FIVE - NASDAQ

Good day, and welcome to the Five Below Second Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ms. Christiane Pelz, Vice President, Investor Relations. Please go ahead, ma'am.

Thank you, operator. Good afternoon, everyone. And thanks for joining us today for Five Below's second quarter 2025 Financial Results Conference Call. On today's call are Winnie Park, Chief Executive Officer, and Ken Bull, Chief Operating Officer and Interim 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 our SEC filings. The forward-looking statements today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements. In this presentation, we will refer to our SG&A expenses. For us, SG&A means selling, general and administrative expenses including payroll and other compensation, marketing and advertising expense, depreciation and amortization expense, and other selling and administrative expenses. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP are included in today's press release. If you do not have a copy of today's press release, you may obtain one by visiting the Relations page of our website at fivebelow.com. I will now turn the call over to Winnie.

Hello, and thanks so much for joining us. We're excited to share our second quarter results which were very strong and exceeded our expectations. I'd like to take a moment to acknowledge a major milestone for Five Below, achieving our first $1 billion sales quarter outside of a Q4. This is a testament to the hard work and dedication of our teams across the company delivered our value proposition of great product, extreme value, and a fun shopping experience to our boss, the customer. Our results demonstrate that our customers are recognizing Five Below as the destination for the kids and the kid in all of us. A few strategies that bolstered our Q2 results were one, curating relevant Wow newness in our assortment; two, simplifying our pricing to whole price points highlighting value; three, improving in stocks and flow of product throughout our network of stores; and four, initiating marketing campaigns fueled by creator content. These actions drove total sales growth of nearly 24% to over $1 billion and a comparable sales increase of 12.4%. Very notable was our comparable transactions increase of 8.7%. With strong fixed cost leverage, and disciplined expense management, adjusted EPS increased 50% to $0.81. We also grew our store base in the quarter with 32 net new stores across 21 states. Four of these stores were among the top 25 all-time spring and summer grand openings, including our Reading, California, and Columbia, Tennessee locations, which just shows the diversity of our appeal. One of our Q2 new stores in Fort Smith, Arkansas made the top all-time openings list. Strengthening these openings were our popular grand opening marketing activities, which created a ton of fun and excitement for our customers. The real key to our success in Q2 is our commitment to our customers. We have a new mantra at Five Below, the customer is our boss. And everyone from our Wowtown teams to our ship centers, to our amazing store crew aspires to put them at the center of what we do. We are all focused on simplification and collaboration across our teams to optimize our product assortment and store labor which is contributing to better in stocks and service levels and creating a more appealing shopping experience for our customers. Now on to product. Providing fresh trend-right quality products at amazing value is our mandate at Five Below. The second quarter was about summer fun. Be it staycations or road trips to the beach and lake, we delighted our customers with products to play, live, give, and celebrate. We were pleased to deliver broad-based performance across our worlds. Our merchants sourced an amazing assortment of products including licensed must-haves, with exclusive collaborations like the Stitch Surf Shop. From toys and games to loungewear, candy, beauty products, including travel necessities and more, we offer trend-right products that resonated with our customers. In tech, we continue to benefit from better in-stock positions in cables, chargers, and phone cases. Perfect at any time of year but especially for back to school. Also for back to school, we delivered great value for teachers and kids with crafts and supplies. Parents and kids loved our iconic $5 backpacks and our expanded assortment of licensed backpacks, which were a great deal at only $7. This is a good segue into the topic of value and how we define it at Five Below. We are 100% committed to providing value for our customers. Value for us is providing unique trend-right quality Wow product at amazing price points. Against the backdrop of higher prices, industry-wide due to tariffs, we are laser-focused on ensuring a compelling value proposition for our customers. Specifically in the second quarter, we executed our planned strategic pricing changes to whole price points in order to simplify the shopping experience for our customers and execution for our store crew. The majority of items outside of our candy world are now priced at $1, $2, $3, $4, and $5. We've also been selective in assorting products above $5 that represent great value for money. To date, we've been very encouraged by the customer response to the implementation of our pricing strategy. On store experience, our simplification strategy is key to enhancing our customer experience and making our stores easier to operate for our crew. By streamlining assortments and pricing, we see immediate and long-term operational benefits across the supply chain, in stores, and within our visual and marketing teams. With a focus on newness and conviction buys, our shelves are stocked with the latest trend products and our stores are cleaner and more appealing with reimagined displays. Improved inventory flow has led to better in-stock positions ensuring the right product is available at the right time and place to help bolster sales. On to marketing. We see an opportunity to better connect with our customers both in-store and digitally to elevate the Five Below brand and increase our brand awareness. We are letting our customers know we are a go-to destination to help them celebrate. Focused on six curtain-up moments we've discussed. With our Halloween and the all-important holiday season up next. In the second quarter, we connected with our customers with a continued focus on value and end-to-end storytelling. From social to in-store. We leaned into creator content with viral product moments and we believe this is driving visits from both new and existing customers. We are pleased with the progress we've made over the last several months and excited to further capitalize on the opportunity to better connect with our customers and grow awareness. Now as we look forward in an ever-changing tariff environment, our teams continue to work very closely with our partners to optimize our inventory availability and receipt flow for the balance of the year. We are all working incredibly hard to control the controllables, mitigate risks, and drive sales through continued executional excellence. We believe that we are in a strong position heading into the fall with exciting plans for both Halloween and holiday. We are the destination for the kid and the kid in all of us, the cool store for kids, and the yes store for parents. Our mission remains to offer amazing trend-right product at extreme value to help our customers throughout their life stages to play, live, give, and celebrate. With that, I'll turn it over to Ken for the financial update. Take it away, Ken.

Thanks, Winnie, and good afternoon, everyone. I will begin my remarks with a review of our second quarter results and then discuss our outlook for the third quarter and full year of fiscal 2025. My comments will refer to results on an adjusted GAAP basis excluding the impact of non-recurring or non-cash items as outlined in our earnings press release. Please refer to our earnings press release for GAAP results and all reconciliations. Total sales in 2025 increased 23.7% to $1,027,000,000 from $830,000,000 in the second quarter last year. Comparable sales increased 12.4% driven by increases in comp transactions of 8.7% and comp ticket of 3.4%. On a two-year stack basis, comparable sales increased 6.7% split approximately evenly between transaction and ticket growth. On store growth, we opened 32 net new stores compared to 62 new stores in the second quarter last year. We ended the quarter with 1,858 stores, an increase of 191 stores or 11.5% versus the second quarter last year. We were pleased with the performance of our new stores, which generated productivity at our target level which is in the mid-eighty percent range. Adjusted gross profit for 2025 was $343,300,000, an increase of 26% over 2024. Adjusted gross margin increased by approximately 70 basis points to 33.4%, driven primarily by fixed cost leverage on the strong comp sales, partially offset by the net impact of tariffs. As a percentage of sales, adjusted SG&A for the 28.1% decreased approximately 20 basis points compared to last year's second quarter. This was driven by fixed cost leverage on the strong comp sales results offset in part by higher incentive compensation. As a result, adjusted operating income grew nearly 50% this year to $55,100,000 versus $37,000,000 in the second quarter last year. And adjusted operating margin increased approximately 90 basis points to 5.4%. Net interest income was $5,500,000 for the second quarter, which was better than planned due to a higher average cash balance throughout the quarter. Adjusted net income for the second quarter was $44,800,000 versus $29,700,000 last year. This resulted in adjusted earnings per diluted share for the second quarter of $0.81 compared to last year's adjusted earnings per diluted share of $0.54. We ended the second quarter with $670,000,000 in cash, cash equivalents, and investments and no debt, including nothing outstanding on our $225,000,000 line of credit. Inventory at the end of the second quarter was approximately $800,000,000 as compared to approximately $640,000,000 at the end of the second quarter last year. Average inventory on a per store basis increased approximately 12% versus the second quarter last year. As we communicated on our last earnings call, the increase in our inventory position reflects the actions we took to accelerate receipts in response to shifts in the global trade environment. At this point, we expect our inventory levels at the end of the third quarter to also be elevated due to continued acceleration of receipts. And we expect to be well-positioned for the all-important holiday season. Turning to guidance. For 2025, we expect total sales in the range of $950,000,000 to $970,000,000 or growth of 13.8% at the midpoint last year's third quarter. Comparable sales are expected to increase between 5-7%. Versus a positive 0.6% comp in the third quarter of last year, we expect to open approximately 50 net new stores in the third quarter. Adjusted operating margin at the midpoint is expected to be 1% versus 3.3% in the third quarter of last year. This decline is being driven by both gross margin and SG&A expenses. Within gross margin, we expect approximately 160 basis points of unmitigated tariff-related costs which will be partially offset by fixed cost leverage. SG&A is expected to be approximately 100 basis points higher than the third quarter of last year, due primarily to higher incentive compensation and investments in store labor, including to support additional physical inventory counts. The improvement versus our prior implied guidance is primarily due to leverage on the higher sales. Net interest income is expected to be approximately $4,000,000 for the third quarter and our effective tax rate is expected to be approximately 26%. Adjusted net income for the third quarter is expected to be $6,700,000 and $13,200,000 versus $23,300,000 in the third quarter last year. With adjusted diluted earnings per share expected to be between $0.12 to $0.24 compared to $0.42 in 2024. For the full year of fiscal 2025, we are increasing our sales guidance to reflect the better than expected performance in the second quarter and our second half outlook. Full year sales are now expected to be in the range of $4,440,000,000 to $4,520,000,000 with a comparable sales increase of 5% to 7%. The midpoint of our full year operating margin guidance has increased from our prior outlook by approximately 60 basis points to approximately 7.9% driven by fixed cost leverage on the higher sales. On a year-over-year basis, operating margin is expected to be down approximately 130 basis points driven primarily by tariff and incentive compensation headwinds partially offset by fixed cost leverage. Net interest income for the year is expected to be approximately $19,000,000 and the effective tax rate expected to be approximately 26%. Adjusted diluted earnings per share is expected to be in the range of $4.7 to $5.16. For fiscal 2025, gross capital expenditures excluding the impact of tenant allowances is expected to be approximately $210,000,000 which reflects 150 net new store openings and investments in systems and infrastructure. And with that, I will turn the call over to the operator to start the Q&A session. Operator?

Thank you. We will now begin the question and answer session. To ask a question, and if you have further questions, you may reenter the question queue. And the first question will come from Edward Kelly with Wells Fargo. Please go ahead.

Hi, good morning everyone and nice quarter. I wanted to ask you a question about holiday. I was curious if you could expand upon the assortment that you're sort of thinking about, make excited about for the holiday season. And then, you know, Ken, as you look at the guidance for Q4, the implied comp, looks like it's up about low single digits. And I know this is like a tight window, that's harder to drive sales on. But on the other hand, if you dig through sort of like comp sales per store or overall sales per store, I mean, comparison seems pretty favorable. I mean, you did talk about leaving sales on the table last year. So I'm just curious as to how you're thinking about Q4 and a bit more detail related to all that.

Great. Thank you so much, Ed. I will start with the holiday assortments and then pass it on to Ken. We are really excited about the holiday assortments. I think we did have some real winners last year that we would like to grow further this year. But I think the key to holiday that is a bit different is that we will be the front and back of store to really create a holiday moment for our customers. We'd love to be known as a gift destination for America at great value. So you're gonna see tons of gifting as well as lounge a great holiday decor, anything you need for those stocking stuffers, last minute, so we really want to outfit all of holiday and again at great value so that's the plan we're very excited for it. And right now, we also have a nice assortment of Halloween and back of store, and we're very pleased with what we're seeing with those results. So I think that'll be great. The last piece is messaging to the customers. We will be messaging and telegraphing what is landing, when it's landing, that people really get a sense of what to come back for all during the holiday season. And I'll pass it on to Ken.

Yes. Thanks, Winnie. And Ed, regarding the Q4 implied guide, you're right, it's in that mid single digit range, really unchanged what we said at the beginning of the year. We'll provide further guidance as we get a chance to get through Q3, knowing that Q4 is a little bit different of a quarter, right, the high competitiveness, the condensed part of the season. And then, you know, there could be some uncertainty go forward from a consumer standpoint. So we think it's appropriate just to leave that guide where it was for Q4 based on where we started the year. Thanks, Eddie. Thank you.

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

Good evening. Thank you so much for taking my question. In the past, Five Below has been comping up at this level, it was often driven by a particular product, rainbow looms, fidget spinners, silly bands. This time around, what is different to be driving these types of comps and how does that influence your confidence in the sustainability of the model heading into 2026? And on top of that, how much of is it driven by the consumer's reaction to tariffs? And if the reaction's better to the tariff pricing that you've been passing along, why can't you pass along more such that you don't have as much margin degradation the next few quarters or even into 2026?

Thanks so much, Michael. Nice to speak to you this evening. So while I wasn't here in the past, yes, you are absolutely correct. Five Below was very, very good at chasing that single trend. And what's really nice in the business currently is the fact that we see really good comp momentum in six out of eight worlds. The majority of our worlds we think that that actually makes it quite a quite a good story moving into 2026 to be less reliant on a single thing and have worlds really speak to the customer and their needs. And then in terms of the tariffs on a go forward basis, it's been nice to see that the customer we've seen really nice growth in customers, both new as well as retained. And great, you know, nice traffic trends. And so all of that has been very positive. When we have taken those price adjustments, and really looked at simplification of pricing, we've been pleased with the elasticity that we've seen. In terms of those adjustments. And certainly, on a go forward basis, we can continue to look at what else we should do vis a vis the tariffs. With that said, delivering extreme value, I think, has been one of our keys success this past quarter and clearly we've got an amazing assortment, the majority of which is a $5 and below. And when we do invest in product that's above $5 ensuring that we pack real great value. And especially relative to others, but just something that's new, trend right, and super special. Thanks so much.

The next question will come from Simeon Gutman with Morgan Stanley. Please go ahead.

Hi, everyone, and good results. So, hey, Winnie, if you do your best, your hypothesis on trend versus price simplification. I think that was in place for more part of this quarter. Maybe some capacity coming out of retail market, except better execution. There's a lot of things you can put up on the wall. How do you boil it down, you know, to yourself, to your team on what's driving the success?

Thanks so much, Simeon. I think that we had a nice flywheel effect this past quarter in terms of having a great balance between, one, an assortment with curated newness that really spoke to the customer, across the majority of our worlds. Two, we did a great job of executing, and I really am so thankful to the teams for the end-to-end execution of ensuring that we had one, better in stocks on product, but two, really great inventory flow and communication of what that flow was going to be. And it was not didn't stop just at the store. It went all the way through to the customer in terms of our communication with that customer. So I think that worked in our favor. Then finally, the price simplification was good for us. In terms of making an easier shopping experience for the customer and, frankly, for the crew. It's a lot more efficient and effective. But again, we were very also pleasantly pleased with some of the results that we saw in terms of customers accepting the roundups in price. But we also did round down in this process. So I think it's the flywheel between all of those pieces that helped us be successful this quarter.

The next question will come from Kate McShane with Goldman Sachs. Please go ahead.

Hi, good afternoon. Thanks for taking our question. We wondered if you could just drill down a little bit more into the role of licensing kind of to Michael's question earlier, just how much of a driver do you think that is? What does that look like into the back half? And then just any update on the progress on SKU rationalization? I think you noted in the winter, we should see some benefits from these actions. But are you already starting to see some of those effects or did you see the effect in Q2? Thank you.

Thanks for your question, Kate. So licensing, I think, has always been a key component of what we deliver, especially the value at which we deliver licensing. I noted that for back to school having licensed backpacks at $7 which really was tremendous value relative to what else was out there, is something that we're really proud of being able to do. And certainly, the customers reacted well. So it's always going to be an important piece of it. I think the key difference is that this time around in Q2, we did highlight and bring together licensing statements like the Stitch Surf Shop so that when you walked in the store, you really got hit with this beautiful assortment that went across multiple different categories. We communicated to the customer about that assortment and the fact that it had landed. All of that worked really well. Again, a nice little flywheel between merchandising, marketing, and in-store execution. And then in terms of SKU rationalization, I think we're reaping some of the benefits of clear, distinct statements. We like to say fewer, bigger, better product statements of key ideas and I do think that the customer is benefiting from those clear statements, and we are getting behind product ideas in a more meaningful way. I think the merchandising team here has done a terrific job. So this is the beginning, and there's more to come.

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

Congrats on a good quarter. Just a couple of quick ones for me. With new store productivity back above 90%, just curious how you're thinking about reaccelerating store growth and the potential to get back to 10% unit growth in the coming years? And then on the quarter, the 3.4% ticket increase, can you unpack that between UPT and AUR? Thanks.

So I'm gonna do this as a two-part along with Ken. In terms of new stores, we've been really pleased with the openings this year. And we certainly have a lot of white space. We believe there's still more white space in the market. Especially as we enter new markets later this year like the Pacific Northwest, I think part of what we've been very pleased with is the fact that we've been very selective in terms of criteria to kind of filter our pipeline, which is a very solid pipeline, but filter the pipeline of new stores and evaluate the best opportunities and be choosy about where we land. That's a methodology that we'll continue to assert as we move forward.

And then Chuck, related to ticket growth, that was pretty much all driven by AUR in the quarter. So we saw that again, Winnie made the comment about the price adjustments that we made during the quarter and how we were pleased with the elasticity there. And the lower unit degradation than we had expected. But the majority of the ticket increase was driven by AUR.

Great. Thank you.

Thanks, Chuck.

The next question will come from Seth Sigman with Barclays. Please go ahead.

Hey, everyone. Congrats on the results. I wanted to follow-up on the gross margin outlook. The 160 basis points unmitigated tariff impact for the third quarter, if I recall, there's discussion in the past about a 250 basis point quarterly impact from tariffs. So I'm just trying to reconcile that. Is it just timing? Or have some of the other assumptions changed? And I guess just related to that, on pricing, if you give us any more perspective on how to think about the ramp in AUR through the rest of the year, that would be helpful. Thanks so much.

Okay. Thanks, Seth. With regards to the impact in Q3 around tariffs, I believe we had mentioned in our prior guidance that it was going to be about 225 basis points, now landing around 160 basis points of total operating margin drag. And by the way, all of that's really up in gross margin for Q3. The improvement there is really due to a few things. Again, we've talked about the lower unit degradation and how we were really pleased with the results of our price adjustments from a customer response. There's a little bit of sales mix included in there too. And then some, you know, little changes in cost mitigation. You know? Because we had made estimates before, and now we've got some better numbers. So that kinda drove the difference there. And then from an AUR perspective going forward, we would expect that to be similar really to what we've seen kind of exiting the second quarter because we made our price adjustments throughout the quarter. For the most part, in the middle of the quarter, they were in place. And so we're going to expect them to remain relatively consistent as we move forward. Although they'll switch based on sales mix and type of product as we go forward.

That's exactly right. And I think, Seth, one of the things that Ken just highlighted as an important one. Because our assortment change season on season, the sales mix in terms of what customers really react to will also drive the AUR outcome. So and again part of what we've seen in Q2 is less price resistance some of the adjustments that we made, but also a nice mix of product that worked across assortments and packing value in price points above $5 is a strategy that has worked for us.

Thanks, Seth. Thank you both.

The next question will come from Scott Ciccarelli with Truist Securities. Please go ahead.

Hi, this is Sherwin on for Scott. Thanks for taking my questions. Just a couple here. Kind of on a topic from, like, where this momentum is coming from, various discretionary retailers like Tmall were negatively impacted by the elimination of the de minimis exemption with data point to roughly 35% drops around the time of the announcement. Announcement and implementation. So I'm curious if you've noticed any of the impact from these orphan sales. And if so, is any of that momentum built into the guidance? And then really quickly on gross margin, if there's any sort of benefit baked into the quarter from price increases ahead of the higher price inventory flowing through. Just really trying to wrap my head around sustainability and variability should tariffs remain constant or subside and how it looks forward into 2026. Thank you.

Thanks for your question, Scott. In terms of TEMU, certainly, there was probably some impact in terms of at TEMU and de minimis loophole being closed. However, we actually don't know exactly what that is. And it's never played a huge role in our business. I think part of the reason being is that our offer is differentiated in that it really focuses on kids. And with kids in particular, the in-store experience and the ability to touch and feel and play is a big piece of it. So and where we've seen momentum in the business, it's in businesses like play and toys and games but also in some of the other businesses like beauty and even in lounge that are just a little more experienced based and impulse based and driven by kids. So that kind of explains that. And then Ken's talk to you about gross margin.

Yeah. And then your question around sales and gross margin kind of going into the third quarter. Obviously, we've got learnings coming out of Q2 with the price adjustments that we made and how the customer is responding. So we are considering that in our guidance in Q3 and bringing that forward. And it is one of the reasons why it was called out on a prior question. Why the impact of net tariffs is lower now than what we thought a quarter ago. Again, a piece of that is just the results of the price adjustment we made and the lower unit degradation that we've seen versus our expectations.

Thanks, John. Thank you. Thanks.

The next question will come from Matthew Boss with JPMorgan. Please go ahead.

Thanks and congrats on a great quarter. Thanks, So Winnie, on the inflection in comp sales in the first half, is there a way to maybe break down what you think is being driven by traffic and new customer acquisition versus basket build? And then, Ken, on the August trend, I guess, is there a way to peg where you stand quarter to date relative to the May forecast? Maybe any thoughts on back to school and just opportunities you see for further product improvement relative to the assortment today?

Right. So, Matt, let me try to answer your questions with regards to unpacking comp sales in the front half. Our front half and specifically this quarter, think the key differentiator was the growth in transactions. And the transaction growth of 8.7% certainly part of that was driven by customers. And this is where we've seen nice increases in terms of new customer acquisition in our comp stores as well as new stores as well as repeat visits. And I think that a little bit of that being driven by our initial marketing that we're working on that is much more focused on social as a channel that we think is very relevant. For the younger customer and for millennial moms. So that kind of explains that. The other piece of it is we did have single digit growth in terms of AUR with some of the pricing adjustments that were made. But also driven off of the mix of the business.

And then, Matt, on your question around quarter to date, thus far in Q3, I mean, we feel good about the business. We normally don't talk about intra-quarter activity at this stage. Knowing that we provide our guidance based on what we've seen so far and then we look forward and look for any anomalies or anniversarying or things like that. But overall, we feel really good about where the business is and feel that guide is appropriate. Thanks, Matt. Thank you.

The next question will come from Randy Koenig with Jefferies. Please go ahead.

Yes, thanks a lot and good evening everybody. Guess, Ken, for you, can you just give us or remind us the around the topic of shrink where are we at with that topic, strategies that taken place? When's the next inventory count? Some of the comparisons we're going up against there and just updates we can expect around that area. And then as you noted in your commentary and answers to questions around accelerating receipts, maybe give us some perspective how you're thinking about sourcing strategies into 2026? How are kind of thinking about the supply chain given all the moving pieces out there? How should we be thinking what you're going to those different strategies are going to take next year perhaps different from what you're doing in 2025?

Thanks, Randy. On the shrink piece, we're actually right in the middle of taking a significant level of physical inventory counts throughout the chain. It's actually one of the reasons why labor is slightly up in Q3 because felt it was important to really get a handle on the results. And if you recall, when we spoke at the beginning of the year, we talked about starting to put various initiatives in that we were going to test. So these August physical inventories are very important for us to see how those initiatives went and what we're gonna take going forward to help us manage shrink. The results are that we're right in the middle of those now, right? You take the counts and it takes a little bit of time to reconcile those. But as part of our third quarter call, we'll be able to come back and provide results on that. Relative to sourcing, a couple of things and when you can jump in on this too. You're right. We feel in this global trade environment, the right thing to do is accelerate receipts as much as we can so we get control of the goods, and we have them here ready to go for all our curtain up events in the key seasons. We always want to make sure we have the available capacity out there. And a call out to our supply chain and logistics teams. They've done a phenomenal job by making sure that we have that capacity through the end of this year and then going into, going into next year. But as you know, we've done a pretty good job historically around this, and I think we're gonna continue with similar strategies as we move forward into 2026. Reacting to whatever takes place.

I think that one of the important things that we garnered out of the tariff volatility is this agile team mentality from merchandising and playing an to supply chain and logistics. And the stores. We really take an end-to-end approach and we'll continue to exercise those muscles as tariffs continue to be somewhat volatile situation. With regards to 2026 and sourcing, the other key in this that we started in 'twenty five and is no different for 2026 is continually diversifying our source space, and looking at the best of breed vendors across the world. And so that's something that with 25% of our source coming out of The United States, we certainly have more that we can do here and elsewhere. So that agility and looking globally is something that we're very, very focused on.

Next question will come from David Bellinger with Mizuho. Please go ahead.

Hey, everyone. Thanks for the question. Really incredible quarter and a nice flow through as well. We step back here, it seems like a lot of the momentum in the business today is basically Five Below getting back to what it does really well. We get that. Our question is, where do we go from here? I think you mentioned two underperforming worlds across the business. And is there a potential to recover those sales as things on the table like party or balloons or some categories that we can look for as preview into 2026 of how we keep this momentum going. Thank you.

David, thanks so much for your question. And absolutely, I think that there is more opportunity. And one of the things that we are certainly focused on and maybe lost a little side of in the past was just the agility to trend down businesses that are no longer on trend. And make sure that we've got more in the pipeline on the things that are coming up. And the team has done such a great job comping the comp, but now they're also, I think, really the merchant team has terrific. They've been really unleashed to go after trends. And now we've got, like, a lot of really great discipline in terms of taking a trend from zero to hero. So we've got more business opportunity. We certainly, I think, have more business opportunity in terms personal celebrations as well as holiday celebrations. Inclusive of party. So we've got an ever-evolving kind of merchandising strategy, and there's I think there's a lot more growth in our future. Thank you, David.

The next question will come from Jeremy Hamblin with Craig Hallum Capital. Please go ahead.

Thanks. And I'll add my congratulations on the impressive results. I wanted to see if we could ask a clarifying question on incentive comp. You talked about roughly 50 basis point impact at the start of the year given how much you're exceeding initial expectations. Wanted to get a sense for how much more is flowing through. I imagine you're maxing out to some degree. And then I had a question just clarifying on the pricing adjustments in the simplification that you're doing. So sounds like you've moved away from $3.5 price points to $3 or $4 and so on and so forth. But also, you haven't heard as much about Five Beyond in kind of the upper end price points. So wanted to get a sense for whether or not that's an area that's going to be let's say, less front and center in the strategy going forward or if that's just another area that you potentially could look at getting momentum in here as we look into the next year.

Thanks, Jeremy. On the first part of your question around incentive compensation, yes, there has been an increase there given the outperformance we saw in the second quarter. And where we're guiding the third quarter, especially versus where we were previously. And you're right, we had estimated about 50 basis points of deleverage in incentive compensation, much down in the SG&A area. And that's up about 20 basis points to about 70 points of deleverage for the year.

And then with regards to Five Beyond, Jeremy, we are still we still believe inside Beyond. However, instead of isolating the product in the back of store, what we've done is we're moving the product in line. And the thought process behind that is that's how the customer shops. And I will give you the example of back to school. You know, one of the statements we make is dorm decor. And while in the past, you had mirrors that were you know, $35 in the back of store, we actually put them in line with the balance of the decor items for back to school. So that thought process customers are responding well too because that is how they shop the store, and we will continue to support that and bring items in line. And the important piece around bringing items in line is they have to be wow. They have to represent great value, trend, and something really special that you can't find elsewhere. And we do think that fuels a bit of that treasure hunt. The other piece of this is, I think in the past, there was probably more of a focus on jumping from $5 all the way to like $15 or $20. Now Five Beyond is really for us how to deliver great value at incremental price points, be it $6, $7, the way up. And, as long as it's great value for the customer, we believe in it. And we think it's a really great way for us to continue to deliver items that we couldn't in the past because they happen to be above $5. Thanks so much, Jeremy.

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

Hey guys, two quick things. So, Winnie, you mentioned on Five Beyond moving that in line. So is there going to be a conscious effort to kind of reverse? Right? I know you've had home and tech, in the back of the store. To reverse that and move that in line. And so your thoughts on that? And then secondly, I know the idea was maybe chase product this holiday. What's your thought on that? And given the strength in the business, is there less of a need to think about closeout than there might have been a few months ago?

Thanks so much, John. Great questions. In terms of Five Beyond and looking at the store and the setup, we are leveraging now the back of store to create statements. And in this case, you'll see it right now in terms of Halloween, and you'll also see it in terms of holiday as we move more of those Five Beyond items in terms of the core items in line. So we will be looking at, you know, what impacts does that have in terms of the movement of different worlds. The beauty of our box is that we want to maintain as much flexibility and agility as possible. We may wanna make a very clear shopping and experience, but that flexibility and agility will help us in terms of not buying to fill a space, but really buying to consumer need and trend. So we're evaluating all of those things right now. And then in terms of Chase product, one of the keys to our success is the ability to test something in Chase. And then also the extent to which a hot new trend comes on the market going after it and seeing what else can we do and how do we make it happen. Be it a Netflix movie premiere, you know, whatever is happening in the cultural zeitgeist. We're out there really trying to chase down the hottest trend. And finally, on closeouts, we're actually we're quite excited about closeouts the extent to which, again, they represent trend and value. And we continue to have closeouts in our assortment as opportunistic buys. And that's still a meaningful piece of our product diversification strategy. Thank you, John.

The next question will come from Brad Thomas with KeyBanc Capital Markets. Please go ahead.

Thanks. Winnie, I to follow-up on maybe a couple of different questions and ask it a different way. When I think of you know, you joining a company, after Tom had had stepped in, with tariffs, certainly an element of the company being in more crisis mode almost. Initially. And as you all clearly are hitting stride here, and getting some nice momentum, how do you think about some of maybe the opportunities and allocations of your time and the team's time that you may be couldn't focus on in the past? For example, you know, accelerating store growth was alluded to. You used to do more on the remodeling front. How do you think about what incremental priorities you all may think about in the months and quarters ahead here?

Great. Brad, thank you for that. And we I certainly entered the company in an interesting time and we certainly didn't waste the crisis. And you're absolutely right. It did take up a ton of time and attention. What tariffs did, though, which was terrific, was got me very very close to the details of merchandising. And how we think about the product assortments and working closely with those teams and getting to know them. So that for me has been lightning in a bottle. It's been terrific. And if anything, what that experience has shown me is that we definitely have more opportunity. And as the business hits its stride, taking some of those insights in terms of the art of the possible of what we have with product and thinking through not only store growth, but also what the box looks like. Is part of the discussions that we're having right now as a leadership team in this first team. What is critical, though, is kind of our core tenets of product, value, and experience, and going back those core tenants and making sure that we don't lose sight of that. Is part of the discipline that Tom brought in. It's something that I truly believe in. And if you look customer first, the magic behind Five Below is making sure that with all of that energy behind new growth and new growth strategies, we remain focused on the customer and that customer is a kid and being the destination for the kid. Thank you, Brett.

Next question will come from Anthony Chukumba with Loop Capital Markets. Please go ahead.

Thank you so much for taking my question and congrats to the team. This has been just a remarkable turnaround. So, Winnie, in response to another question you were asked, you talked about you alluded to a Netflix best best, you know, best seller. And that leads into my question. Three words. K pop demon hunters. How big of an opportunity is that for you Halloween Christmas, could this be as big as Frozen was for you? Thank you.

So, Anthony, who knew K pop Demon Hunters would be as explosive as it is? It's amazing. The teams are all over it. But right now, product I think even Netflix realized how big it was gonna be. So we're trying to go after it in a way that we can. I do think what it underlines is a broader trend zeitgeist, and we certainly see it in categories like novelty food and candy, which is this whole, you can see it in Korean beauty as well, but those are some of the ideas that, like, if you tease out what's really hot beyond that particular moment of k pop demon hunters, how do we continue to follow the through line of that trend? So we have been talking about the influence of, you know, Asia, Korea, Japan, and all the goodness that comes from that. Thank you for your questions, and I hope you watched the movie.

The next question will come from Philip Lee with William Blair. Please go ahead.

Congrats on a great quarter. So it seems like the investments and optimization of stored labor has had a really nice tailwind on in stocks and conversion. Is there still a decent amount of room there for further improvements? And then what other areas are you looking at to improve in store operations that could help continue to fuel strong comps next year against more difficult comparisons? Thank you.

Philip, before I pass it on to Ken, one of questions that came earlier in terms of unpacking our comp, conversion actually was a big driver of it and it was execution. And Ken's gonna lean in here and talk about what we've done and also what's ahead.

Yeah. To Winnie's point, Philip, inside that transaction number, conversions was a big driver this year on a year-over-year basis. And you're right, we started that investment in store labor in the back half of last year. We're going to start to that as we move forward. So we saw that in the first half. And we're really looking at that in a couple of ways. One is from a workload perspective also to make sure you know, we keep it as efficient as we can, whether it's moving product into the store or the moves that the crew has within the store when we're setting new product. I can tell you the price adjustments that we made in the second quarter that drives a good amount of efficiency for the stores. It's much easier for them to move product around not ticketing the product as we were given it's at full price points, and you also have you know, benefit from a signage standpoint. So on a year-over-year basis from store labor and the impact to the financials, that'll be the negative impact will be less and less as we move through the back half of the year as we anniversary those investments from last year. It's really the bigger side of the other side of the equation there where we're gonna look to your point, continue to increase the efficiency there. So we can repurpose hours into more, customer-facing activities. Thanks, Philip. Thanks, Philip.

Question will come from Joe Feldman with Telsey Advisory Group. Please go ahead.

Yes. Hey, guys. Thanks for taking the question and congrats on the quarter. I did want to go back to this comp position of the comp and was wondering if you could share a little of your view of how transaction and ticket and maybe conversion mixed in there. How that's all going to balance out in the second half of the year? And because so far you've been getting great transaction trends and I'm just wondering if that's going to still be like waiting the comp if it'll move more towards ticket. And again sort of gets into the elasticity and what you're kind of thinking as you head into the back half.

Thanks, Joe. As we've seen historically, normally been transactions that drive the comps, especially higher comps. And obviously, we saw that Q2, and I think we also saw it back in Q1. If you look at our guide and our assumptions going forward, again, there's ticket has been in a kind of low single digit range increase. I would expect that to remain relatively consistent as we move through into the back half of the year and whatever the remainder is in comp to be driven by transactions.

Great. Thank you. Good luck with the next quarter.

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

Hey, good evening. Great. Congratulations. Question I wanna ask, I guess, is maybe more qualitative. This I'm with regard tariffs, I mean, clearly, your Five Below has been managing tariffs and a lot of other aspects of business really well. The tariff environment remains fluid, but the question I see, as you're looking forward, are there still significant risks with tariffs as you see them now? And what would those be? And then is or should we interpret the guidance and communication to suggest that the mitigation efforts of Five Below will the tariff mitigation efforts will just evolve and take and take place over time.

So Brian, I think that tariffs is a reality and has certainly been baked into our forward outlooks. I think that the key piece of this is the reaction to the tariff and how do we mitigate. And I do think we've got a toolkit from looking not only at just price, but also looking at assortment changes and the newness, you know, and with that assortment change, a diversification of country of origin, as well as vendor base. The last piece of this is that we have had some amazing partners in terms of our vendors. Many of whom have been with us for a while, and they have also really come to the table. In terms of navigating the ups and downs with the tariffs. And so I think this is just a way of life at this point. And being able to exercise those muscles constantly and having this toolkit of how to address the issues has been critical for us. Brian, thanks for your question.

Thank you. Helpful.

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

Yes. Hey, good evening. Thanks for including me. Just had two quick questions related. The first one was on the fourth quarter. It looks like it's implying about 350 bps of margin pressure at the midpoint. So wanted to see if you could give any splits there between gross margin and SG&A? And then to follow-up on the tariff side, is that a similar kind of 150, 180 bp headwind in 4Q? And how would you compartmentalize some of the offsets to tariffs? In the past, I think it was about a third, a third, a third for the twenty seventeen one. So how would you kind of characterize it this time?

Okay. Thanks, Michael. Relative to Q4, we are assuming about a three it's about a 320 basis point op margin decline of which you've got about 225 basis points of tariff mitigation, net impact, pretty consistent. I mean, fourth quarter overall remain unchanged for us. And, you know, the other pieces that are going on there again, still have some a little bit of higher incentive compensation in Q4. And we also have and we called this out on the prior call again, there really hasn't been a change in how we look at Q4. We're going have a little bit of fixed cost deleverage because it's going to be on a lower comp. So those are really your components of that full operating margin deleverage in you got about 70% of that up in gross margin and the other 30% deleverage on that 320 basis points down in SG&A.

Thanks, Michael.

Thank you so much. We really appreciate all of you joining us this evening and thank you so much for the thoughtful questions. We're really excited by the progress we've made across product, value, and experience. And I want to send a heartfelt thank you to our teams for their hard work and dedication to delivering our first ever billion dollar quarter outside of a Q4. I want to reiterate that Five Below really is we aspire to be the desk for the kid and the kid in all of us. Our teams remain focused on delivering trends, extreme value, and a fun shopping experience. I think in summary, we feel good about where the business is today. And we're excited for y'all to experience Halloween followed by an amazing gifting season with holiday with Five Below. Thank you all so much.

Thanks everybody.