to flat, maybe up $0.05 in the first quarter.

Ken, just roughly speaking, are we way out of left field with that type of math?

Thanks, Chuck.

Listen, appreciate the question, but as I mentioned before in my prepared remarks, I mean we gave you a little bit of the indication of what we were thinking before the situation here with the COVID-19.

It's really -- it's really difficult for us to take a look forward like that, and we really want to kind of avoid making any of those statements in terms of what the potential will be, especially in terms of specific financial results.

So yes, on that question, I think we're just going to say that we'll leave it where we talked about for the full year.

And as I mentioned before, we're going to continue to react appropriately to the situations that are put in front of us.

And I would just add, I mean, as I shared with you, having said that, when we do open -- reopen, the supply chain is fully stocked, and there is really not a lot of hurdles we got to go through to reengage our stores and associates and get the doors back open.

The next question is from Karen Short with Barclays.

I guess what I want to focus on one clarification is with respect to the store closures, are you going to make a blanket decision to open all stores at once when this lifts?

Or will it be maybe a state-by-state or region-by-region basis?

But then the bigger question I had was, in terms of inventory, how much inventory can you really pack away, I guess, from a DC perspective?

And what part is seasonal and kind of has more of a shelf life if -- to the extent that you're dealing with an excess inventory situation?

Yes, no problem.

If you go back and kind of study the last few calls we've had, strategically, the single biggest initiative we've been focused on for the last several years has been distribution center expansion.

And we're in a fortunate spot that we've got plenty of DC capacity.

In fact, our Texas DC has just gotten its certification, and we are now -- while we're not open for business and shipping out, we've got all the racks in place and are starting to receive inventory.

So that -- now it's a brand-new DC with a lot of capacity.

So we're not at all worried about that side of things at all.

And then as far as how we're going to reopen stores, it's a little speculative on our part, but I would guess it would be more regional or local rather than all at once just given the way that things have transpired, and how we've watched stores shut down or states react.

So -- but I'm completely speculating there, Karen, and I think we'll watch how this unfolds and take some guidance from state and national officials.

The next question is from Michael Lasser with UBS.

Your model...

We thought you went underwater there, Michael?

Go ahead.

Can you hear me okay?

Yes, we got you now.

Yes.

So your -- Joel, your model is very traffic-dependent.

And even once you open your stores, it's likely that we're going to see social distancing and overall engagement with physical locations by the consumer be much -- the consumer is likely to be much more hesitant or resistant to go out in freely traffic in physical locations.

And I think your comps were down low to mid-teens in that week before -- in the last week or so.

Do you think that's a good indication of how social distancing might impact your traffic overall, even in that kind of steady state environment?

And how do you manage through that, even putting aside the economic ramifications of what the current situation might cause?

Yes.

A lot of that, Michael, I'd have to speculate on.

But I will tell you, part of the reason we've stayed open, the fact that we've only been down in the teens, it just shows you how much the customer needed us and especially as they were kind of preparing to hunker down and be with their kids that were suddenly off school.

But during that 10-day period, we instituted, as did a lot of retailers, a new way of working.

And we opened every other register.

We've brought in lots of hand sanitizers, et cetera, et cetera.

And that kind of procedures will continue afterwards, I'm sure, but we're -- store ops teams is way more than prepared to kind of handle that, and we'll be prepared as the customers get comfortable and come back.

Yes?

Can I clarify some of the...

Go ahead.

You said 100 basis points of cannibalization.

I think that's much higher than what you've experienced historically.

So what's driving that?

Sure.

Honestly, Michael, we actually have never really shared that number specifically.

And part of the reason as we're ramping up stores, we also want you all to understand, again, it's in the vein of transparency, how that comp multiple is built.

Know that, that cannibalization is planned for and is built into -- as we're kind of building our stores out.

And so while we might go into fewer new markets, our focus on densification is a good thing.

And we really started to see ourselves picking up some market share in some great areas.

And those stores tend to bounce back after we cycle the year.

But I just wanted you to have, again, some transparency of what's built into the whole comp multiple.

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

Scot Ciccarelli.

So Joel, I know you said earlier that your current plan is to maintain your 180 store openings for the year.

But with negative, call it, mid to upper teen comps, that can be pretty spooky.

So I guess the question is, how much flexibility do you guys have on your prior CapEx plan?

Sure.

Well, we actually have quite a bit of flexibility there.

But I would tell you, as I think I might have said, first of all, we'll certainly come back after things get back to normal and give you specific guidance if we stay at 180.

For sure, our cadence will change, but we feel really good about those stores and communities that we need to go into.

Built into that CapEx plan was also distributions that we purchase.

So certainly, we have some flexibility there, whether we would go forward with purchases or not, but that makes up for quite a bit of the overall CapEx from that perspective.

I don't know, Ken, any others on CapEx?

No.

I think you mentioned it.

Again, there is probably going to be some flexibility for us down the road, but I think at this stage of the game, it's still a little bit too early to tell.

But just to get back to the comment that these are all things that we're going to look at as we move forward here and as the events evolve, yes.

Yes.

We'll be looking at everything, Scot.

Go ahead.

I guess my question was just about like if you don't get the volume back and like social distancing does remain a thing for quite a while, you're not -- you're potentially not going to need as much of the distribution.

So I'm just wondering if there is an ability to maybe put off some of those expenses and kind of defer that to the future.

Absolutely.

I mean that's what I was talking about on the DC, and we don't have to make those decisions in the next 30 days here.

So the timing works out nice.

And also, I mean, look, we're a growth company.

That doesn't change.

And I think our customers are going to need us even more when you come through this with our value-based model.

Right.

And Joel, just to add to that, too.

So Scot, just to add to that, I think I mentioned it before, again, related to go forward, our financial position, liquidity, whatever it may be, we're going to look at all the potential actions across the business and see what makes sense for us as we move forward.

The next question is from Brian Nagel with Oppenheimer.

First question I have, we've talked, even through the holidays, about just the online effort and maybe pushing that further.

So as you look at what's happening now with the virus and shutting down the stores, is that -- is pushing online further becoming more of a topic?

And so I guess a couple of parts.

I mean to what extent could your existing online operations help to offset these store closures in the near term?

But then as you look beyond that, are you now more focused on building out a larger online offering?

Yes.

Look, Brian, don't forget that we made the investment in Hollar long before this came along.

So our belief in enhancing our digital capabilities for the long term and being able to accelerate that were necessary and was the right thing to do strategically.

So that was done independent of COVID-19 and the ramifications associated with that.

As far as looking at it in the short term, as we've said on every call, our e-commerce business is still a very, very small piece of the business.

So this is not a short-term fix for Five Below, but it has seen a significant uptick on the business.

And it just ties right into why we made the investments we did last year.

And long term, I think that strategy is even smarter than it seemed when we made the decision back in 2019.

But don't look for it as the -- suddenly, the business model for Five Below changed here in the next 3 months.

The next question is from John Heinbockel with Guggenheim.

So Joel, it's obviously pretty fluid.

But how is this impacting the stuff that Michael is -- not long term, but when you think about plans sort of beyond Easter receipts, changes he's making given the fluidity of this?

Yes.

I mean look, it will obviously have an impact on Easter.

But putting that aside, Michael's team's probably never been better staffed, prepared.

We brought in 2 GMMs last year, very senior capable people and really to beef up that organization and continue to invest in our merchandising organization.

And so what we've got in the pipeline, especially when you think of the opportunities Michael now has at his disposal because of Ten Below, and then you couple that with the scale benefits of how much of a bigger company we are now than we were a couple of years ago, I see nothing but upside for what the merchants have in store as we move forward and get back to a more normal situation once we move past this, but there is great opportunities in front of them.

The next question is from Paul Trussell with Deutsche Bank.

You just spoke to some of this, but Joel, you outlined in the release your strategic priorities for this year were experience, product and supply chain.

So maybe kind of putting the virus to the side, to some extent, talk to us a bit about what goals you wanted to achieve and what actions you're taking to push forward on those strategic priorities.

Yes.

Great question, Paul, and thanks for looking past it, right?

And I think as we get back to more normal calls, we'll certainly go into it in more depth.

But let me just give you a little color quickly because it is important.

On the supply chain front, the path we're heading down by holiday of '21 is that we will be able to distribute to all of our stores in less than 2 days.

And that has not been the case for us.

You'd have to go back to our old days when we were just a regional player in the Northeast.

So that's a significant change.

That's been a multiyear strategy and that all comes together nicely by next year.

We're close to getting to -- this spring, we'll open up the Texas facility, which will really help us out west significantly.

And then on the experience and product, without getting into it in detail, let me just lump those together for a second here because I think the single biggest change we're making is in the new prototype.

And that new prototype really touches the experience, coupled with a real enhancement in products, some of the stuff I was just talking to John Heinbockel about as we were able to now take all the learnings from Ten Below from the gift shop we did and bring that into one new prototype without having to expand the size of the footprint.

So you talk about leverage and really getting efficiencies coupled with then unleashing the merchants, especially in Tech and Room, to explore extreme value price $6 to $10.

So just a little color commentary on those 3 as it comes together, and certainly, as we get back to quarters to come, we'll continue to spend more time on that.

But hopefully, that gives you a little color.

Thanks, Paul.

The next question is from Judah Frommer with Crédit Suisse.

I just wanted to follow up on the variable costs within SG&A.

Ken, is there any way you can help us kind of size what could actually be pulled out kind of dependent on the time line?

How much of that is store or DC labor?

And if you did cut some of that variable cost, would you have to rehire?

And is there expense tied to that as stores reopen and volumes come back online?

Yes.

Thanks for the question, Judah.

But again, as we mentioned before, we're at the beginning stages of this, and this is something that we're going to look at and dig into.

But at this stage of the game, there are no specifics to provide on a go-forward basis, aside from saying again that we'll take the appropriate actions across the business.

And as I called out, there are certain volume of fixed costs and obviously, some variable costs that we'll look at as we move forward.

And I hope you can understand why we're not there.

Our first priority, as I said in the call, has been taking care of our associates.

And so we've had several conference calls in the last 24 hours with the crew out in the field, reassuring them that they work for a strong company, and we'll be there for them.

And so that's now behind us.

They understand how they're going to close down the stores, and then we'll start to turn to answering some of your questions.

But we entered this with a really strong balance sheet and a lot of liquidity and access to additional capital should we need it.

Thanks, Judah.

The next question is from Jeremy Hamblin with Craig-Hallum.

Thank you, guys, for the transparency.

I wanted to ask a supply chain question.

Just flashing back to maybe where things were, let's say, 10 days ago, can you give us a sense for -- you're obviously dependent on a lot of imported goods from Asia.

I know this is a time of year where typically you're getting to trade shows, a lot of which take place in Asia where you're making plans for, frankly, the holiday period and for the fall season.

Has the impact -- have you felt like the supply chain from Asia has started to come back up?

Has it had any impact in terms of the assortment that you have and can offer to your customers?

It seems like you had maybe an uptick in things like Candy and snacks and maybe a little bit of a downtick in things like Tech accessories.

Any color that you could share on those items?

Yes.

I mean great question, Jeremy.

And I will tell you and for everybody, honestly, probably, our import supply chain has probably never been stronger since this began 4 or 5 months ago.

And we can -- I can tell you that we did see a big decrease in containers, and they were significantly behind.

But even just in the last 2 to 3 weeks, the number of our factories, almost every one of them is back working, products flowing, bookings are starting to happen, and we're actually starting to see a catch-up in a lot of stuff that was behind.

So I feel really strong about the import supply chain side of it.

And then beyond that, I think it just starts to get a little too speculative, but we're in a great shape from that perspective.

Thanks, Jeremy.

The next question is from Michael Montani with Evercore.

Just following up on the sourcing front.

Just wanted to see -- you had mentioned, obviously, some efforts that you all had made, I think, on the diversification front.

I was thinking, in the past, maybe 60% of the goods were imported from China.

Can you provide us some sense of what that's kind of run rate into now given the efforts that you've put in?

Thanks, Michael.

The majority of our goods still are from China.

As I said in my prepared remarks, the team has been doing a great job, starting to move countries.

We're starting to see the ramp-up of some lines we moved out of China last year and into Vietnam.

In fact, those first orders were just shipped a few weeks ago, but we'll have to go back and kind of reassess that now and kind of understand what the mix is.

When it all does settle, it will still be the majority out of China, but we are significantly less dependent than we were before, and you would expect us to continue to see that decrease.

So it's a little fluid right now, but I would just tell you it's still on the majority.

Thanks, Michael.

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

I just had one quick question.

You mentioned the Dallas distribution center is supposed to open this spring.

And I was wondering, will this current situation -- is there any risk in delaying the opening of that Dallas facility?

Thanks, Anthony.

Look, I don't want to -- in this situation, I don't want to say 100%, but we have received our certificate of occupancy.

We are starting to receive goods, and there is -- we're moving ahead as usual.

I mean obviously, if there is shutdowns in the city that prevent us from continuing to take goods in or something like that, there could be a delay, but the building is basically done, and we're just putting the finishing touches on it.

Just one clarification.

I think you said Dallas, it's in Houston.

It's outside of Houston in Conroe, but no delays expected.

Thank you.

Thanks, Anthony.

This concludes our question-and-answer session.

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

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

Obviously, not our normal call.

We look forward to speaking to you again after the first quarter call, and we will commit to keeping you informed as situations develop.

But thanks for getting on the call with us.

Have a great evening.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

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