Good day, and welcome to the Five Below Fourth Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Christiane Pelz, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thanks for joining us today for Five Below’s fourth quarter and fiscal year 2019 financial results conference call. On today’s call are Joel Anderson, President and Chief Executive Officer; and Ken Bull, Chief Financial Officer and Treasurer. After management has made their formal remarks, we will open the call to questions. I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and Five Below's SEC filings. The forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward-looking statements. If you do not have a copy of today’s press release, you may obtain one by visiting the Investor Relations page of our website at fivebelow.com. I will now turn the call over to Joel.

Thank you, Christiane. And thanks everyone for joining us for our fourth quarter and year end earnings call. I will review the highlights of the quarter and fiscal year as well as thoughts on 2020 before handing it over to Ken to discuss our financials in more detail, and then we will open the call for questions. Before I speak to our results, I want to offer our thoughts on COVID-19. This outbreak has impacted the world and reminds us how truly we are a global community. Our thoughts and prayers are with everyone impacted. Our priority is the health and wellbeing for our associates and customers, and earlier today we announced the closing of all stores effective tomorrow evening at 7 p.m. It is very difficult to determine the extent and duration of this rapidly evolving situation. So, we will not be providing specific first quarter or full year guidance at this point. We continue to be focused on managing the business with great discipline and maintaining our financial strength. Now turning to the fourth quarter, our Q4 results were in line with the revised expectations announced in conjunction with our holiday sales release. Our results were driven by strong performance from new stores, which remain our most significant growth opportunity. We opened 150 new stores in 2019, of which six opened in the fourth quarter. We ended the year with 900 stores which represents a little over a third of the 2,500 plus potential we see in the United States. As previously stated at the January ICR conference, the periods between Thanksgiving and Christmas were relatively on plan, while the period from Thanksgiving leading up to Christmas was impacted by the shortened holiday selling season. Our key selling periods were positive on a shifted comp basis but were…

Thanks Joel. And good afternoon, everyone. As Joel said, we are operating in an environment that is rapidly changing and we are adapting quickly. With regard to our financial health, we have the benefit of the strong balance sheet and we are managing the business and our assets with discipline. Now, I'll review our fourth quarter and fiscal 2019 results and then discuss fiscal 2020. Our sales in the fourth quarter of 2019 were $687.1 million, up 14% from the fourth quarter of 208. We ended the quarter with 900 stores, a year-over-year increase of 150 stores or 20%. Comparable sales decreased 2.2% for the fourth quarter of 2019 versus a 4.4% comp increase in the fourth quarter of 2018. The comp decrease for the fourth quarter was driven by a 3.6% decrease in comp transactions, partially offset by 1.4% increase in comp average ticket. Gross profit increased 18.5% to $289.1 million from $244 million reported in the fourth quarter of 2018. Gross margin finished at 42.1% increasing 160 basis points from 40.5% last year. The improvement in gross margin was due to improvement in merchandise margins, lower incentive compensation and distribution efficiencies, partially offset by deleverage in store occupancy costs on the negative comp. SG&A as a percentage of sales for the fourth quarter of 2019 decreased to 21.1% from 21.2% in the fourth quarter of 2018 as lower incentive compensation was offset by deleverage of fixed costs. Our operating income increased 23.7% to $144.1 million. Operating margin increased approximately a 165 basis points to 21% of sales. Our effective tax rate for the fourth quarter of 2019 was 23.6% compared to 24.4% in the fourth quarter of 2018. The decrease in the effective tax rate was driven by discrete items which included a benefit from share based accounting.…

Thanks Ken. 2019 was a very productive year for Five Below as our team successfully mitigated tariffs while advancing our strategic objectives around experience, product and supply chain. Across the world, people are living through a very challenging period right now. Here at Five Below, we are drawing inspiration and strength from our favorite customer, kids. We're embracing their unmatched resiliency and ability to grow from challenge and we're certain that together we will come out of this a stronger community. I want to thank all of our associates for their hard and dedication to making Five Below what it is today and for their commitment to our customers. Even as we make decisions to adapt to the rapidly changing environment, our long-term focus and goals are still to continue to innovate, be relevant, deliver WOW products at incredible value and provide an amazing differentiated experience to our customers. We believe we are well positioned and capitalized to continue our growth in the future. With that I'd like to turn the call back over to the operator for questions. Operator?

[Operator Instructions] The first question is from Paul Lejuez with Citi Research. Please go ahead.

Hey, thanks guys. Appreciate the comments. Wondering if you can maybe talk about how you're going to change your marketing efforts? Any stepped-up e-com efforts now that you're going to be dealing with some store closures for a while, and also how does that change, how you manage your TV marketing in this sort of environment customer outreach in general, and then also curious about the number of store openings. I think you've laid out what your plan was going to be and then kind of said that, that was no longer in place. I didn't know if that applied to your store openings and CapEx as well or if you're going to pull back on that. Thanks.

Right. Paul, thank you. So, let me just discuss the marketing efforts. As it relates to first quarter, and that's really the only place we've made any changes at this time. We have pulled back on TV and the circular that will not run for Easter this year. We are leaving in place our digital efforts and are focused on our e-com, and in that case we are seeing an increase in e-com business and are having no problems keeping up with it. As for the 180 stores, that is still our plan and although at this time you should, you certainly should expect a change in cadence on those stores, and And it's too early for us to give you guidance on what that new cadence would look like. Thanks Paul. I’d just remind everyone, if you keep it to one question, that'd be great so we can get through everybody here. Thank you. Next?

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

Yes. Hi, Joel. So, question for you first just is what would you need to see the open stores again? And then beyond that as we think about the cost structure, help us out with what's fixed, what's variable, and if stores are closed for an entire quarter, how much of the cost structure is going to stick with you?

Yes, and Ed what was that question about the closed stores?

Well just initially what would you need to see to open stores again? And then beyond that the cost structure and how much it stays with you?

Yes. Look, we're shutting stores down this week, and while it'll be customer facing tomorrow, our associates will remain in the stores Friday, not open to the customers as we -- as you can imagine had a lot of freight in route to stores, and so we're taking all that in, so it doesn't get trapped in any supply chain disruption should there be any and preparing the stores to open, and so to that point, we will be able to open at a moment's notice but it's honestly too early to speculate what it will look like. I mean I think at this point, we'll turn to take guidance from local, state, and national as far as when it's safe to start to resume opening stores back up, but we want to stay in compliance with that, and then Ken I'll turn it to you.

Yes, and Ed just around the cost structure as you would guess, a majority of cost of goods sold is obviously variable related to merchandise cost, but there is some fixed cost in there because we record occupancy costs up in cost of goods sold and some buying costs there too. And then when you look at SG&A, about 40% of our SG&A costs are fixed. So, again just to give you kind of an idea of the cost structure based in our P&L.

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

Great, and thanks for all the color so far on the call guys. Joel, look, while there's not really a compare for the near-term closures, maybe if you took a step back, can you just speak to how the model has held up during times of past economic stress? Trying to get a sense as we maybe come out of this on the other side if unemployment is higher or there’s changes to your core consumer. Just how you see your value proposition positioned today relative to peers, and anything you could do to bolster that coming out on the other side of this.

Yes, and I might let Ken give a little more color. He was actually here back in 2008 and 2009, but as you look back to my prepared remarks, certainly if you speculate that customers might tighten their belt initially coming out of this as it was 2008 and 2009 during the financial recession, we were very successful coming out of that and I think this will be a place where customers are going to turn to us as they look for value and stretch their dollar until things get back to a more normal type of period. I don't know, Ken if you had anything to add during time of back in 2008.

No. Matt, I think Joel answered it. I was here during that time period going through 2008 and 2009 and obviously there was that initial shock from a traffic perspective. I think all retailers were impacted right out of the gate, but we did see ourselves come back. It fell quicker than other retailers, and I think to Joel's point, I think it was customers out there who really discovered the value that we were able to offer because we were another choice at the end of the day. So, it ended up being somewhat positive for us as we came out on the other end of that and came out relatively quickly.

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

Good afternoon. My question is the decision to close, and you gave out those numbers which was helpful, which I think means business was down somewhere close to 20-ish percent, but can you tell us was that getting progressively worse each day or was it leveling off? And Ken gave some helpful numbers on the cost, fixed costs and SG&A gross margin. I don't know if you've done this math, but how long can you record no revenue without needing any liquidity? Do you know what the numbers of days I guess you're going to get us to the conclusion of doing that math quicker than we could do it ourselves?

I think on your initial math there, you're in the right ballpark. It might be a little high on in terms of what it was down, but it was pretty consistent through that period of time. And I think it was important for us while we can't give you guidance to be as we always try to do, be extremely transparent on how the quarter was shaking up. And as many of you expressed concern about our negative comp during the holiday and whether it was true to the shorter days, I think this returns to low-single digits on the upper end of it to that matter is what we really want to share with you. And, Simeon, it's too early to do that scenario planning and obviously that's where we'll focus right now. Ken gave you a lot of color commentary on our balance sheet. It's very strong, and we'll start to look at that, but at this point in time it's too early to kind of lay out every scenario. Ken, do you have anything to add?

Sure. I agree with what Joel mentioned, Simeon, in terms of the go forward, but I will remind everyone. I mean we are an extreme value retailer, and one of our core values has always been around operating discipline and cost efficiency. And it's really who we are and as we even -- and as Joel mentioned in this call, we were faced with a similar situation with mitigating tariffs in terms of the challenge that was put in front of us and we were successful in doing that, but we will take the appropriate actions across the business as the situation evolves obviously to maintain our financial health and our future growth.

Yes. I honestly think, thanks Simeon. Some of that that we went through with tariffs last year probably made us a better stronger company is that number approach to $100 million, we had to get pretty creative to manage and mitigate all those tariffs and that discipline will serve as well as we go through this as well. Next question?

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

Hey, guys. Bringing in there, if you think about the quarter progression on comp and if we assume business is going to be closed for the next two or three weeks. It's probably a realistic you're going to comp down say close to 50% in the first quarter and it sounds like to your question earlier that the SG&A cost structure 40% is going to be fixed. So it seems like earnings are probably going to be probably close to flat maybe up a nickel in the first quarter. Can just roughly speaking; are we way out of left field with that type of math? Thanks.

Thanks Chuck. Listen, appreciate the question but as I had mentioned before in my prepared remarks I mean we gave you a little bit of the indication of what we were thinking before the situation here with Covid-19. It's really difficult for us to take a look forward like that. And we really want to kind of avoid making any of those statements in terms of what the potential will be especially in terms of specific financial results. So, yes, on that question I think we're just going to say that we'll leave it where we talked about for the full year. And as I mentioned before we're going to continue to react appropriately to the situations that are put in front of us.

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

The next question is from Karen Short with Barclays. Please go ahead.

Hi. Thanks for taking my question. I guess what I want to focus on one clarification is with respect to the store closures. Are you going to make a blanket decision to open all stores at once when this lifts or will it be maybe a state by state or region by region basis? But then the bigger question I had was in terms of inventory how much inventory can you really pack away I guess from a DC perspective and what part is seasonal and kind of has more of a shelf life, if to the extent that you're dealing with an excess inventory situation?

Yes. No problem. If you go back and kind of study the last few calls we've had strategically the single biggest initiative we've been focused on for the last several years has been distribution center expansion. And we're in a fortunate spot that we've got plenty of DC capacity. In fact, our Texas DC has just gotten its certification and we are now -- while we're not open for business and shipping out we've got all the racks in place and are starting to receive inventory. So that now it's a brand new DC with a lot of capacity. So we're not at all worried about that side of things at all. And then as far as how we're going to reopen stores, it's a little speculative on our part but I would guess it would be more regional or local rather than all at once just given the way the things have transpired and how we've watched stores shut down or states react. So but I'm completely speculating there, Karen. And I think we'll watch how this unfolds and take some guidance from state and national officials.

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

Good evening. And thanks a lot for taking my question.

We thought you went underwater there Michael. Go ahead.

' Can you hear me, okay? Joel your model is very traffic dependent and even if once you open your stores it's likely that we're going to see social distancing and overall engagement with physical locations by the consumer be much the consumers likely to be much more hesitant and resistant to go out and in freely traffic in physical locations. I think your comps were down low to mid-teens in that week before in the last week or so. Do you think that's a good indication of how social distancing might impact your traffic overall even in a kind of steady state environment and how do you manage through that even putting aside the economic ramifications of what the current situation might cause?

Yes. A lot of that, Michael, I'd have to speculate on but I will tell part of the reason we've stayed open the fact that we've only been down in the teens. It just shows you how much the customer needed us and especially as they were kind of preparing to hunker down and be with their kids that were suddenly off school. But during that that 10-day period we instituted as did a lot of retail is a new way of working and we opened every other register. We brought in lots of hand sanitizers et cetera, et cetera and that kind of procedures will continue afterwards I'm sure but we're store ops teams is way more than prepared to kind of handle that and we'll be prepared as the customers get comfortable and come back. Go ahead.

Could I clarify something, you said 100 basis points of cannibalization that I think that's much higher than what you've experienced historically. So what's driving that?

Sure. Honestly, Michael, we actually have never really shared that number specifically and part of the reason as we ramping up stores, we also want you all to understand again some transparency how that comp multiple is built know that that cannibalization is planned for and it's built into as we're kind of building our stores out and so while we might go into to fewer new markets, our focus on densification is a good thing. And we've really started to see ourselves picking up some market share in some great areas and those stores tend to bounce back after we cycle the year, but just wanted you to have again some transparency of what's built into the whole comp multiple.

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

Hi. Guys. Scot Ciccarelli. So, Joel, I know you said earlier that your current plan is to maintain your 180 store openings for the year but with negatives called mid to upper teen's comps that can be pretty spooky. So I guess the question is how much flexibility do you guys have on your prior CapEx plan?

Sure. Well, we have -- we actually have quite a bit of flexibility there, but I would tell you as I think I might have said, first of all, we'll certainly come back after things get back to normal and give you specific guidance if we stay at 180. For sure our cadence will change but we feel really good about those stores and communities that we need to go into built into that CapEx plan was also distributions that we'd purchase so certainly we have some flexibility there whether we would go forward with purchases or not but that that makes up for quite a bit of the overall CapEx from that perspective. I don't know, Ken any others on CapEx.

No. I think you mentioned it again there's probably going to be some flexibility for us down the road, but I think at this stage of the game it's still a little bit too early to tell. But just to get back to the comment that these are all things that we're going to look at as we move forward here and as the events evolve.

We'll be looking at everything, Scott. Go ahead.

I guess my question was just about like if you don't get the volume back and like social distancing does remain a thing for quite a while. You're not -- you're potentially not going need as much of the distribution. So I'm just wondering if there's an ability of maybe put off some of those expenses and kind of defers that to the future. Thanks.

Absolutely. I mean that's what I was talking about on the DC and we don't have to make those decisions in the next 30 days here. So the timing works out nice and also I mean look, we're a growth company that doesn't change. And I think our customers are going to need us even more when you come through this with our value based model.

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

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

Hi. Good afternoon. Thanks for taking my question. Thanks for all the color. Question I have we talked even through the holidays about this the online effort and maybe you're pushing that further. So as you look at what's happening now with the virus and shutting down the stores. Is that -- as pushing online further becoming more of a topic and so I guess like couple parts? I mean what -- to what extent could your existing online operation help to offset these store closures in the near term? Because then as you look beyond that are you now more focused on building out a larger online offering?

Yes, look, Brian don't forget that we made the investment in Holler long before this came along. So our belief in enhancing our digital capabilities for the long term and being able to accelerate that were necessary and was the right thing to do strategically. So that was done independent of Covid-19 and the ramifications associated with that. As far as looking at it in the short term, as we've said on every call our e-commerce business is still a very, very small piece of the business. So this is not a short-term fix for Five Below, but it has seen a significant uptick on the business and it's just ties right into why we made the investments we did last year. And long term, I think that strategy is even smarter than it than it seemed when we made the decision back in 2019. But don't look it for it as the suddenly the business model for Five Below changed here in the next three months.

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

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

Yes. I mean look, it'll obviously have an impact on Easter but putting that aside Michael's teams probably never been better staffed, prepared. We brought in two GMMs last year, very senior capable people and really the beef up that organization and continue to invest in our merchandising organization. And so what we've gotten the pipeline especially when you think of the opportunities Michael now has at his disposal because of ten below and then you couple that with the scale benefits of how much of a bigger company we are now than we were a couple years ago. I see nothing but upside for what the merchants have in store as we move forward and get back to a more normal situation once we move past this. But there are great opportunities in problem.

The next question is from Paul Trussell with Deutsche Bank. Please go ahead.

Good afternoon. You just spoke to some of this but, Joel, you outlined in the release your strategic priorities for this year were experience product and supply chain. So maybe kind of putting the virus to the side to some extent talk to us a bit about what goals you wanted to achieve and what actions you're taking to push forward on those strategic priorities?

Yes. Great question, Paul, and thanks for looking positive right. And I think as we get back to more normal calls, we'll certainly go into it and more depth, but let me just give you a little color quickly because it is important in the supply chain front the path we're heading down by holiday of 2021 is that we will be able to distribute to all of our stores in less than two days. And that has not been the case for us. You'd have to go back to our old days when we were just a regional player in the Northeast. So that's a significant change and it's been a multi-year strategy and that all comes together nicely by next year. We're close to getting this spring we will open up the Texas facility which will really help us out west significantly. And then on the experience and product without getting into it in detail, let me just lump those together for a second here because I think the single biggest change we're making is in the new prototype. And that new prototype really touches the experience coupled with a real enhancement and product. Some of the stuff I was just talking to John Heinbockel about as we were able to now take all the learnings from Ten Below from the gift shop we did and bring that into one new prototype without having to expand the size of the footprint. So you talk about leverage and really getting efficiencies coupled with then unleashing the merchants' especially in tech and room to explore extreme value price $6 to $10. So just a little color commentary on those three as it comes together and certainly as we get back to quarters to come we'll continue to spend more time on that, but hopefully that gives you a little color.

The next question is from Judah Frommer from Credit Suisse. Please go ahead.

Hi. Thanks for taking the question. I just wanted to follow up on the variable cost with SG&A, Ken. Is there anyway you can help us kind of size what could actually be pulled out kind of depending on the timeline? How much of that is store or DC labor and if you did cut some of that variable cost, would you have to rehire and is there expense tied to that as stores reopen and volumes come back online?

Yes. Thanks for the question, Judah. But again as we mentioned before we are at the beginning stages of this and this is something that we're going to look at and dig into, but at this stage of the game there's no specifics to provide on a go-forward basis aside from saying again that we'll take the appropriate action across the business. And as I called out, there are a certain volume of fixed costs and obviously some variable costs that we'll look at as we move forward.

And I hope you can understand why we're not there. Our first priority as I said in the call has been taking care of our associates. And so we've had several conference calls in the last 24 hours with the crew out in the field reassuring them that they work for a strong company. And we'll be there for them and so that's now behind us. They understand how they're going to close down the stores. And then we'll start to turn to answering some of your questions. But we enter this with a really strong balance sheet and a lot of liquidity and access to additional capital should we need it.

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

Yes. Thanks and thank you guys for the transparency and all the color you're sharing. I wanted to ask a supply chain question. Just flashing back to maybe where things were let's say 10 days ago. Can you give us a sense for; you're obviously dependent on a lot of imported goods from Asia. I know this is a time of year where typically you're getting to trade shows, a lot of which take place in Asia where you're making plans for frankly the holiday period and for the fall season. Has the impact -- have you felt like the supply chain from Asia has started to come back up? Has it had any impact in terms of the assortment that you have and can offer to your customers? It seems like you've had maybe an uptick in things like candy and snacks and maybe a little bit of a downtick and things like tech accessories. Any color that you could share on those items?

Yes. I mean a great question, Jeremy. And I will tell you and for everybody, honestly probably our import supply chain has probably never been stronger since this began four or five months ago. And we can -- I can tell you that we did see a big decrease in containers and we were -- they were significantly behind but in even just in the last two to three weeks the number of our factories almost every one of them is back working products flowing, bookings are starting to happen and we're actually starting to see a catch up in a lot of stuff that was behind. So I feel really strong about the import supply chain side of it. And then beyond that I think it just starts to get a little too speculative. But we're in a great shape from that perspective.

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

Hi. Guys. Just following up on the sourcing front just wanted to see you had mentioned obviously some efforts that you all had made I think on the diversification front. What I was thinking in the past maybe 60% of the goods were imported from China. Can you provide us some sense of what that's kind of run rating to now given the efforts that you've put in?

Thanks Michael. The majority of our goods still are from China. As I said on my prepared remarks, the teams have been doing a great job starting to move countries. We're starting to see the ramp up of some lines we moved out of China last year and into Vietnam. In fact those first orders were just shipped a few weeks ago, but we will have to go back and kind of reassess that now and kind of understand what the mix is when it all does settle it will still be the majority of China but we are significantly less dependent than we were before. And you would expect us to continue to see that decrease. So it's a little fluid right now but I would just tell you it's still in the majority.

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

Good evening and thanks for all the color. I just had one quick question you mentioned the Dallas distribution centers supposed to open this spring and I was wondering will this current situation is already risk in delaying the opening of that Dallas facility? Thank you.

Thanks Anthony. Look, I don't want to in this situation I don't want to say a 100% but we have received our certificate of occupancy. We are starting to receive goods and there's -- we're moving ahead as usual. I mean obviously if there's shutdowns in the city that prevent us from continuing to take goods in or something like that there could be a delay but the building's basically done, and we're just putting the finishing touches on it. Just one clarification I think you said Dallas, it's in Houston. It's outside of Houston in Conroe, but no delays expected. End of Q&A

This concludes our question-and-answer session. I would like to turn the conference back over to Joel Anderson for any closing remarks.

Thank you, operator and thanks everybody for joining us today. Obviously, not our normal calls. We look forward to speaking to you again after the first quarter call and we will commit to keeping you informed as situations develop. But thanks for getting on the call with us. Have a great evening. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.