Five Below, Inc.

Good day and welcome to the Five Below Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press stars and one on your touch-tone phone. To withdraw your question, please press stars and two. Please note, this event is being recorded, and I'd now like to turn the conference over to Christiana Fels. Vice President of Investor Relations. Please go ahead.

Thank you, Cole. Good afternoon, everyone, and thanks for joining us today for Five Below's second quarter 2020 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.

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I want to begin by saying how proud I am of the execution and results the entire Five Below team delivered, especially given the pandemic impacted and rapidly involving backdrop. We did this by playing offense and staying focused on our growth strategies. We swiftly responded to new and changing operating conditions while safely reopening our existing stores adapting our new store opening plan, remodeling stores, accelerating our digital strategy, and ensuring the relevance of our merchandise assortment and marketing messages reflected the current environment and our customers' needs. Through it all, we did not lose sight of our longer-term vision and goals. This discipline and focus is evident in the significant strides we made on the foundational initiatives that underpin our growth strategy, namely our people, systems, and infrastructure, which I will discuss further. Our teams worked very hard to accomplish all of this, and they did so with the safety and wellbeing of our customers and crew remaining top of mind. I thank them for their flexibility, dedication, and determination and rising to the challenges presented by this unique environment. As you can tell, it was a busy quarter for Five Below. Let me start by discussing the restart and ramp in our operations and reopening of our stores. We reopened stores in weekly ways throughout the quarter and virtually all of our stores were reopened by the end of June. Additionally, during the reopening period, we opened a record 63 new stores, most in the new prototype, which features five beyond and the reimagined front end, which includes self-checkout and an expanded snack area. And we remodeled eight additional stores. We did this while restarting our supply chain, which has largely been shut down. Our vendors have been great partners throughout this entire period. quickly ramping up their own operations to fulfill our orders. During the quarter, we also opened a new distribution center, expanding our supply chain network and enhancing our overall distribution efficiency. In addition to all the work we did related to stores, we rapidly improved and expanded our e-commerce capabilities in the quarter, enabling strong current and future growth from this channel. We leveraged the platform, capabilities, and customers acquired with the purchase of holler.com's assets last year to improve and grow our e-commerce offering, achieving three major milestones in Q2. First, the successful migration of our site to our new platform was completed in mid-July without any interruption to our site.

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Second, we launched the Five Below app about a year ahead of our originally contemplated timeline. And third, we fully transitioned... holler.com's Ohio e-commerce fulfillment to five below. With a stronger technology stack, a newly launched app, and a second and fully dedicated e-commerce fulfillment center, we are in a great position to continue to improve and expand our e-com business. Now on to our financial results. Total sales in the second quarter grew 2% over last year's second quarter, to $426 million despite the impact of store closures, as Ken will later discuss. We are very pleased that we generated a positive re-open comp of approximately 6 percent from our re-open stores and e-com combined. With disciplined expense management, we delivered earnings per share of 53 cents compared to 51 cents in the second quarter last year. Our most attractive growth opportunity continues to be new stores, which were disrupted by the pandemic. We were able to partially catch up in Q2, opening 63 new stores, and this brings our year-to-date openings to 84 new stores, similar to the 83 new stores opened in the first quarter of 2019. These new stores opened in diverse geographies across 24 states. We were pleased with the performance of these openings, even in this COVID environment, which curtailed our ability to grand open new stores in the manner we typically do. We also operated the new stores with reduced hours compared to previous years as we did throughout the entire chain. Despite this, two stores still made our top 25 summer grand openings. and they were both in the brand new markets of Denver, Colorado, and Las Vegas, Nevada, which demonstrates the universal appeal of Five Below and the growing awareness of our brand. The appeal of Five Below lies in our unique, special, flexible, and edited assortment of WOW product at incredible values delivered in a neat, clean, and fun store environment. History has taught us that tougher economic times serve to strengthen that appeal. And our commitment to our customer promise of delivering wow and value is stronger than ever. With nearly 1,000 stores today, we have a long runway of growth with a nationwide potential of over 2,500 stores. As we navigate the current environment, we do so with the flexibility and speed that is inherent to our model and the discipline that is core to our DNA. And most importantly, we do so while staying true to our customer promise of always delivering value. We have a unique ability and organizational agility to make quick assortment changes that ensure continued relevancy. Recognizing that shopping patterns have changed with customers consolidating trips and prioritizing health, safety, and convenience we added more essential household and wellness items and snacks at great prices. In addition to the hand sanitizers, wipes, and masks we sourced in the first quarter, we now offer new home and personal care essentials, including kitchen and bath products. We also continue to see demand for fun teas and tops, as well as home or nesting products, including items for pets. Both new and existing customers discovering or returning to our stores have recognized and embraced our offering of fresh product, extreme value, and a fun shopping experience. And we are pleased with their response. With regards to marketing for Q2, given the environment, we focused our program on targeted digital advertising, scaling back from traditional TV, and eliminating print flyers. We created an authentic approach with a digitally focused Kickstart the Fund campaign that launched in mid-June. It was a very successful and cost-effective campaign for us. We were present across many digital platforms including YouTube, Instagram, Facebook, Snapchat, Snapchat and others. And we also executed paid search and emails. While our digital reach increased, our TV reach was reduced to just over 10% of our stores in Q2. We will continue to evaluate our marketing mix, prioritizing digital marketing strategies, including e-com, where we have a great opportunity to attract and retain the large number of customers new to 5below.com.

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In addition to our operating activities and achievements during the second quarter, we also made significant progress on our strategic investments across people, systems, and infrastructure, which will allow us to continue to scale our business to over 2,500 stores. Some examples include, we made key senior hires at the senior vice president level for digital and stores. We installed a new warehouse management system And we opened a new distribution center in Conroe, Texas, which is our second owned facility. We also announced our next distribution center, which will be located in Buckeye, Arizona, where we are currently already under construction for a new building to service our stores in our Western states. We expect this DC to open in mid 2021. I am extremely impressed at the team's speed and ability to accomplish these major fundamental milestones that are critical to our growth, especially given the very challenging environment. Looking ahead to Q3 and the holiday season, I'm very pleased with our readiness, including our lineup of amazing products at outstanding values, as well as the improvement in store operations. that will make for a better customer experience during this important time of year. Given that this back to school season is far from traditional, we shifted the level of composition of our assortment accordingly, from backpacks to study and work at home related items, as well as more essential items. Being flexible, quickly adapting, and constantly innovating are core to Five Below and what we do every day. And these capabilities service well in this current environment, which requires extreme nimbleness. We are in the middle of finalizing our plans for holiday. Our buying team has been busy sourcing amazing, fresh, new and relevant products. We believe our inventory will be in a very good position as we have adjusted orders and are closely monitoring deliveries in order to maximize the sales in the back half of 2020. From a store operation standpoint, we are working on a number of initiatives so that our customers can continue to shop safely and efficiently in the holiday quarter. For example, we are in the process of increasing the penetration of self-checkout and adding temporary registers, especially in our higher volume stores, and expect half of our chain will have self-checkout this holiday season. These initiatives improve the customer experience by significantly increasing register capacity and customer throughput, which is especially important during the holiday shopping period. We also plan to optimize store hours and once again offer curbside pickup as needed. In addition, and brand new this year, we expect to implement a trial for same-day home delivery and VOPS. On the merchandising front, we will be bringing back the seasonal Wow-Wow, now called Five Beyond, featuring unbelievable products at extreme value. And we are allocating more space for these incredible gifts, as well as starting our holiday selling period earlier than we did last year. Our digital team will be increasing their reach throughout the second half to let customers know about our amazing offering. And finally, the holiday calendar itself is more favorable, which will help to spread out the holiday traffic and shopping. This year, there are two more shopping days between Thanksgiving and Christmas, and Christmas is on a Friday, providing a full week post Super Saturday for last minute holiday shopping. We are ready for the holidays and are confident in our ability to offer unbelievable and affordable gifts for our customers and to provide multiple shopping options for them. We can't wait to surprise and delight our customers with our amazing assortment of WOW holiday gifts and stocking stuffers at incredible prices. In summary, we are successfully managing the business through this challenging time, innovating and adapting quickly, while making progress on our strategic initiatives which will continue to drive our long-term success. Our business model is flexible and resilient. The team is very disciplined in the management of our expense structure and capital allocation, and in the prudent investments we continue to make in our people, systems, and infrastructure. We have substantial cash reserves, a debt-free balance sheet, and a new store model that continues to pay back our investment in less than a year. enabling us to self-fund our continued growth. We maintain an unwavering focus on delivering wow and unbeatable value for our customers as we further strengthen our competitive position and drive long-term sustainable growth. With that, I will turn it over to Ken to provide more details on the financials. Ken?

Thanks, Joel, and good afternoon, everyone. I will begin my remarks with a review of our second quarter results and then provide some go-forward commentary. When we held our first quarter call in early June, about 90% of our stores were reopened. And by the end of June, virtually all of our stores had reopened. As Joel mentioned, in addition to reopening stores, our teams did an amazing job in the second quarter opening 63 new stores, compared to 44 new stores opened in the second quarter last year. We ended the quarter with 982 stores, an increase of 149 stores, or 17.9%, versus 833 stores at the end of the second quarter of 2019. Despite this growth, given the temporary store closures during the quarter, our total operating days were down about 3% compared to last year's second quarter. which significantly impacted sales, operations, and results. Additionally, throughout Q2, our reopened stores operated on limited hours. Our sales for the second quarter of 2020 were $426.1 million, up 2.1% from $417.4 million reported in the second quarter last year. Comparable sales for the second quarter decreased by 12.2%, driven by a reduction of approximately 19% in comp store operating days. Positive comp contributions from both our reopened stores and e-commerce helped partially offset the loss of operating days. Comparable sales for the reopened period increased approximately 6%, with the reopened stores comping up approximately 4% when compared to the same open period last year. and e-commerce contributing approximately 2% to the total reopened period comp. E-commerce sales were strong in Q2, with sales over four times higher than last year's second quarter, yet they still represented a low single-digit percentage of our total sales. As we had expected, as stores reopened throughout the quarter, e-commerce sales moderated. In stores since reopening, we saw higher average tickets partially offset by lower transactions, as we believe customers consolidated trips. Turning to gross profit, typically about 20 to 25% of cost of goods sold are fixed costs, with occupancy being the largest fixed component, followed by certain distribution center operating costs and the expenses related to our buying teams. Given the temporary store closures, and the impact they had on our sales results and our fixed costs, gross profit decreased $6.4 million from the second quarter of 2019 to $139.8 million. Gross margin decreased 220 basis points to 32.8% compared to 35% in the second quarter last year, with more than two-thirds of the decline driven by occupancy cost deleverage. We also faced a headwind as we anniversary last year's benefit from the timing of certain merchandise costs that shifted from Q2 to Q3 in 2019. SG&A expense for the second quarter of 2020 of $106.7 million decreased by approximately 3% versus last year's second quarter. As a percent of sales, SG&A decreased 140 basis points to 25% from 26.4 percent last year. We acted swiftly to manage variable expenses in a closed-store environment and approached the reopening period with discipline from an expense standpoint. The primary drivers of the SG&A leverage were lower marketing and store expenses. We reduced our TV advertising penetration, produced a lower-cost commercial, and did not print any flyers. as we shifted our focus to a more efficient and cost-effective digital spend. The lower store expenses were driven by the reduction in operating hours. These savings were partially offset by the deleverage of corporate expenses. Corporate expenses for the second quarter included a benefit of over 100 basis points from stimulus-related credits. As a result, we reported operating income of $33.1 million for the second quarter versus operating income of $36 million in the second quarter of 2019. Our effective tax rate for the second quarter of 2020 was 9.4% compared to 23.2% in the second quarter of 2019. The effective tax rate includes the benefits of discrete items related to the stimulus program and share-based accounting. We currently expect a more normalized effective tax rate for the back half of fiscal 2020, bringing the rate for the full year fiscal 2020 to approximately 20%. Net income for the second quarter of 2020 was $29.6 million versus net income of $28.8 million last year. Earnings per diluted share for the second quarter was 53 cents. compared to last year's earnings per diluted share of 51 cents, driven primarily by the factors I just described. This year's earnings also included a share-based accounting benefit of approximately three cents compared to last year's second quarter benefit of approximately one cent. We ended the second quarter in a strong liquidity position with $202 million in cash, cash equivalents and investments, and no debt, including nothing outstanding under our $225 million line of credit. Inventory at the end of the second quarter was $294 million as compared to $273 million at the end of the second quarter last year. Average inventory on a per store basis decreased 8.5% versus the second quarter last year. As we managed inventory carefully by canceling and delaying orders, and as we sold through the inventory from the end of the first quarter, which resulted from the store closures. We feel we are in a good current inventory position going into the back half of the year with flexibility and open to buy to respond to customer preferences we have seen since reopening our stores. Now, looking ahead and similar to last quarter, we are not providing guidance due to the continued uncertainty in this COVID environment. While we normally do not provide quarter-to-date updates, we will provide some color on what we are seeing currently, as well as certain of our plans and expectations. We are continuing our growth and have increased the low end of our 2020 new store opening program from 100 to 110 stores, expecting to end the year with 1,010 to 1,020 stores, or a unit growth of 12 to 13%. The majority of these new stores are being opened in existing markets as we execute our densification strategy. In addition, we plan to remodel approximately 45 stores and add self-checkout capabilities to over 100 additional existing stores. With respect to business trends so far in the third quarter, total comparable sales are tracking up approximately 6%, consistent with the second quarter. In stores, as we anticipated, we continue to see higher baskets and fewer transactions. As it relates to future profitability, after cutting and delaying expenses in Q1 and Q2 due to the COVID environment, we are restoring expenses in the back half of the year. In Q3, this is expected to result in a slight operating margin decline. For Q4, we expect to return to a more normalized gross margin after a record 42.1% gross margin in Q4 last year. In addition, we expect a more normalized level of incentive compensation expense in Q4 this year that will result in SG&AD leverage. With respect to gross capital expenditures, which excludes tenant allowances, We still plan to spend in total approximately $200 million in 2020. This reflects the planned investments in new stores and remodels, the new Texas and West distribution centers, and investments in systems and infrastructure. I believe we are in a very good position on many fronts, and I am not only proud of everything we accomplished in the last 90 days, but all that we accomplished over the last six months. Our teams did an outstanding job reopening stores quickly and safely and pivoting on merchandise, store operations, marketing, and e-commerce, as well as preparing for the all-important second half of the year, all while continuing to advance our strategic growth priorities. I, too, thank the teams for their hard work, dedication, and enthusiasm. The flexibility of our model and the discipline that is an integral part of our culture here at Five Below will continue to serve us well as we execute our growth plans, especially during the current evolving environment. And with that, I would like to turn the call back over to the operator to open up the lines for questions. Operator?

Thank you. And we will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. Please limit yourself to one question. If you have further questions, you may re-enter yourself in the queue. And at this time, we'll pause momentarily to assemble the roster. And our first question today will come from Simon Gutman with Morgan Stanley. Please go ahead.

Hey, everyone. It's Simeon. My question for either Joel or Ken, is the off-pricers who you're sometimes compared to, they haven't seen their sales recover yet. Your business seems to be on a better trajectory. And I think, Joel, you said it, you're selling value and fun. The key thing the market is trying to figure out is what your value proposition ends up being in a post-COVID world, one in which we're going to have likely a higher e-commerce And so your comps would suggest that you'll have a pretty strong place going forward. Can you point to anything else to make that case even stronger?

Yeah, thanks, Simeon. You know, I can't speak for them. I can tell you for us, and I think you heard it both in my comments as well as Ken's, I'll tell you, the team just executed on all levels. They were fast. They were nimble. We got back in stock and product. You know, we were, you know, playing offense quite frankly. And once we kind of knew the path to reopening, you know, we got back to, you know, getting back in stock, ordering product. We really, especially those first couple waves of stores that reopened, we watched the shift in what the customer was buying. You heard us talk about, you know, adapting and, you know, picking up essential merchandise. You know, I think normally if you would see a quarter And I'll say we announced a five, six comp quarter. Our high departments would probably be low double digits, and our underperforming departments would be flat. That's very different this time. We're seeing our eight worlds, some are up 20%, 30%. Some are down significantly in negative comps. So what the buyers especially did was nimble. And we shifted what we bought back into. And that's really kind of served us well. And clearly, you've got every kid in America home, either for the summer or extended, as it's varying for schools. And I think parents are looking for something to do with their kids. And Five Below is that destination. And you add value into it, and it all plays into our favor. Thanks, Simeon.

And our next question will come from David Buckley with Bank of America. Please go ahead.

Hi, guys. Thanks. What have you seen with traffic trends in 2Q, and how does that compare with August? And then looking out to the fourth quarter, how are you thinking about Black Friday and the holiday shopping season as consumers might remain reluctant to return to in-store shopping and how that will impact fourth quarter sales volumes?

Ken, you want to talk about traffic trends, and I'll take the fourth quarter?

Sure. David, thanks for the question. We saw from the beginning of Q2 when we were reopening stores that trend in the components of comp where transactions were down, but they were more than offset by average ticket. And it was pretty consistent throughout the quarter, and we've actually continued to see that as we've moved into the third quarter, again, where transactions down and ticket up. So it's been relatively consistent throughout the reopening period, even into August.

Yeah, that's good. As far as Q4 goes, David, I think I hit on it in a lot of my prepared remarks. The biggest couple changes we've made is the amount of self-checkout stores we've added. As I said, half our fleet will have self-checkout. And really what that does is allows for greater social distancing. It allows for more checkout locations in a given store. On average, we go from five in a normal environment to nine. And we also have looked at shifting our hours a little bit in fourth quarter. And quite honestly, the calendar set up for this particular year couldn't be better for us. Hanukkah moved earlier. Last year it was right on top of Christmas. We've got a full week from Super Saturday, which really spreads out shopping. So between the calendar set up, which is great, and then the changes our operators are making to allow for a greater throughput will really serve us well as we try to you know, manage through, you know, the increase in traffic in Q4.

Thank you.

Thanks, David. Yeah, you bet, David.

And our next question will come from Matthew Boss with J.P. Morgan. Please go ahead.

Great, thanks, and congrats on a nice quarter.

Yeah, hey, thanks, Matt. Appreciate it.

So can you speak to trends that you're seeing in your new stores? Productivity was back nearly to historical levels in the second quarter, and that's despite the social restrictions and marketing cuts. So maybe just touch on opportunities that you see in the store pipeline, your confidence multi-year and high-teens unit growth, just overall new stores and what you're seeing.

Yeah. You know what? We're really pleased with what we saw with new stores. If you recall, Matt, somewhere late last year, we started talking about a new prototype. And that really emerged out of the tariffs when we broke $5 for the first time. And back then, we called it 10 Below. And we tried several different versions of that. We've now landed on it being called 5 Beyond. And so all these new stores that were opening this year are opening in the new prototype that has a Five Beyond section year-round in the back of the store. It has the reimagined front end, which is expanded snack and self-checkout. And then quite frankly, just being value-driven, the timing couldn't be more right as the country went through this pandemic. And as our awareness continues to grow and we open new stores, it's like customers kind of know we're coming. We've seen, you know, I called out, you know, having a record opening in both Denver and Vegas, and I think those are just indicators of the awareness levels being there. But really, no concerns on the new stores. You know, we clearly couldn't, you know, the first week or two was certainly open softer because we didn't do grand openings like we normally would. But, you know, you put those first couple weeks aside, it really was all around, you know, 63 stores in a... you know, pandemic environment, great execution by the operators.

That's great. Best of luck.

Thanks, Matt.

And our next question will come from Edward Kelly with Wells Fargo. Please go ahead.

Yeah, hi, guys, and nice quarter. Joel, I wanted to ask you about, I wanted to just get back into holiday a little bit. Can you just maybe provide a little bit more color around sort of how you're thinking about it. I mean, obviously, historically, you've been very traffic dependent. You know, you do a lot of business in a very short period of time before Christmas. Maybe help us think about what that cadence normally looks like and how you overcome it. And then as you think about the product cycle for holiday, you know, what's really changing? Because you're going to have things like Frozen. You have some things coming in. Do you think is that a net positive? Just sort of like additional thoughts there I think would be helpful.

Yeah. Certainly we are lapping frozen, but we always talk about trends and all the trend around essentials right now is significantly bigger than frozen. So that more than offsets that. I called out in my prepared remarks the continued emphasis on Five Beyond. I think last year it was opportunistic. And the buying teams had a scramble to get that in place as that was the first time we'd ever done that. Whereas this year they had more than a year to prepare and put together an incredible assortment that we're quite honestly really excited about. And that'll make a difference. So that five beyond section will be bigger and it will be throughout the entire chain. Also, look, we're gonna stretch the season this year. Dave Kuntz, it's going to start in October it's not only us, I think all of retail is looking to pull things forward so we'll benefit from that. Dave Kuntz, You know, we always say we drive half our traffic other retailers drive the other half so. Dave Kuntz, By starting it earlier in October, I think that helps spread out the traffic further, and you know with with more customers home than ever I mean look a large majority of schools are on. you know, school at home. And so it gives the customer a lot more flexibility when they shop. We're not going to be relying on just weekend traffic. So really, Ed, it sets up about as good as you could ask, and especially when you layer in the overarching, you know, concerns over safety and that. And we're about prepared as we could be. And you layer in, we've got a great assortment of product coming. We feel good.

Great. Thank you.

Hey, thanks, Ed.

And our next question will come from Karen Short with Barclays. Please go ahead.

Hi, thanks very much. I was wondering if you could talk a little bit more about the online customer, maybe a little bit of color on what the average ticket is online, what the demographic is for the online, and then maybe tie that in with a little more color on what you're seeing with respect to new customer draw with the app as well.

Yeah, thanks, Karen. You know, look, this is my third time running an online business from Toys R Us, Walmart, and now this. Like most retailers, a typical online transaction is roughly double the stores. That's how I used to look at it in the past. That's kind of how we see it today. It's a little early to really Tell you a lot about the customers we picked up from the hauler transition as you know, we just made that conversion in July. We do know we saw a lot of new customers come from that. Now we need to keep them and keep bringing them back. So I think that's a net positive that will continue to grow. And so, you know, as excited as we are about, you know, really finally putting some investment behind our digital capabilities, you know, specifically e-commerce. We hired a senior vice president of digital. I think it's also important, Sharon, to still keep in mind that e-comm is still the icing on the cake for us. It's not the driver of our business. It's still low single digits. But it is a nice additive. And clearly, for those customers concerned about going in the stores, want to socially distance even further, It was fortuitous timing that we made that acquisition last year, have it up and running, and it will be fully operational for holidays. So a lot of good stuff there, Karen. It's just a little early to, you know, speculate on a couple of questions you asked me, but hopefully that gives you some good color. Thanks, Karen.

And our next question will come from John Heinbockel with Guggenheim Partners. Please go ahead.

Hey, Joel, two quick ones. Five beyond. Do you think you double the space and assortment this year? And do you think we'll see a lot of $10 and up items? And then on Bopas, right, how many stores do you think you'll really have where there's a store-specific inventory, right, and you can do Bopas, you know, completely? What percent of the change do you think?

Yeah. Look, On the Five Beyond stuff, it's, you know, it'll definitely, it's probably not double, John, but it's significantly more than last year. And I think the biggest difference is, you know, Michael's team last year, as I said a couple questions ago there, had to be opportunistic. This year we go into it planned. And I think, you know, what it's really going to allow us to do long term, John, is continue to move more and more to center of the plate. So instead of being just the stocking stuffer destination, we'll become the main gift destination. So we got to walk there at the right pace, John. We can't just quickly and immediately jump to $15 and $20. So the majority of the items will be in $5 to $10, but there is the opportunity to push that even further. The one caveat, John, though, is it will always be about value. So if you don't walk in and see that five beyond and go, wow, that's incredible value, then we missed on that piece of it. And as far as BOPIS goes, look, it's a trial. We hope to have out really soon here. And then based on how well that trial does, we'll determine how quickly we roll that to the chain. But we've been moving really fast on that since, We last talked, and I think it's just another addition and feature we need to get added into our offering for all our customers. But I think for 2020, think of it as a trial and just another feature for our customer. Thanks, John.

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And our next question will come from Brian Nagel with Oppenheimer. Please go ahead.

Good afternoon. Great quarter. Congratulations. Hey, thanks, Brian. It's my question. Just with regard to store openings, clearly you continue to execute well upon an aggressive opening plan, and you're one of the few retailers I know of that's opening stores, particularly in this environment. So the question I have is, Maybe just talk about the rent negotiations or as you're looking at the stores you opened or stores you will be opening soon, how much more leverage do you have as you talk to landlords with regard to rents?

Yeah, it's a good question. I'm going to be a little vague with you, but it's not intended to be that way. A, I appreciate the call-out notice on how fast we're moving on that. In fact, That muscle of opening stores is probably what allowed us to really get our chain reopened faster. I never thought we'd use that muscle to reopen existing chains, but we really approached our reopening the same way we open a new store. But I think as it goes to rent negotiations, look, the landlords need strong balance sheet retailers, you know, thriving centers as much as we want to be in one. And so I think the biggest difference going forward is, you know, while certainly we're going to get better deals, and I think we've already started to see that, more importantly, we're going to be in better centers. And I think our model, you know, different than some other, you know, value players out there, has always been to kind of be in the A centers, And so I think, obviously, I think the first place we'll see a change in rent structure is going to be in the urban locations. And as those locations struggle with the pandemic, the rent concessions there are going to be higher quicker. And so it's going to be case by case, Brian, but we see it as a net positive. And more importantly, we see it as an opportunity to get into centers we haven't been able to get in in the past. Because we offer a differentiated concept that, you know, and, you know, we've got a strong balance sheet. And certainly the landlords, you know, are really especially appreciative right now of that. Thanks, Brian.

And our next question will come from Paul LeJouet with Citi Research. Please go ahead.

Hey, guys. Thanks. I'm curious if you can talk about what your best-selling categories are online. and how that might differ from in store. Also, curious how you're thinking about e-comm growth, plans for 4Q, what sort of growth do you anticipate, and how do you plan to manage the shipping surcharges around this holiday? Thanks.

Yeah, for competitive reasons, I won't get into the specifics on the differentiation. What I will tell you, though, is that In general, they're the same. What we really see is each season takes off sooner online than it does in the stores. So, for example, right now our Halloween store is already up and running online. It's not in the stores. So it takes off sooner. It allows us to get a better read of what we think is going to sell in the stores because of what's selling online. And there's a lot of similarities to that. So that's the first thing I would tell you and kind of the leading indicator. And then look, as far as the shipping surcharges, fortunately we're in a good position in the sense that we don't offer free shipping today. We charge $5 for every order. We certainly haven't made the decision to raise that price at this point in time, but we're not like some that have to decide if they're going to go off for free. You know, you could easily see a path where we're at 555 or 595, but we're getting our arms around the surcharges that have happened. It's also a small enough piece of our business that we can absorb a lot of it. We're not a retailer that, you know, e-comm makes up 30, 40, 50% of your transaction. And so I think in many ways we look at this year as a one-off on that. And we haven't made any final decisions here, but we're not in any position where I think it's going to have a material impact on the bottom line for this year. Thank you. Got it.

Thanks, Joel.

Good luck.

Yeah, thank you.

Our next question will come from Michael Montani with Evercore. Please go ahead.

Hey, good afternoon. Thanks for taking the question. Just wanted to ask if I could about your thoughts around media mix, you know, moving forward. Obviously, you mentioned some increased digital there, so just wanted to get a better sense of that. And then on a related note was, you know, opportunity for personalized marketing as you all, you know, ramp up digital. And then lastly is loyalty. You know, is there a chance to maybe accelerate that sort of the way that you're able to do with the mobile app?

Yeah, look, I think what you could tell from our media mix discussion was we are now largely out of the print circular business. We probably accelerated that an extra, you know, 12 to 24 months from the path we were already on. And so I see no reason to return to that. And, you know, what you saw us do in the second quarter is likely the strategy we'll take going forward. And then what was the second half of that? As far as personalization and loyalty goes, they're all on the roadmap. Obviously, with this pandemic, we had to put on hold a lot of those initiatives that we were originally working on this year. It's been a focus on getting the site transition, getting the app up, getting ready for things like BOPIS. honestly getting our stores reopened. So several of those new features are all coming, but quite honestly, Michael, they're further down the road now than originally planned. Thanks, Michael. Okay, thank you.

And our next question will come from Scott Siccarelli with RBC Capital Markets. Please go ahead. Hey, guys. Scott Ciccarelli.

So was there anything to note regarding the cadence of new store openings into Q? And kind of related to that, as we do our SG&A per store calculations, it's down about 17% by our math. So as we kind of think about the back half as some of these expenses come back, how should we be thinking about SG&A per store over the next two quarters? Thanks.

Yeah, Scott, with regards to the new store cadence, it was a little bit less than last year's second quarter from a timing perspective. And we talked a little bit before about the new store productivity. And if you were calculating that, you probably got 82%, 83%. If you adjusted for timing and then also for some of the things that Joel mentioned, we held back on marketing. Also, the shortened hours, you probably get into the high 80% to 90%. That's why we were saying we're very pleased with the new stores. With regards to the expenses and what we saw in Q2 and then what we expect going forward, you're right. Obviously, on a per-store basis, we really held back on expenses and we had delays and cuts, in fact, in Q1 and Q2. In Q2, a lot of that was driven by reductions in marketing expense and then also store payroll as we were operating under reduced store hours. But then looking forward in the back half, we really expect to restore the expenses to the extent that we've seen them in the past now that we're fully reopened and operating. So you could expect to see that as we go into Q3 and into Q4.

Got it. Thanks, guys.

Thanks, Scott.

And our next question will come from Chani Nusra with Goldman Sachs. Please go ahead.

Hi. Yes. Hi. Thank you for taking my question. Nice quarter, team. I just had a quick question about closeouts and opportunistic buys, which you had mentioned, you know, as sort of an opportunity in one queue. What are you seeing in that space right now? Are there any compelling products, open to buy plans? Are you taking advantage of any such opportunities? Thank you.

It's certainly not as big as last year. Last year was probably the largest ever. In fact, we've got a lot of those teed up and ready to go for fourth quarter this year. You know, clearly with everybody canceling orders this year, it's not near as big. For us, you know, we use those as supplemental and they're not, you know, quarter of the business, but I don't see it being a big year for closeouts like it has been in the last couple years. Thank you.

Got it. Thank you. You bet.

Our next question will come from Michael Lasser with UBS. Please go ahead. Good evening.

Thanks a lot for taking my question. Joel, connecting some of the comments you made about a wider distribution of performance by category this quarter than Five Below has seen historically, coupled with the comment around household essentials doing very well. Presumably, the basket benefiting from consumers adding things like Tide Pods, SOS pads that you're now offering. A, how long do you think that continues? And B, do you think you're getting permission to expand further into those types of consumable categories to eventually drive more traffic from those products over the long run?

Yeah, you know, the last part of your question there would be a little speculative and a little early on my part, Michael, but But clearly, I think every time we've seen some sort of trend and we've jumped in on it, the customers responded and we pick up new customers from it. Certainly past trends like selfie sticks or spinners that happened. And in this case, it happens to be household essentials and product like masks and things like that. And I'll tell you, it's done very, very well. Michael's team does a great job of pivoting quickly. And as long as we stay relevant, and that's the beauty of the eight worlds, Michael, is it gives us the permission to shift our products. So our customers respond to trends, and they are certainly responding this time to the trend. But certainly going into it, I would think that is going to, you know, lead to, you know, a better response from the customers. But we don't have the data yet because it's just been too soon. But we like the early signs and what we're seeing. And, you know, hence the traffic trends we just shared with you have been strong. Thanks, Michael.

Our next question will come from Chuck Grom with Gordon Haskett. Please go ahead.

Thanks. Just on the quarter to date, I think you guys set up 6%. Is it possible to quantify what the impact has been from the less operating hours in the month of August? And then also, if you've got an estimate for what you think the shift in Labor Day was, Costco said it's about 50 basis points for the month of August. Do you feel like that's a good number? Thanks.

Yeah. I can't speculate on the Labor Day one. It's been so long since there's been that shift, and we were a lot smaller company when that last happened. I think it was 15, is that right? Yeah. You know, we only didn't even have 400 stores. But, I mean, it's a net positive, not a net negative. You know, for them, they report monthly, so they're probably talking about the impact on their month. You know, I think on the quarter, it's a net positive for us, because remember, we're tied to when kids go back to school, so that pushes a lot of schools back a little later. So I think that's kind of the way I would see it there. Thanks, Chuck.

And our next question will come from Jeremy Hamblin with Craig Hallam. Please go ahead.

Thanks, and I'll add my congratulations on the strong execution. I want to come back to the store operating hours and think about on a longer-term basis. You're starting to get a little bit back towards your more normalized hours, seeing expansion on the weekends. But after we get through the holiday season and we're still in an environment with more people working from home, more virtual schooling, have you given thought in 2021 to whether or not going from a 12-hour day to an eight-hour operating day or something in between makes most sense now that you have a much stronger online platform and offering than you've had in the past? Is there a potential change on a more permanent basis?

Yeah, thanks, Jeremy, for the shout out there. And Chuck, I apologize, you asked something similar and I didn't touch on the store operating hours. But Jeremy, look, this is a tough one, right? Because You know, I don't think the country's ever seen, you know, such a seismic shift in consumer shopping patterns, you know, in such a short period of time. And so, you know, I think for us, you're going to see us, you know, probably slowly adjust. You know, it's worked out really well for us on the shorter hours. We're much more efficient operation that way. And quite honestly, early on we tested lengthening hours and we didn't see any increase in sales. That has changed a little bit on the weekends, and hence you saw us expand our weekend hours. But for right now, I think the speculation is that we'll move slowly on that. I wouldn't expect us to make any other changes before the end of Q3. We will certainly have longer hours in Q4 for nothing else that we really want to spread out the traffic. And so we're going to use that to do that. But I think for Q3, you probably see us where we're going to be. But we'll adjust if we need to. It's pretty easy to do that. But it's made for a pretty efficient operation. Plus, honestly, our stores need a little extra time for cleaning protocols. getting back in stock. So it's kind of a win-win for both the customers and the stores. And right now, I'll tell you what, safety is trumping everything from the customer. But thanks, Jeremy.

And our next question will come from Brad Thomas with KeyBank Capital Markets. Please go ahead.

Hi, thanks for fitting me in, and congratulations here. Question on merchandise margin and hoping you could give us some brushstrokes with which to think about some of the put and takes on merchandise margin through the back half of the year here. Thank you.

Sure. So, Brad, as you look forward, and actually, I mean, we've always said, right, for the most part, we would expect our merch margins to remain flat as any benefit we get from scale will reinvest back into product. There are a couple things that were going on more related to last year that we might be running up against if you remember the tariffs that came into play. And we didn't really start the meaningful price increases until the fourth quarter. So we would expect to see some of that benefit in Q3. And then last year also we had some costs, merge costs that were shifted out of Q2 into Q3. So you'll have those two things going on in the third quarter, and if you go into the fourth quarter, what we can say about that is if you look at last year, it was a record overall gross margin for us at 42.1%, and we would expect the fourth quarter to get back to more normalized gross margin levels that we've seen in prior years.

Thanks, Brad. Thanks, Brad. Operator, I think we've got time for one more question.

Yep, and that question will come from Joe Feldman with Telsey Advisory Group. Please go ahead.

Hey, guys. Yeah, thanks for squeezing me in. I just wanted to ask, are you seeing any pressure on freight? We're hearing a little bit more about that as you enter the back half of the year and what impact that could have on supply chain costs and timing of receipts. Maybe anything you can share on that would be helpful. Thanks.

Yeah, I assume you're talking about import freight, Joe.

Yeah, yeah.

Yeah, look. Yeah, go ahead, go ahead. You cut off on me, but look there. There are some peak surcharges on on ocean freight, but you know that's largely offset for us. you know, by some lower fuel surcharges that have certainly come down from last year. And we also do an annual contract for our ocean carriers. So largely, this is where our scale really benefits us. And, you know, so I think some of that you're hearing out there, smaller players, ones that aren't growing are probably feeling it more than we are. But overall, the Supply chain team has really done a great job with the contracts we have in place to help minimize that, and I don't think it's going to have a material impact on us because we don't rely on spot rates as much as some people do. Thanks, Joe. Operator, I think we're going to have to conclude that. I appreciate everybody joining us today. Let me just close with a couple quick concluding remarks. Honestly, we've operated successfully through a very difficult environment. Hopefully you can tell by Ken and I's comments how excited we are about the quarter that just finished. Our teams continue to play offense. They've worked tirelessly to get us back up and running again. I really thank our associates, our vendors, our customers for being there for all of us. We are focused on continuing to source cool, trend-right products at amazing value, which we believe is Right now, what our customers want and need as we move into the holiday season, which is a magical time of year for us, and we can truly help make it more affordable for our customers. Our customers and communities are special to us. We want to give back to them however we can, whether it's by providing a great store experience, which we talked a lot about today, helping their hard-earned dollars last longer. It might be hosting a fundraiser for a local nonprofit group. We're raising funds for good causes. And one I'd love to share with you is that most recently, through our partnership and the Kids in Need Foundation, and honestly the generosity of our customers, we recently were able to donate over 350,000 backpacks to kids. Our customers continue to never cease to amaze us. We hope everyone stays safe this holiday season. And I really look forward to speaking with all of you after the Thanksgiving. Have a great day, and thanks, everybody. Goodbye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.