Five Below, Inc.

Good day and welcome to the Five Below Second Quarter 2021 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 star 1 on your touchtone phone. To withdraw your question, please press star 2. Please note, this event is being recorded. I would now like to turn the conference over to Christiana Pelz, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us today for Five Below's second quarter fiscal 2021 financial results conference call. On today's call are Joel Anderson, President and Chief Executive Officer, and Ken Bull, Chief Financial Officer and Treasurer. After management has made their formal remarks, we will open the call to questions. I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and Five Below's SEC filings. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements. 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, Christiana, and thanks everyone for joining us for our second quarter earnings call. I will review the highlights of our second quarter performance before handing it over to Ken to discuss our financials and outlook in more detail. Then we'll open the call for questions. We continue to operate successfully in a very dynamic environment, staying nimble to navigate the evolving conditions related to the Delta variant and global supply chain. Ensuring the health and safety of our customers and crew remains our priority while also delivering that much needed fun with our WOW product and store experience. Now, turning to the quarter. We are very pleased with our second quarter results delivering sales of 647 million and earnings per share of $1.15. Versus 2019, which is more comparable than 2020 due to the store closures in the first half of the year, sales grew 55% driven by double digit ticket growth and earnings per share grew 125%. For the group of stores that were open in the second quarter of 2019, and 2021, sales grew 21%. Both new and existing stores performed well with record average sales per store. New stores, the fuel of the Five Below growth engine, once again delivered strong performance. In the second quarter, we opened 34 new stores across 19 states, bringing our total open for the first half to a record 102 new stores. Three of these stores in California, South Carolina and West Virginia made the top 25 list of summer grand openings. We now are on track to open 170 to 175 new stores this year and end fiscal 2021 with nearly 1200 stores, leaving us a long runway ahead to reach the 2500 plus total store potential we believe exists in the United States. The teams executed extremely well in Q2. Our merchants did an amazing job sourcing WOW products and capitalizing on current trends to bring our customers the items they just got to have. The supply chain team worked diligently to ensure the stores were stocked with these TrendRight products while managing through the ongoing global supply chain disruption. Our store teams also delivered these results while operating with fewer hours than in the past and very little marketing. Overall, the team continued to focus and make progress against our three key strategic priorities of product, experience, and supply chain, which I will now discuss in more detail. For product, we continued to see broad base strength across our worlds on both a one- and two-year basis, especially in the sports, tech, candy, room, and style worlds. Customer trends were broad and diverse. For example, renewed interest in sensory items emerged, including popular new fidget toys called Poppers. Our pet business remained strong, as did the gaming products we launched through the collaboration with Booga last year. We love trends, as they drive traffic and bring in new customers. We have the unique ability to participate in almost any trend through our eight worlds and the flexibility within those worlds enable us to adapt to ever-changing customer preferences. All of these are key distinguishing features of our model. Back to School kicked off at the end of Q2 with amazing products and featured a seasonal Five Beyond Wow wall in all our stores. Our merchandising team sourced some great value products like denim jackets, flannel shirts, and backpacks for the new school year. We are very pleased with our performance through August. The extreme value Five Beyond section in our new prototype store allows us to offer products in categories we previously would not have been able to sell in our stores. With approximately 40 to 60 SKUs in the permanent section of a Five Beyond prototype store at any given time, the offering, although relatively small, provides an opportunity to acquire new customers and drive additional sales. Approximately 270 stores featured the 5Beyond section of the back of the store at the end of Q2, and we expect about 30% of our chain to offer 5Beyond by year end, with approximately 50% of the chain by the end of 2022. The merchandising team is looking forward to continue to delight our customers with new extreme 5Beyond products, as well as products priced $1 to $5. On experience, our second strategic priority, we relentlessly look to enhance the in-store and digital experience for our customers and crew. Five Beyond is an example of the innovation we are creating in this area, as is Associate Assisted Self-Checkout, or ACO as we call it. ACO offers both customer experience benefits as well as store operational efficiencies. We remain on track to offer ACO in over 60% of the chain by the end of this year, and eventually be in almost all of our stores. Separately, as it relates to the experience for our crew, we recently completed upgrading our human capital management system to the new Workday platform. Since the end of 2016, we have more than doubled our workforce, and this new platform is another great example of our investment in robust enterprise systems to support our continued growth. Under digital experience, we include marketing and e-commerce, which are both focused on increasing our brand awareness and acquiring as well as retaining new and existing customers. We shifted marketing from Q2 into Q3, as we mentioned on the last call. And the very small amount we did in Q2 was focused on paid search and social campaigns, which we believe were successful. Digital continues to be an effective and efficient platform to reach customers, both new and current. As for e-commerce, we are focused on growing the number of new customers while also increasing the percentage of repeat customers. In addition, we expanded the partnership with Instacart for same-day delivery to now reach the entire chain. We believe our presence on Instacart is an effective brand awareness and new customer acquisition tool, as well as a convenient service for our customers. On to our third strategic focus, supply chain. We are very excited to announce the opening of our Arizona Ship Center. We began shipping our stores from this facility at the beginning of the third quarter, which will help us better serve our five below stores out west. E-commerce fulfillment in that center is expected to begin later in Q3, which will also contribute to more efficiency and sending packages to customers out west. In addition, the Indiana Ship Center, which is planned to open in the summer of 2022, is under construction and will complete what we believe to be the optimal distribution center network to service over 2,000 stores. While focused on achieving our longer-term objectives within supply chain, we have also continued to manage through the current global challenges and rising costs resulting from the pandemic. We expect these conditions to persist through the balance of fiscal 2021, and our teams are staying nimble and innovative as they continue to navigate the tight supply chain environment. In summary, we are very pleased with the results from the second quarter. As we begin the third quarter, We continue to see strong momentum in our overall business. We are playing offense, pivoting, and flexing as we execute with discipline. And we are making the right investments across our priorities of product, experience, and supply chain to support our high growth. Additionally, we are focused on the all-important fourth quarter and are excited to showcase great new product, including the Holiday 5 Beyond Wow wall. We will continue to listen to and work back from our customers to find those gotta-have, trend-right products at extreme value and all packaged in a fun and amazing shopping experience. With that, I'd like to turn it over to Ken for the financial discussion. Ken?

Thanks, Joel, and good afternoon, everyone. I will begin my remarks with a review of our second quarter results and then provide guidance for the third quarter and commentary on the full year. Because our stores were temporarily closed during the second quarter last year, making a year-over-year comparison less meaningful, I will also provide a review of our results versus the second quarter of 2019. As Joel said, we were very pleased with our second quarter results. Sales increased to $646.6 million. from $426.1 million reported in the second quarter last year. Total sales this year grew 55% compared to the second quarter of 2019 on an average store count growth rate of 36%. For the comparable subset of stores that were open in both the second quarter of 2019 as well as the second quarter of 2021, sales increased 21% driven by continued strong customer tickets. Transactions continue to be down versus 2019, given we operated the stores with fewer hours versus our standard pre-COVID operating hours. These ticket and transaction trends are similar to what we have seen since reopening the chain last year. We opened 34 new stores across 19 states in the second quarter, compared to 62 net new stores opened in the second quarter last year. We ended the quarter with 1,121 stores, an increase of 139 stores, or approximately 14%, versus 982 stores at the end of the second quarter of 2020. We were very pleased with the performance of our new stores, especially given the limited grand opening marketing. As Joel noted, we had record grand openings in Q2 with three store locations in Somerville, South Carolina, Turlock, California, and Charleston, West Virginia, finishing in the all-time top 25 summer grand opening weekends. Gross profit for the second quarter of 2021 was $230.3 million versus $139.8 million in the second quarter of 2020. Compared to the second quarter of 2019, gross profit increased by 58%, while gross margin increased approximately 60 basis points, driven primarily by occupancy leverage on the strong sales results, which more than offset higher inbound freight costs later in the quarter. SG&A expenses were $144.2 million for the second quarter of 2021, versus $106.7 million in the second quarter of fiscal 2020. Compared to the second quarter of 2019, SG&A expenses decreased approximately 410 basis points as a percent of sales. The leveraging of SG&A expenses as a percent of sales versus 2019 was primarily driven by reduced marketing expense, lower store expenses on the reduced operating hours, and fixed cost leverage. As a result, we reported operating income of $86.2 million for the second quarter of 2021 versus operating income of $33.1 million in the second quarter of 2020. Versus the second quarter of 2019, operating income this year more than doubled. Net income for the second quarter of 2021 was $64.8 million versus $29.6 million last year and $28.8 million in 2019. Earnings per diluted share for the second quarter was $1.15, compared to 53 cents last year and 51 cents in 2019. Versus Q2 2019, earnings per diluted share increased 125%. We had share-based accounting benefit of approximately one penny in the second quarter this year, compared to approximately three cents in the second quarter last year and one penny in the second quarter of 2019. We ended the second quarter with $414 million in cash, cash equivalents and investments, and no debt, including nothing outstanding on our $225 million line of credit. Inventory at the end of the second quarter was $347 million, as compared to $294 million at the end of the second quarter last year. Average inventory on a per-store basis increased approximately 3.5% versus the second quarter last year, as last year's second quarter inventory was impacted by pandemic-related order cancellations. Versus the second quarter of 2019, average inventory per store decreased approximately 5%. We feel well positioned from an inventory standpoint to deliver on our Q3 outlook and our accelerating receipts ahead of the holiday season. Now looking ahead, we are providing formal guidance for the third quarter of 2021. We are still not guiding beyond a quarter given the uncertainty related to the ongoing impact of COVID variants, a potential shift in consumer spending away from goods and towards services, and the impact of the ongoing supply chain disruption. However, I will offer directional commentary on how we are viewing the full year, which we will continue to compare to fiscal 2019 due to the disruption in store closures caused by COVID in the first half of last year. For the third quarter, we will compare our guidance to last year as our stores were fully reopened for the entire third quarter of 2020. We are very pleased with the start to the third quarter. We expect third quarter sales to be in a range of $550 million to $565 million with comparable sales in the mid single digit range versus the record third quarter comparable sales increase of 12.8% last year. We expect to open approximately 40 to 45 stores in the third quarter. Versus the third quarter last year, we expect operating margin to delever by over 100 basis points, with the majority of this deleverage to occur within SG&A expenses. We are up against record comps and sales, which resulted in higher than usual leverage on fixed costs last year, in addition to lower marketing expenses and store hours. We also expect gross margin to delever versus last year, as supply chain disruptions are increasing our inbound freight costs. Our effective tax rate for the third quarter is planned at approximately 25%, which excludes the impact of share-based accounting or any share repurchases. As you know, our practice is to update the tax rate outlook quarterly with actual results when we report earnings. That income is expected to be in the range of $12.8 million to $16.7 million, with diluted EPS expected to be in the range of 23 to 30 cents. Looking at the full year, on our last earnings call in June, though not in a position to provide formal guidance, we shared an outcome scenario in order to shed some light on how we are thinking about the business from a profitability perspective. We provided a full-year scenario where a two-year compound sales growth rate in the low 20% range versus 2019 would result in operating leverage of approximately 30 basis points versus fiscal 2019. With more visibility now and despite the tightening supply chain environment that's driving higher freight costs, that same two-year compound sales growth rate over 2019 would now deliver approximately 50 basis points of operating leverage. We plan to continue to spend approximately $315 million in gross capital expenditures, excluding the impact of tenant allowances. This reflects the opening of our new ship center in Arizona, construction of a new ship center in Indiana, opening new stores and executing remodels, and investing in systems and infrastructure. We expect to open 170 to 175 new stores and complete approximately 30 remodels in fiscal 2021. In conclusion, we had a great second quarter and Q3 is off to a strong start. Our teams are executing at a high level across the organization, remaining agile in this very dynamic operating environment. As we look to the second half of the year, We expect continued challenges in the global supply chain. Flexibility, innovation, and disciplined cost and capital management are key attributes of how we have always operated, and they are even more important for us now. We look forward to delivering an outstanding assortment of WOW products at incredible value to our customers in the third quarter and the all-important holiday season as we expand our store base, improve our capabilities, and relentlessly raise the bar on the value that we deliver to customers day in and day out. And with that, I'll turn the call back over to Joel for a summary before we begin Q&A.

Thanks, Ken. As you can tell from both Ken and my prepared remarks, we are very pleased with our year-to-date performance. Our teams have executed well, and I want to thank them again for their continued resilience and agility. Every week has brought new challenges. The teams have worked through them and found innovative ways to address them. I'm confident we will continue to do so, and given the inherent flexibility of our eight worlds, our unique merchandising approach, and focus on innovation across product, experience, and supply chain, we believe we will remain in a position of strength, continue growing by below and driving sustainable long-term value for all our stakeholders. With that, I'd like to turn the call back to the operator for questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Please limit yourself to one question. If you have further questions, you may reenter the question queue. At this time, we will pause momentarily to assemble our roster. Our first question is from Simeon Gutman with Morgan Stanley. Please go ahead.

Hey, guys. I hope you're good. My question is on freight, so maybe just two parts but same topic. Can you, do you have line of sight or visibility into sort of when the pressures peak inside the gross margin? And then if we didn't have the pressures this quarter, can you talk about, I guess, how much better gross margin would have been? Because I assume, you know, some of your merchandising initiatives are paying off. Thank you.

Yeah, thanks, Timmy. And I'll comment specifically and let, you know, Ken talk to it from a financial perspective. You know, as we've said on many calls, we, you know, contract the overwhelming majority of our freight. So, you know, relatively speaking, you know, to the industry, I think that – in fact, I know our teams have done a fantastic job managing the pressures as it relates to freight, and they continue to manage those. So, look, despite a really tough environment, Simeon – And as you can tell by, you know, the overwhelming results and, you know, the updated guidance Ken gave as a scenario there, you know, despite all that, we, you know, continue to deliver a pretty strong bottom line. And, Ken, if you want to comment on the financials.

Yeah, Simeon, just in terms of the impact on the financials, with regards to the freight, the cadence, you know, we really saw increased freight costs. come in in the back half of the second quarter and then, as I mentioned, expect them in the third quarter and fourth quarter. In terms of a net impact, it's really in the tens of basis points as we look forward. There's a couple things going on there. One, the mitigating factors and things that we're doing internally and the logistics team is doing to be able to offset those costs is helping us out. That's why I'm saying it's not a very large number that you're seeing that's going to be reflected in the third quarter guidance. And again, I didn't provide a full year guidance, but we are doing a pretty good job in terms of mitigating. But they're in the tens of basis points in terms of a net impact on the financials.

Thanks, Simeon.

Thank you.

The next question is from Edward Kelly with Wells Fargo. Please go ahead.

Hey, guys. Good afternoon. I just wanted to follow up on freight, particularly, Ken, in relation to the tens of basis points impact that you talk about for the quarter. And I'm kind of curious if there's any more color that you could give us on kind of container usage, how much business needs to be done on spot versus sort of like normal times. And then As it relates to mitigation, you guys have a very good, strong, flexible pricing model. And I'm just kind of curious, as we saw with tariffs, with the ability to offset those issues, how big is pricing as part of the mitigation? And is that really why you're able to keep this issue down to the level that you're talking about?

Ed, great question. Let me start with the pricing. I'll work back to Ken there. Look, I think this came up in the last call as well. And I think had this happened three or four years ago, we would have been in a much different position as we didn't have Five Beyond. And so with Five Beyond as part of our arsenal today, it certainly gives us an opportunity to mitigate through pricing. Having said that, You know, we have always gone there last, and that'll continue to be our strategy. And so in addition to, you know, raising price, we also talked about we can also pause for a period of time the addition of new features into product, which also we've done that in the past as we've gotten leverage from our scale. Instead of, you know, taking that to the bottom line and gross margin, we've added new features and benefits. There's a couple of different ways we can go at it, Ed. And I can tell you our mantra here at Five Below is pricing is the last place we go. But it clearly now is an avenue and a vehicle that we will use, much like we did when we first implemented it to mitigate against the tariffs. So it's hard to quantify what percentage it is, but I can tell you it'll be the last one we'll pull. But as you can tell by the scenario Ken laid out, We've got line of sight on how we'll continue to have a net impact only in the tens of basis points.

And then, Ed, at the beginning of the question, I think you spoke about kind of our contract setup and our commitments out there. You mentioned spot rates. The overwhelming majority of our rates are contracted in advance, so we are not in the spot market. So when you do that, you're actually locking up your capacity and your rates. And I think, again, the team has done a great job in doing that and navigating through that and also working with our carriers to adjust as we've moved through the year here. You know, some of the things we're doing around mitigation, obviously just the overall investment that we've made in the business historically that we're starting to see some leverage in areas. I'll bring up the distribution network and the ability for us to You know have stores and closer to our DCs and have lower stem miles. I mean that helps us out and all those things help You know, we're looking at now trans loading which we do to kind of help out now internally When the goods get here to the United States So again, there's a list of things that the teams are doing to to mitigate again If we've always done this in our past right we've ever been faced with cost increases that we've got a great team in terms of being flexible and innovative and And it's the same thing that we're doing now through this increase in freight costs. And again, that's why I'm saying that you're really looking at tens of basis points in terms of the impact in the back half of the year.

Thanks, Ed.

The next question is from Brian Nagel with Oppenheimer. Please go ahead.

Hi, good afternoon. Thank you for taking my question. Next quarter. So the question I have, and again, I apologize for getting too much maybe in the weeds here, but With regard to sales and just kind of the underlying sales momentum from Q1 to Q2, clearly a lot of moving parts with all the COVID disruptions. If you look at that comparable comp you gave of 21% in Q2, that similarly calculated figure was 23% in Q1. Again, I know it's only two percentage points, but is there a way to explain kind of that shift I think in the prior commentary you called out the benefit of stimulus. Has that waned or is there some other factor at play?

Yeah, thanks, Brian. Yeah, you called out the right percentages there. That was the calculation that we did on a – because you couldn't do a true comp, we picked a subset of stores that were open in 19 and 21, 23 percent increase in Q1, 21 percent increase in Q2. You could attribute the difference between those two amounts really to the stimulus, that third round of stimulus in March of this year that was in the first quarter. That had a pretty material effect on the business, and I think that was probably the biggest differential between those two rates.

Thanks, Brian.

Thank you.

The next question is from John Heinbockel with Guggenheim. Please go ahead.

So guys, it's never too early to think about holiday. You've got a bunch of levers here, right? You can step the marketing back up, you can increase the hours, and you can do more five beyond, just three things. So how do you think about holiday, pulling those levers right, and maybe some level of confidence this year compared to prior years on those fronts?

Yeah, John. Hey, thanks. Great question. And you know what you, you called out, you know, several levers that, you know, are, are available to us. Um, and you know, in addition to that, you've got, you know, the pure, uh, merchandise assortment that Michael and his team put together. And, you know, we called out on the, on the call, some of the trends that are out there right now. Uh, I would also add to that just, you know, the overall scale of the business today versus a couple of years ago is, is much different. The operations team with ACO has really helped us on line management in the fourth quarter. And so I think when you add them all up, John, we've got a lot of tools in the toolbox, so to speak, that we can use to manage sales. And you can tell by the guide of mid-single digits here in Q3, as an example, on top of a double-digit comp last year that the teams are doing a great job of executing and managing through not only the examples you gave, but, uh, the couple that I laid out there and we've got a few others. So John, there's really, I mean, what you're seeing is honestly the overall maturity of the business. We are much bigger than we were a few years ago. And, um, you know, just are gaining more momentum as we, you know, continue to come outside of the, you know, post pandemic and, We've obviously picked up some new customers that were acquired during that time period. And I feel really good about Q3, as I think you heard Ken and I a number of times, strong start to the quarter. Now, look, there's a bunch of uncertainties in the future, and we'll manage through those as we get closer to it. And it's probably the reason we haven't done a long-term guide as we think about the future. But we've got a lot to use at our disposal as we get closer to the fourth quarter. Thanks, John.

Thanks, John. The next question is from Matthew Boss with JP Morgan. Please go ahead.

Great, thanks, and congrats on another nice quarter.

Yeah, thanks, Matt.

Thanks, Matt. Maybe, Joel, near-term, you cited, like you said, a couple times the strong start to August. I guess my near-term question would just be, have you seen any moderation in comp at all relative to the second quarter? And, Ken, to your point, it sounds like the first and second quarter have had some pretty nice consistency. And then maybe just larger picture as we exit the crisis, is there a way to just maybe rank offensively, you know, the top line drivers that you think you have moving forward as we think about maybe incremental to the pre-pandemic low single digit comp algorithm? Basically, what do you think you've gained out of this period that you didn't have before?

Yeah, thanks, Matt. There's a lot to unpack there. You know, on, on the, on the comp side of things, you know, this it's just, it's not fair to like compare quarters as apples to apples. I mean, you know, clearly, you know, Q2 is up against, you know, basically a half closed quarter and Q1 was up against a totally closed quarter. And, um, but you know, Q3 where we're, you know, up against a very strong quarter last year and then are lapping it with, you know, a guide of mid single digits. I mean, that should give you some indication of, you know, how strong the business is right now. Um, and you know, I spoke to trends which are out there and those are really helping the business as it, you know, as it goes to the last part of like actually ranking them, it's hard to rank. And I think similar to the way I was answering the question John just asked, um, rather than rank, it's more about, do you have a lot of, you know, different levers to pull? And I think you could tell that what we called out was certainly a variety of different levers. What I might add that I didn't talk about in John's question was we're in a much different environment as it relates to digital than we were pre-pandemic. We made the acquisition of Holler. We've rolled out Instacart. We're no longer doing paper flyers, and it's now 100% digital flyers. So that's just one example of the the difference pre pandemic. And then the other side of it is the scale. And I touched on that a little bit with John, but you know, I would tell you our, our, our merchants are better than we were two years ago, or our operators are better. Uh, and all that contributes to, you know, how we're driving sales and our store consistency with, with George team is done great. ACL is now in, you know, 60% of the chain, which just helps in operating efficiency. So you put all those together. Matt, and I think you can tell we're pretty bullish on the long term as we, you know, continue to, you know, get in a post-pandemic environment and, you know, obviously excited about the back half of the year. Thanks, Matt.

The next question is from Paul with Jews with Citi. Please go ahead. Hey, thanks, guys.

I'm curious, outside of freight, what sort of product cost inflation? you're seeing these days and just how you plan to navigate that. And on a related note, I'm curious what percent of your assortment is at the $1 to $2 price point. Thanks.

Yeah, thanks. Look, obviously supply chain is probably the biggest one that we're talking about from the inflation front. You're certainly also seeing it probably the most in wages. And wage inflation comes in the form of two different ways, one where we've moved our base wages up, and then also where states are moving. So we have a variety of different wages out there. We're very competitive, but at the same time, there are state mandated wages that continue to happen, and they roll at all different times. Those are probably the two biggest ones. The third one we manage always through is raw material inflation. And the merchants have done a great job on that. You get more efficiency. You get some benefits of scale. We might not add in some new features this year to maintain the same cost. But that's the three areas that we're seeing the most in inflation. In terms of the $1.

Yeah, Paul, I think you asked about the penetration of a certain price point. I think the one to three, it's greater than 50% of the units that are in a store. So it's still a pretty significant portion of our assortment that we have.

Thanks, Paul. The next question is from Lorraine Hutchinson with Bank of America Merrill Lynch. Please go ahead.

Thanks. Good afternoon. I just wanted to hear your thoughts on the push and pull between increasing your store hours back to 2019 levels, if you think that that might move transaction count above 2019 levels, and then how you balance that with the associated costs over the holiday season. Thanks.

Thanks, Lorraine. I think the way you asked the question is exactly the way we think about it. you know clearly you know we have seen if you increase the the hours you know that the transactions do go up but the balance is you know you know the labor market is very tight right now and and hiring is tight and so you know those are the exact ways we're looking at it we all probably the third factor we look at is you know when is the center open who's in the center with us and what's right hours to be but We did take the hours up mid-second quarter, and we feel we're in a good spot. It's a nice balance right now. We've gotten feedback from the field, and they feel we're in the right spot. But the way you ask questions is the exact way we're thinking about it, and right now we think we're at the right balance between the two. Thanks, Maureen. Thank you.

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

Good afternoon. Thanks for taking my question. I was just wondering if you're seeing any, I mean, obviously at a very strong quarter and it sounds like the strength is broad-based, but I was wondering if you're seeing any variations in your performance geographically based on COVID-19 infections and or hospitalizations and also vaccination rates. Thanks.

Anthony, great question. You know what? We look at that every week. And surprisingly, it's pretty consistent from week to week. And we really don't see a large difference, certainly not based on vaccination rates and COVID cases. So that was pretty consistent during the pandemic as well. Not sure I can tell you why that is, but, you know, it is something we look at consistently and has not been a driver geographically. Thanks, Anthony.

The next question is from Michael Lasser with UBS. Please go ahead.

Good evening. Thanks a lot for taking my question. Given the algorithm that you laid out for this year where if you were to achieve a low 20% compound annual growth rate, which translates to 50 basis points of margin expansion. Can we also assume that that would be valid for 2022? Or because of the wraparound of some of these freight costs, a catch-up in marketing, an increase in wages, your margin expansion might be more modest next year, even if you had the low 20% top-line growth algorithm. Thank you.

Yeah, thanks, Michael. We don't want to get too far out ahead for 22. We still got a long way to go in 21. But yeah, I mean, you've probably heard the supply chain disruptions are going to have an impact, obviously, through the end of this year and most likely into next year also. But as you know, you've been with us for a long time. We've been faced with rising cost environments before. And you've seen us navigate through those. And again, there's a lot of things that we can do out there and a lot of levers that we can pull. I think Joel talked about a little bit earlier in terms of scale of the business is always a big one for us. But there's also other initiatives out there. We talk about five beyond the assisted checkout, product collaborations from a traffic driver standpoint. the distribution network that we've put in place over the years that we can start to see some leverage from that. So, we still have a ways to go, but I think the good thing here and the takeaway is that we do have a lot of tools in the toolbox here to be able to help to offset a rising cost environment.

Yeah, and I'd just add, I think, got asked earlier a question, how much would we use price? And price continues to be a lever we'll use. So if that pressure persists into 22, you'll start to see us start to move on that one a little bit more. But we're just not ready yet, Michael, till we get our hands around it to give some 22 guidance. But hopefully, from our commentary, you can get a sense of the levers that are out there at our disposal. Thanks, Michael. Thanks, Michael. Thank you.

The next question is from Jeremy Hamblin with Craig Hallam Capital Group. Please go ahead.

Thanks, and congrats on the sustained momentum. Wanted to ask a question about the new units. You took the top end of the new unit openings down by five in total. And typically, you are further along in the percentage of new units for the year than your suggesting by the end of q3 I wanted to get a sense for you know I'm sure some of that is maybe landlords not having sites quite done on time but wanted to see if you could add a little bit of color on the change there and also whether or not you know it's something for us to think about you know I know you're not guiding to 22 at this point on new units But are we seeing a backup just on the construction side of things that, you know, may spill over into 22?

Hey, thanks, Jeremy. I think it's a little less – oh, sorry, we're getting an amber alert here.

No, it's tornado warning.

Oh, tornado warning, sorry. We're in Philly and – the tornadoes made its way here. So not tornado, but something to do with the hurricane. But Jeremy, back to the question, it's less about a little bit of what you were insinuating. It's more about, you know, getting back into a rhythm, you know, post pandemic, you got to remember, we literally stopped all construction a year ago. And so now it's, you know, starting to start that up. And, If you remember a few years ago, we really didn't even give you guys a range on, on new stores. We just gave you a number. And so the last couple of years we've given a range, obviously last year's got totally disrupted. And, you know, I think when we gave you the range at the beginning of the year, we just weren't, you know, there on knowing all the inputs that go into getting the chain back up and going, um, both not only on our side, but on the contractor side, on the landlord side. And so the fact that we're still at 170, 175 gives you a great sense that we're still where we thought we'd be at the beginning of the year, which was a high teens growth rate. And that continues to be. So the momentum's kind of getting the engine going again. And it's right in the same range we thought we'd be. I don't know, Ken, anything to add on that?

Yeah, I mean, exactly what Joel mentioned there. The range is in that high teens, which still is in line with our multi-year growth vision. You had talked about next year. And again, I think in the near term, we're seeing similar growth rates that we'll be able to hit that. I think what you're seeing now and just the adjustment kind of midstream here and back to what Joel mentioned, the pandemic has caused some disruption and delays out there, whether it's permitting or equipment or, you know, other types of shortages are taking place. So we're reacting to that from a landlord's perspective. But on the flip side, you also see that we were able to, you know, we opened up 102 stores year to date, which is a record for us in the first six months of the year. So I think, again, it shows the agility and the resilience and the flexibility of the teams And when you look at our real estate and construction teams and what they can do. So, again, we expect significant growth as we move forward in the near term.

Thanks, Jeremy.

The next question is from Michael Montani with Evercore ISI. Please go ahead.

Hey, thanks. Good afternoon and good evening. Just wanted to follow up on the freight front for a moment. I feel like in the past you all may have said that you had relatively kind of contracted carrier rates through December. I just wanted to see if that, in fact, is correct, number one. And then number two, you know, what would be some of the main kind of levers, if you had to think about it, into 2022 that you all could pull, you know, to manage that if you do have to go back to the spot rate, spot market?

Yeah, the second part of your question is really answered by the first part of your question, which is our rates are contracted beyond Q3 and 4. They're done on a carrier-by-carrier rolling basis. So we've started to have a pretty good line of sight into 22, so it's well beyond the end of this year. And so, you know, we're not overly worried. We're, you know, being a high-growth Retail, like we are, we have a great relationship with multiple carriers and, you know, continue to manage through it. I mean, costs are up, but not near to the impact that you're hearing out of the overall industry. Thanks, Michael. Thank you.

Good luck. Thank you. Good bet.

Thank you. Excuse me. The next question is from Karen Short with Barclays. Please go ahead. Good evening.

This is actually Jim Barraga.

Pardon me, this is the conference operator. We're having some difficulty hearing you. Your line is very bad and hard to understand.

Let's move to the next question.

Agreed.

The next question is from David Bellinger with Wolf Research. Please go ahead. Hey, Joel.

Thanks for taking the question. So you're expecting 40 to 45 new stores in Q3. That would imply something like 25 to 30 new unit openings in Q4 this year. a quarter where you haven't historically opened a lot of stores. So how does that fit into your thing for the holiday season? Will those units get ramped up in time to capture all the sales they can for the holiday? And just also anything in particular you're doing to avoid any operational hurdles that could potentially come up with, you know, just opening a larger subset of stores in the Q4 period. Thanks, guys.

Yep. Yeah, thanks, David. Yeah, you're right. Obviously, your estimate there in terms of opening up in the fourth quarter, and that would be done early in the quarter. And it is unusual for us, but as you can see also, we're opening more of an actual number of stores. And given that, you know, the cadence and the timeframe for opening those stores starts to stretch out, right? We actually opened up a stores in February. Historically, we didn't do a lot of that in kind of the wintertime in the northeast here, but it's really something we have to do as we continue to get bigger. So you'll see us opening really from the beginning of the year all the way through to the beginning of November. And then you had a part two to that question, I thought.

You know, just anything in particular, just given that you haven't open that big of amount of stores in Q4, just anything that you're doing to avoid any operational hurdles that might come along with that, or just anything out of the ordinary that you're taking into perspective for this Q4?

Yeah, well, one of the things we continue to do, and we've said it over the years, and Joel says it all the time, you know, investing in the business, right? It's people, systems, and infrastructure. And that's, along with other areas of business, real estate and construction is an important area for us that we want to make sure we continue to invest. So whether it's in people or systems or technology, to be able to stay out ahead of it, right, in the store opening teams. We have dedicated store opening teams that have continued to grow, and we invest in those. So, you know, if you hear what's going on with our stores, I think every quarter we call out record store openings, so that's great to see as we continue to move on. And I think it's an indication of the success of the teams and the process that we have in terms of opening the store. So we would expect that to continue as we move forward.

Thanks, David.

The next question is from Chuck Grom with Gordon Haskett. Please go ahead.

Hey, guys, just a couple quick ones for me. The first one would be on 2Q, you guided 640 to 660 million. You came in a little bit at the bottom end of that. I guess I'm curious why. And then, um, two, um, just bigger picture, the five beyond seems very successful. 30% of the chain by the end of the year, 50% by the end of 22, I guess, why not roll it out more quickly?

Yeah, Chuck, I think on, on the guide, I, you know, you gotta remember in the, in days past, you know, our range was more like 5 million on a quarter and you can tell the range was 20 million and, and it's, it's, it's a good example why we're not guiding. beyond the quarters as there's just a lot of uncertainties. We weren't comparing it to 2020. There really wasn't a year to compare it to. And so just due to the volatility and unknowns there, I needed a wider guide. But I'll tell you what, coming in the middle of it and then beating on the earnings, I think is really the more important takeaway from the quarter. It shows you that we're able to, you know, deliver disciplined earnings approach despite wherever the sales may come in. But we're really pleased with Q2, and more importantly, we're pleased with, you know, the momentum we got right now in Q3 and beyond from that perspective. All right. Thanks, Chuck.

The next question is from Joe Feldman with Telsey Advisory Group. Please go ahead.

Yeah. Hey, guys. Thanks for taking the question. On the inventory, I know you guys feel like you're in a good spot. It does feel like it's a little light relative to where you might want to be. And if I recall what you had thought it would be at this point. So I'm wondering just, you know, what you are doing to accelerate receipts ahead of the holidays and how we could kind of, where you think inventory should be at the end of the third quarter entering the holidays and maybe even coming out of it. Should it be a fair amount higher than it is today or?

Yeah, thanks, Joe. Yeah, you're right. I mean, we gave you, obviously, the number where we landed at the end of Q2. And again, just to reiterate, we feel like we're in a great position to be able to hit the outlook that we have for Q3 sales. Looking forward, as I mentioned, we are going to be accelerating our receipts, and I would that average inventory per store to increase significantly, double digits at the end of Q3 as a reflection of accelerating those receipts. So the buying team and everybody involved there has been working hard with the vendors to try to move those up, especially the holiday receipts and the seasonal receipts to make sure we have those in for the fourth quarter.

Thank you, Joe. Thanks, Joe. Excuse me, the next question is from Christina Katai with Deutsche Bank. Please go ahead.

Hey, guys. Good afternoon. I just wanted to quickly follow up, you know, on the top line. I mean, comp growth has decelerated a bit, and I guess based on your third quarter guide, it implies further deceleration versus 2019. So is there a way to quantify how much of this is due to waning stimulus, perhaps being a little bit lighter in inventory? And then how do you guys think about 5B on rollouts helping sustain the top line?

Yeah, we probably have a different takeaway than you did. I mean, clearly Q1 had a stimulus in it. And I don't think anybody should build their business based on a stimulus, you know, being what sustains you going forward. So, you know, if you look at the Q2 number and the, you know, take some number in the middle of the guide on Q3, I mean, you're within spitting distance of a differential there. More importantly, I don't think you've ever seen us have a double-digit comp one year and then come back with a guide of mid-single digits the next year. The last time you saw a double-digit out of us was probably back in the spinner craze. And I think a lot of people wondered how we'd come around the horn on that with a flat comp. And so here you're coming around on a 12-plus comp, and now you're guiding to a mid-single digit. I don't know how you're seeing deceleration, but we're pretty consistent and feeling really good about the business. I think it's just a testament to the merchants, it's a testament to chasing trends, and it's just a testament to the broad-based appeal of the eight different worlds. I feel pretty good about it, Christina.

Got it. That's helpful. As we think about all the new customers that your business has seen over the last year, Can you maybe just speak to door productivity and just overall brand awareness opportunities ahead, especially in some of your newer stores, you know, call it the zero to two-year-old ones?

Hey, Christine, I'm just going to ask you if you can bring that back on the follow-up calls because we've got people to get through and we're trying to limit it to one question to everybody. Thanks.

The next question is from Brian McNamara with Barenburg Capital Markets. Please go ahead.

Hey, thank you for taking the question. So you mentioned poppers in your prepared remarks, which feels like the first big product trend in some time outside of pandemic related trends. So can you compare this trend to fidget spinners in 17 and how meaningful it was to your Q2 comp and your Q3 comp outlook? Poppers seem to be pretty widely distributed across competitors relative to the early days of spinners. Thanks.

Yeah, thanks, Brian. And look, Obviously, we knew about them last quarter, and that was baked into our guide. And they're continuing now, and it's baked into our third quarter guide. It's a little bit harder to calculate at this time versus last time, because you got Q2 up against nothing, Q3 up against a big number. But obviously, for it to be in our prepared remarks, You know, healthy piece of the business and it's, but it's probably relatively in the same range as spinners were back in, in 17. And, um, that that's probably the best way to think about it. It's just, you just don't have the year over year apples comparisons like you did back in 17 versus 16, but it's a great, it's a great trend. And I'll tell you what, I give a lot of credit to our, our merchants for. identifying it and then really jumping on it and making it part of our assortment. It's done really well. This concludes our question and answer session.

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

Thank you, operator, and thanks, everyone, for joining us today. We hope to see you in our stores, and we'll look forward to speaking to you again after the Thanksgiving weekend for Q3 results. Have a great evening and enjoy the upcoming Labor Day weekend. Thank you.