Five Below, Inc. Aktie

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made during this call may constitute forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from such statements, including those described in the press release and our SEC filings. In this presentation, we will refer to our SG&A expenses, which for us includes depreciation and amortization. Additionally, we will be discussing certain non-GAAP financial measures. Please review today's press release, which is posted on our Investor Relations website for a reconciliation of these items to the most directly comparable U.S. GAAP measure and a cautionary statement regarding forward-looking statements.

I will now turn the call over to Winnie.

Thank you, Christiane, and hello all. I want to start by saying how grateful I am to our amazing Flow crew. They have executed our strategy at an exceptional level by seeing laser-focused on what matters most, the customer, our box. Our first quarter results are a testament to their great work, which reflects our operating flywheel in action and demonstrates the traction we've made in transforming our business and strengthening our position as the destination for the kid and the kid in all of us.

For the first quarter, we are reporting results that exceeded our expectations, with sales growth of nearly 33% to $1.3 billion, driven by 23% comp growth and strong new store performance, including 49 net new stores that opened during the quarter. Adjusted EPS of $2.22 per share grew over 2.5x compared to the first quarter of last year. With this positive momentum and despite an expected more challenging macro environment as the year plays out, we are raising our full year outlook, which Dan will discuss shortly.

Our outside sales growth in the quarter was driven by three key factors. First, we continue to see the customer reacting favorably to our strategy and the changes we made to our operating model. We often talk about the 3 legs of the stool that support our unique value proposition. The first leg is curated product storytelling focused on newness and amazing value across our assortment. Second, meeting the customer where they are with relevant marketing and social and digital media. Third, easier and funner shopping experiences in our stores, which offer better in-stock positions and streamlined pricing. Importantly, we operate as a real team, galvanizing all of our corporate ship centers and stores in 6 [indiscernible] moments that celebrate the season and milestones in our customers' lives. The second driver of our sales growth was engaging in social trends to amplify their virality.

While we have benefited from trends in the past, we are now able to actively engage with our customers through social media, direct marketing and finally, within store activations. Our marketing toolkit is expanding. And with the adoption of social-first approach, we are so much more reactive and relevant in messaging and engaging with our Gen alpha, Gen Z and millennial mom communities. And third, we benefited from customers spending their higher tax refunds. We leveraged our position as a value retailer to make fun and newness accessible to all. We continue to push ourselves to deliver aspirational product stories at very accessible price points.

Importantly, our growth was broad-based with 15 of 18 departments comping positively. Games and toys were particularly strong, driven by flexibles and the overall squish trend. We again grew in our districts, all vintages of stores and across all income cohorts. The comp growth was disproportionately driven by transactions, up 19% with ticket up 4%, reflecting strong traffic, customer engagement and continued success in our value proposition across price points. This reinforces what we've consistently said, our strategy is not reliant on a single product or trend, but rather driven by a full assortment of products at great relative value and supported by strong execution.

Identifying and capitalizing on trends is a core and growing capability at Five Below, and one that are newer, more impactful marketing strategy and campaigns enable us to amplify as we did with the authentic RMS squishy dumplings, leveraging our enhanced social activation capabilities and working with more agility cross-functionally. We feel a cultural like guys that has reinforced the strength of our brand with our core customers, while also introducing the brand to new customers. This end-to-end approach from detecting a burgeoning trend to amplifying it in social to creating an amazing in-store experience. That's our special sauce. And we're just getting started with how much more we can do here.

Our teams remain laser-focused on consistently executing against our core pillars, the 3 Cs: One, staying maniacally focused on our target customers; two, delivering a connected customer journey from social to in-store; and three, collaborating cross-functionally to enhance execution. This focus allows us to deliver amazing new products packed with compelling value, engaged with our customers on social media and digital and execute consistently at a high level. On merchandise specifically, we differentiated our offering through trend-right newness at amazing price value. The popularity of candy, beauty and toys help fulfill Valentine gift needs and fill Easter baskets. Our robust games and toys growth in the quarter further evidence our role as the greatest little toy store in America.

Our focus on curating licensed products led to an exclusive collaboration with an old favorite Winnie-the-Pooh. Value remains a critical component to our offering, and we believe our customers recognize the compelling value we provide, whether it be at $5 and below, our foundation and the vast majority of our products or $6 and above. We're very disciplined about ensuring it's not just another product on the shelf, but something that delivers wow value and really speaks to our customers' need for newness and fun.

With our new cross-functional go-to-market process in place, the team is focused on bringing the products to life by delivering current at moments for Valentine and Easter. We also hosted into activations to help our customers celebrate special moments, such as the 30th anniversary of Pokemon, a National Pokemon Day in our entire network of stores. In terms of marketing, as I mentioned earlier, we engaged our customers in social with creator content highlighting trends, newness and viral moments. We also deployed amazing AI content in connected TV commercials focused on seasonal moments. During the quarter, we made great progress building an e-mail database, which will sharpen our ability to direct social and digital marketing content to better engage with our customers and develop a more personalized relationship with them.

Across our fleet, we host fun treasure hunt shopping experiences for the whole family. Our labor model is designed to ensure in-stock positions while we simplify pricing structure, and improved visual presentations have made our stores easier to shop. We've largely completed integrating pipeline product in line in their appropriate world, and we are now testing layoffs and designs within the store to further strengthen the shopping experience while improving sales.

So to wrap up, I'm really excited about our first quarter results. They demonstrate the strength of what we've built and the progress we're making in staying maniacally focused on our customers. We're just getting started with what we can do across merchandising, marketing and the store experience. More to come, but we are confident that the strategies we put in place will enable us to deliver sustainable growth on the top and bottom line and to drive long-term value creation.

With that, I'll turn it over to Dan.

Thanks, Winnie. Good afternoon, everyone. I'd like to start by also thanking our crew for their incredible focus on serving our customers. In the face of growing macro challenges and an increasingly cautious consumer, our results exceeded our expectations in the quarter and further reinforce the strength of our unique retail concept. For the first quarter, net sales increased nearly 33% to $1.3 billion, supported by a strong comparable sales increase of approximately 23%. On a 2-year stack basis, comp sales grew approximately 30%. Q1 represented our fifth consecutive quarter of positive comp sales growth and fourth straight of double-digit growth with widespread increases in new and retained customers as well as across all income cohorts.

Growth across games and toys was noteworthy, underpinned by strong support in squishy trends and collectibles. We opened 49 net new stores across 25 states compared to 55 new stores in the first quarter last year. We grew our store count by 8% year-over-year and ended the quarter with 1,970 stores. As Winnie mentioned, we were very pleased with the performance across our fleet as growth rates were similar across all classes of stores. Adjusted gross profit increased 46% to $479 million or 37.2% in rate of sale, an increase of approximately 340 basis points compared to Q1 last year. This was primarily driven by fixed cost leverage on the strong comp sales with efficiencies in distribution and a lower shrink accrual also contributing.

Adjusted SG&A expenses totaled $324 million or 25.2% in rate of sale, a decrease of approximately 250 basis points compared to Q1 last year. This was primarily driven by fixed cost leverage on the strong comp sales, partially offset by increased incentive costs and higher-store labor related to the April physical inventory counts. The profit flow-through on our sales growth was strong. Adjusted operating income grew 160% to $155 million, and adjusted operating margin increased approximately 600 basis points to 12%. Net interest income was $8 million or $2 million above last year, primarily due to a higher average cash balance throughout the quarter.

Adjusted net income for the quarter grew 160% to $123 million and adjusted earnings per share increased 158% to $2.22. We ended the first quarter in a strong cash position with approximately $1.1 billion in cash, cash equivalents and investments. Inventory was $813 million at the end of the first quarter, an increase of approximately 16% with a commensurate 10% increase in units. Average inventory per store was up 7% at the end of Q1. The increase in inventory reflects both opportunistic buying during this favorable tariff environment and taking the appropriate steps to ensure seamless flow of product amidst a more challenging global supply chain environment. Overall, we believe we are in a very good inventory position heading into the summer and holiday periods.

Now I want to turn to our expectations for the remainder of the year. We're very pleased with our Q1 performance and remain highly convicted in our ability to continue to generate durable, sustainable growth. At the same time, we remain cautious with respect to the macro environment, consumer sentiment and buying behaviors. As such, we have left our half 2 comparable sales assumptions unchanged from our previous guidance. On tariffs, we have now voted through the estimated benefits from the 10% global tariff rate that is in place through July '24. And we continue to assume that the tariffs will then revert to rates that were in place at the beginning of the fiscal year.

I'd like to also point out that our guidance does not assume any impact from EPA tariff refunds. With this as context, I'll now turn to our outlook. For the second quarter, we are raising our previous implied outlook. We now expect total sales in the range of $1.18 billion to $1.2 billion or growth of 16% at the midpoint versus last year's second quarter, with comparable sales growth between 7% and 9%. We expect to open approximately 50 new stores in the second quarter compared to 32 last year. Adjusted operating margin at the midpoint is expected to be 7% versus 5.4% in the second quarter last year. With the 160 basis point increase driven by gross margin expansion, partially offset by higher SG&A.

Adjusted gross margin in the second quarter reflects higher merchandise margins, fixed cost leverage and the lower shrink accrual partially offset by the effect of higher supply chain and fuel costs on outbound transportation. Adjusted SG&A is expected to deleverage slightly as the benefits of leverage are more than offset by increased marketing investment and increased store labor due to the timing of physical inventory counts. Net interest income is expected to be approximately $8 million for the second quarter and the effective tax rate is expected to be approximately 25%. Adjusted net income is expected to be $68 million at the midpoint or an increase of 52% versus Q2 last year.

Adjusted diluted earnings per share at the midpoint is expected to be $1.23 compared to $0.81 last year. For the full year, our guidance for sales reflects the outperformance we delivered in the first quarter and the improved sales outlook for the second quarter. We expect operating margin expansion to be driven by gross margins with SG&A rate of sale now expected to be flat to 2025. Full year sales are expected to be in the range of $5.4 billion to $5.48 billion, an increase of 14% at the midpoint versus last year, and comparable sales growth is expected to be between 6% and 8%, or nearly 20% growth at the midpoint on a 2-year stack basis. Adjusted operating margin is expected to increase 170 basis points to 11.6% at the midpoint driven by gross margin expansion.

Versus our prior guidance, the operating profit flow-through from the increase in sales is partially being offset by higher incentive costs. We've largely mitigated higher operating costs across the supply chain, including fuel-related headwinds, primarily through the lower tariff rates and increased efficiencies in our distribution centers. We expect net interest income of approximately $31 million and a full year effective tax rate of approximately 25%. Adjusted diluted earnings per share is expected to be $8.85 at the midpoint on 55.7 million shares outstanding or growth of 33% versus 2025. Capital expenditures are still expected to be between $230 million and $250 million, excluding the impact of tenant allowances, which reflects approximately 150 net new store openings and increased investments in technology and infrastructure.

In summary, we're very pleased with the performance of the business. We remain focused on executing at a high level and continuing to deliver on our top and bottom line growth strategies.

With that, I'll hand the call back over to the operator to start the Q&A session.

[Operator Instructions] And at this time, we will take our first question, and that will come from John Heinbockel with Guggenheim.

Winnie, can you talk to the results that you're seeing, obviously incredibly strong, particularly as it relates to traffic. Can you talk to brand awareness? And then maybe brand awareness around certain elements of your go-forward strategy and the degree to which you're acquiring new customers because it would appear that you're acquiring them at a much more rapid pace than even you had 6 months ago.

Thanks, John. Thanks for your question. A really good one. We actually did see a really, really great lift this quarter out of transactions driven by traffic and actually nice double-digit growth both the new customers as well retained. And I think we're actually in the early innings with marketing and growing our awareness. Our awareness still remains both aided and unaided, remains pretty low relative to our competitors. So we've just started this journey. I think what we're very pleased with is the fact that we're making good strides, and it was really a switch in our marketing strategy moving from more traditional marketing and directing our media spend into social. Coupled with that, we have really tried to build our customer database and to ensure that our stores are capturing customer e-mails because that just makes us that much more effective, both in driving the appropriate media messages to our customers, but also hopefully growing a lifetime relationship with them and eventually being able to personalize our reach out to them. But traffic has been tremendous, and we certainly had a nice lift. Our traffic -- our messaging resonated with our customers in social, and it was across Valentine's, Easter or health and fitness trends, which focused on Pilates all the way through to squishy things and squish sampling. So really pleased with the initial results we've seen. Thanks, John.

The next question will come from Matthew Boss with JPMorgan.

Congrats on another nice quarter. So two questions. Winnie, with four straight quarters now of double-digit comps, could you touch on foundational changes you've made, which you think provides confidence to comp the comp I guess how best to think about merchandise opportunity remaining across your world today? And can you just touch on the momentum that you've seen continue so far in May?

Thanks so much for the question, Matthew. And it's a really, really good one. We feel really good about the strategy we put in place, and what we think is a lot of dry powder in order to go after continued growth of the top line. I have a simple saying around here at the office and it's still of problems. And I'm a tried and true merchant, and I'm incredibly excited about the momentum I see in the business, but also what our merchants have brought to the table. We have taken what used to be a very item-focused merchandising approach to really an assortment merchandising approach, looking across assortments targeting our core customers and really thinking through how do we tell stories around the product. And I think it's the combination of that product storytelling being maniacal about continuing to refresh the product lines because that is what our customers are voting for, and then also making sure that we've got compelling value. The majority of our assortment over 80% is still $5 and below. We did switch to simplify pricing at full price points, much easier to shop. Frankly, it's a lot easier to merchandise to as well. As we look at price points above $5, we've seen really great resonance because we pack so much value into anything that's above $5. We also abolish the Five Beyond section, move that product in line, and we've actually seen that product perform better because it's basically merchandise the way the customer wants to shop the product. If you have a $35 gilt floor mirror in the room section and not tucked away in the back of the store. So all of those changes have made a real difference. We also -- in terms of our execution, we're very, very focused on these [indiscernible] moments. And what it has done is galvanized the organization to work together to make sure we've got the right product at the right place at the right time, in-stock levels are good and that our stores are educated about the product stories that they're going to be hosting for all of our customers. So all of that has been a foundational work. We have ways to go early innings in terms of what more we can do both in terms of marketing, via database, via social. And then in terms of merchandising and specific to your question, I am really excited about the newness that I see and the opportunities we have in every single world. We had outsized growth this quarter in terms of toys, collectibles and games. But I also see so many green shoots and so much strength across the assortment from beauty to fashion, and very, very strong food and candy business that continues to be a cornerstone for us at Five Below. So a lot ahead of us. And I think the big thing with my coming here, we've unleashed the merchant. And the vendors really do love us, and we've worked very hard to diversify that vendor base. So I think we've got a lot ahead of us in terms of growth, and I feel very confident about our ability to comp. Thanks so much, Matt.

The next question will come from Michael Lasser with UBS.

A, is there a way that you can quantify some of the unique contributions to the comp from things like Squish Dumplings or Pokemon that may be more trend related and not necessarily continue for an extended period of time? And b, could you break down some of the unique costs that you are experiencing today such that if the market were to assume you comp flat as you anniversary some of these strong growth rates, we can get a baseline of what Five Below's earnings outlook would be even a more conservative scenario as you get into 2027?

Thanks for the question, Michael. And I'll kick off and talk about quantifying the [indiscernible] for Q1. I would characterize our strategy at work, the flywell operating model great product rate value stores that look great or fun to shop, easier to shop as well as our ability to really engage with customers via social media. I would quantify that as being high single digit in terms of kind of run rate and what we're seeing. In addition to that, we had a quarter where we enjoy the benefit of higher tax refunds that the customers spent with us. That was terrific. The final thing is everyone's been talking about the Squishy Dumpling. And what's really interesting to me about this particular trend because we've always had cyclical trends in the business that come in and out, is not the what, but the how. And I think that the big driver of how this trend went from zero to hero was; one, our doing a lot of social listening, seeing what was popping; two, amplify, reposting and then engaging with customers. And then three, really thinking through not just a dumpling, but a full assortment of squishy things. And that has driven some really nice traffic and we're going to continue to use that mental model to drive traffic in the future. And we're constantly looking at what next trend can we amplify. The good thing about our business today, however, is that, again, we've got a store in business. Every world is working very well and positively, and we continue to drive what new ideas are out there in every single world and then how can we talk and engage with our customers about it. That is really a new tool for us. And then I'll let Dan speak to costs.

Yes, hi, Michael, thanks for the question. I would probably highlight two topics to your question on the cost profile. One is clearly transitory, and that is around the supply chain. And in particular, the rising cost of fuel and the rising cost of diesel fuel per gallon. We've sized that for the year 20 to 25 basis points of an increase. Important to note though, within our outlook for the year, we have fully offset those costs through a combination of better tariff costs flow through and better productivity and efficiency across our distribution centers. But that's clearly, to your point, one of the outliers. And then I think the second one that I would highlight, which is absolutely intentional is around the marketing investments that we are making. Winnie has described so much of the incredible outcomes that we are seeing. And that's coming from our stated desire to really feed this capability. It's about a 20 to 25 basis point year-over-year increase this year. The beauty of that is we're seeing terrific returns. And if we get to a place in whatever circumstance hypothetically, where we are in a more challenged environment, we would obviously be able to pull that back as well. So hopefully, that answers your question.

The next question will come from David Bellinger with Mizuho.

I want to ask about the trading card category, some of that's very on trend right now. Is that an opportunity to chase talk about any conversations you've had with larger brands or manufacturers to get even more allocation across the store base?

David, trading cards are a great business driver for us, and we were really happy with the results of our National Pokemon Day. And we are definitely looking at further opportunities to chase Pokemon but other trading cards. That is actually one of the trends that has a more enduring effect. And what I'm also saying is that we're just looking at what does that mean beyond just the trading cards and looking at the impact of anime collectibles and growing those assortments accordingly as well. So it's something that we are looking at very carefully, and I'm having daily discussions about increasing supply. Thanks so much for your question.

The next question will come from Edward Kelly with Wells Fargo.

Congrats on really amazing results. Dan, you mentioned in your prepared remarks around the outlook, just about a bit more caution, I guess, on the macro and the consumer. Could you just maybe give a little bit more color around why that's worked its way into sort of like your way of thinking. Is there anything that you're seeing in the business yourself currently? And then as it pertains to all this and the outlook for the back half because that hasn't changed. Can you just maybe talk about some of the things you might be excited about for the holiday period as it pertains to how you're thinking about the back half?

Yes, absolutely. Look, I think there's a couple of things here within the business that are worth commenting on. One, and you've heard Winnie unpacked the Q1 results. We are incredibly pleased and confident with the results that our strategy is delivering in terms of sustainable growth. We're fore quarters now of double-digit growth and five quarters of comp growth, and that's a great reflection of the execution of the strategy. I think as we look forward from here, and we talked about it in our last call, we are certainly cognizant of the fact that we are cycling a stronger year-over-year performance in the quarter we're in, let alone the back half of the year, and that factored into our thinking as well. I mean half 2 of this year will be cycling 15% comp growth from a year ago. And we'll be doing it, having fully anniversaried the pricing activities that we initiated a year ago. And so as we thought about that, we see an incredibly healthy business that is absolutely delivering durable growth. We see a more challenging back half of the year simply based on what we will cycle. And then that leads to the point of your question, which is the environment in which we're operating. And I would say here, we're being cautious, and we're looking at the environment. We're looking at the world that our customers are living in with rising fuel costs with very sticky inflation with a somewhat soft labor market. And we think a piece of that pain that they are feeling wasn't felt in the first quarter purely because of tax proceeds year-over-year that were significantly up. And so I think you have to look at all three of those together. We don't have data that would suggest there's trade down happening. We don't have data that would suggest there's been a shift in behavior. That's certainly not what we're saying. But I do think we transparently have to look at the environment we're operating in and the world our customers are living in the reality of some of the points that I made. So that's how we shaped it and thought about both the near term and the back half of the year. Winnie, I'll let you talk about what you're excited about.

And Edward, I would also add to Dan's comment to say that, as he mentioned, we actually have seen growth across all of our income cohorts. And I think the beauty of our model is we have a very unique value proposition that's pretty much one of one. We are a brand that is delivering a specialty experience for kids and doing it at extreme value. And the notion that the price of entry is a buck is something that we think is going to really help us gain market share as we move through the quarters and should the customer feel more pressure. With that, in holiday, it's very interesting being part of the Five Below team because one characteristic is that no one's ever satisfied. And with the great holiday results that we posted last year, we walked away hindsighting 15 or 16 things we could be doing better. There are certainly things that we executed really well. And I would say from a product ammunition point of view, we were still light in certain areas because of tariffs. And I think we believe we can buy back into those categories. So there will be additional goodness that we couldn't necessarily afford last year. The other piece of this is that, like I said earlier, the product storytelling and bringing together really fulsome product stories to engage with the customers at the beginning of the holiday season ending with an amazing stocking stuffer type of event. We've got a lot going. And our job is to pull it together to make sure that it's curated and that we're messaging it correctly. So we're actually quite excited. We think we've got a lot of really great dry powder for the season. Thank you.

The next question will come from Scot Ciccarelli with Truth Securities.

Dan, I think that last call, you used the phrase, we're seeing what you're seeing in terms of your sales growth versus maybe what some of the 3P services would have suggested. Given that context, it appears your 2Q guide is below, I think, what we're seeing from the outside. So given the magnitude of outperformance in 1Q, and what we always believe is a higher current run rate, are you actually expecting a slowdown in the back part of the quarter? Or is it more of that kind of cushion for the macro dynamics that you were earlier referencing?

Yes. No, of course. Look, let me spend a minute on how we thought about the second quarter. I'm not going to get into necessarily the specifics of the quarter of where we are, but I'm happy to put some color to it and connect it to how we built the outlook. I'll start by saying we're certainly pleased with the start to the quarter. The team has executed at a very, very high level. And you've had some interesting holiday moments, whether they be Mother's Day or grad or early summer that certainly we're excited about, and we've seen good results. So from that standpoint, off to a good start. The quarter the way the quarter shapes to May is the smallest of the three months. June and July is where the heavy lift is. We have a lot of work left to do here as we get deeper into summer, the heart of grad, Father's Day, Fourth of July, et cetera. And so we've got a long way ahead of us here in terms of the quarter. As a reminder, at this moment, we've almost entirely cycled the pricing actions of a year ago. And so for the back half of the quarter and rest of the year, we will have fully anniversaried that. And so look, all in all, again, we're pleased with the start of it. We're about halfway through it. We have a lot of -- a lot to do for sure. And look, while I'm on the quarter, let me just comment for a second on the squishy event that took place in mid-May. Look, you heard Winnie described it in her prepared remarks, it was an absolutely amazing, amazing program. Cultural [indiscernible] is what we've called it. And I think that's the right way to describe it. We saw tremendous response from customers and really brilliant flawless execution from our team. And so if you look at that event through the lens of the Five Below brand, how we engage customers, create a unique retail moment and ultimately execute terrific on absolutely all accounts. I would caution against the notion of this event being a meaningful catalyst to the comp profile for the quarter that we've built, right? It's a one-day event, essentially of one item with intentionally constrained supply. And so I want to just sort of make clear for everyone, it was an absolutely terrific event that was not designed to be a meaningful catalyst to the comp profile for the quarter. So hopefully, that gives you a bit of color of how we thought about it.

And I would say the last thing is just price and the roller price because I think Dan mentioned this, but pricing impacts a little bit of Q2, but then we will have anniversaried it for the second half of Q2.

The next question will come from Zhihan Ma with Bernstein.

I wanted to ask about the traffic versus ticket dynamic with the great traffic result that you guys achieved in Q1. I'm assuming part of that is linked to squishy, wondering if there's additional color you can provide there. And meanwhile, ticket growth did seem to have decelerated somewhat. Despite in Q1, I'm assuming you still had some tariff-driven price increases in there. So was UPT down? Are people buying smaller baskets? And how do we see the balance for the rest of the year?

So for the first quarter, Zhihan, you hit the nail on the head pretty much. So the traffic, we had a couple of things going on. We saw really nice increases. We did see nice increases that were generated by all the marketing actions we took to amplify the squish trend. And with that trend, we did drive footsteps that cross the threshold. And those baskets typically are smaller than the broader basket. And that kind of explains why you see ticket not being quite as high or equally as high as other quarters. So that's effectively it. With that said, one of the things that we're seeing, we continue to see is nice traffic lift, and it really is we think our marketing strategy is working and our ability to be agile to really think about what's happening, reflect on those trends, react very quickly and drive footsteps across the threshold. So all good stuff, but we did see a nice benefit and a smaller basket in the quarter because of the squish trend.

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

First question, new space productivity was outstanding. I assume part of it is how strong the core comp is. So you're opening stores with product and trend that you probably didn't have in the base. So how to think about it if there's any change or things that you're doing on your side outside of the strong comp? And then, Dan, just to paraphrase, you left back half unchanged, but you're not seeing anything different about the consumer and some of the cost things that you cited, it sounds like they're mostly or fully offset other than increase in marketing.

Hi, Simeon. So thanks for the questions. On new store productivity, of course, you're right. When you see widespread growth like this, comp growth, you're going to see the step-up in productivity. And of course, that's what we're seeing. I do think it's worth highlighting, we are seeing outsized performance in our 2025 and 2026 classes of stores, which directly feeds back to the strategy that we've put in place, which is we want to be incredibly good from site selection to preopening to grand opening to post opening. We've intentionally shifted our approach here. It's about quality of properties and locations, not just quantity. We still are committed to the high single-digit unit growth profile, but we want to do it in a really, really compelling way. And I think that's a piece of what you're seeing here as well. And then, yes, I think the way that you described it is right. I think we haven't changed our back of year outlook. We have contemplated when we spoke three months ago, that we were expecting a bit of a choppy environment with our consumer in a challenging macro environment. And that's certainly what we've seen play out. And I would say that has accelerated recently in the world we're operating in. I would point out, though, that holding our comps outlook consistent for the half 2 reflects an incredible confidence and belief in how we are running this business and delivering results, while also acknowledging that it is a challenging environment right now for our consumers. And so we want to be thoughtful about that. We want to be balanced about that, which we think is the appropriate stance given the operating environment.

The next question will come from Robby Ohmes with Bank of America.

Congrats. My question is, how much of online growth was a driver in the first quarter? And how do you see going forward? And was digital a bigger contributor than expected in the first quarter? And is that because of the squishy trend? And just how do we think about that momentum continuing for the rest of the year?

Thanks so much for the question, Robby. We did see some nice growth online, but it's still a very small percentage of the total business. And again, this is another white space opportunity as we move forward and really think about this connected customer journey and the role of omnichannel. We are seeing nice pickup, but it's still a small percentage. Really where we have leveraged online is the social media and influencer creator marketing that we put out there, it really points most customers directly to the site, which becomes kind of a window to Five Below and drives them traffic into the stores. But again, potential white space opportunity for us in the future.

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

Winnie, on the outside looking in, sometimes hard to contextualize the marketing upside. So could you perhaps size up what's worked well so far? What's next as you leverage loyalty and more influencers to modernize the social spend? And can you touch on the e-mail database that you're building out, I guess, where that stands today relative to, say, a year ago?

Chuck, thanks for the questions. So I'm going to actually start with the marketing spend. It's really interesting. We just started on this journey with social last year. And so I think first step was just trying on different types of content, but creator content, boosting UGC. And what has really, really helped us is that we have a lot of stories to tell the marketing and merchandising teams work really closely together pretty much from the inception of the line. And they start thinking through what would really hit. The second piece of social though that we've really enjoyed is social listening. And just paying attention to what our customers are talking about and then being able to really lean into those trends. And we see it not just in the squish phenomenon, but we also see it in our food world with candy. And even with what's happening with our beauty programs in BD [indiscernible]. So those are new muscles that we're just beginning to really take advantage of. We also have seen a nice pickup in terms of customer growth through Connected TV. And here, I mentioned that we are doing more more AI-generated content that just allows us to be fast, nimble but also really use our imagination and touch kids and really in terms of the channels they are looking at like YouTube. The customer file is beginning to grow, and we are in very early stages, but we are seeing that the value of those customers in our file are growing pretty much not geometric -- pretty much geometrically as we go quarter in, quarter out. So the key to this is how do we get more customers capture more at the till, but then also start to really think through what loyalty could look like for Five Below. And what we're working on is, is it going to be through the app is it reward points for spending and visits. We think that our customers will actually really enjoy being first in terms of doing about new releases and new products. So there's a lot more to explore there. And again, we're in early stages in that journey, but excited about what we've seen so far.

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

I just wanted to ask for a moment about the EPA tariff rebates basically coming to about 150 basis points of potential tailwind from that, which assumed about 85%, 90% import and then about 30%, 35% foreign direct import. Just wondering if you guys would comment at all on that. And then also, you had mentioned the 10% tariff rate coming back into play that could go up to where it was last year pre-EPA. We had that at like 18% to 20%. So I'm just curious if you'd be willing to comment at all on how you see that margin playing out?

Yes, Michael. Happy to do so. Look, on the EPA tariffs, we've not publicly sized or quantified that, and I'm sure I'm not going to do that here. What I would say is we've taken all the appropriate steps to secure the claims and avail ourselves to these claims. And so from an administrative perspective, I think we're in very good standing here towards the refunds. Now of course, the if and the when to that conversation is still to be determined, but we've done all the right things that we need to do. On the broader tariff discussion, just to be completely clear, what we have assumed for the back half of the year is tariff rates that returned to levels that they were at the start of our fiscal year. Certainly, what's been in the news the last couple of days would tell us that's probably a pretty good assumption. How the administration intends to get back to this some way, likely through Section 301 tariffs. So we think we're in a good position there. What we have updated in our outlook at this point is we have flowed through the benefit of lower tariffs that we have experienced over the 150-day period that will end in late July. It is an incredibly fluid and complicated topic. We have resisted the temptation to quantify every element of it because I think for us, we want to just make sure that we're being clear with how we thought about it, and what we've included in our outlook or not. This has a lot to play out as we work through the year.

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

Congrats on the momentum. I wanted to ask about the strong customer traffic that you've had over the last year. Wondering if you've looked at or could share with us any insights into what kind of repeat visits you're seeing from new customers that are coming in. And then as we think about a world where perhaps tariffs are more benign, curious if there are any investments in price on the more favorable side for the customer that you may be considering should the savings stay in place?

Fair question, Brad, on the repeat from new customers, we are seeing a nice growth from repeat from new customers. And we've seen double-digit growth both in terms of repeat as well as new customer acquisition. So really nice results thus far and more to do again, early innings on this one. In terms of price, it's a great question. Last year, we really made a move to simplify prices and to round everything up and down to whole price points. And our customers responded very favorably to that move. It's a much easier shopping experience, much easier for our crew as well. With that, we kept the majority of our prices at Five Below, and we made sure to invest in the Five and above and make sure that we had great relative value. The final thing was we got rid of it beyond and put those products in line. Those two things gave us a real insight into how customers respond to price, and we have not seen resistance on prices above $5 if we can pack enough relative value. So we feel good about the strategy we've got and the customers have definitely voted for it, both in terms of a lot on offer at $5 and below. But again, at $5 and beyond, they have responded very favorably to the value we've packed into those products. So we feel good about the trajectory we've got and are sticking to this game plan for now.

The next question will come from Anthony Chukumba with Loop Capital Markets.

Let me add my congratulations on another blockbuster quarter, and I'm not going to make a joke, so I can actually get my question in this quarter. So based on your -- I mean, you have a debt-free balance sheet, right, between your cash and short-term investments, call it $1.1 billion and kind of based on where your stock is in the aftermarket, looking at how of a classic buy the [ rumor cell ] in the news, it's about -- your cash is about 10% of your current I guess my question is, how do you think about potential returns to shareholders given the fact that you're in this very advantaged position.

Anthony, thanks so much for the question. Look, we continue to deploy capital primarily in support of our growth strategies. That's been our stance. And here, we continue to see outsized returns on these investments. So for us, we're super excited about that. You're right, by the way, though, we're certainly doing this from a position of strength, liquidity, health of balance sheet is spot on. And we're super proud of that and the optionality that gets us as well. I see that personally as a real competitive advantage for us, especially in an increasingly challenging macro environment. Now so in the near term, I think that's unlikely to change. Having said that, I fully appreciate the question. And as we move forward, we will continue to reevaluate here and consider opportunities to optimize returns on excess capital to consider alternatives and potentially deploy capital differently, probably not at this moment because we remain in growth mode and really wanting to feed this outsized growth platform that we think we can deliver, but certainly something that we're looking at. And over time, we'll continue to evaluate.

Your next question will come from Brian Nagel with Oppenheimer.

Great quarter, congratulations. So the question I want to ask, you mentioned a few times here, it's the benefit of outsized tax refunds in Q1. So as you look at the quarter, was there -- the tax refund benefit, did it change the shape of that quarter? And I guess how-- if there was a unique driver, so to say, is something else taken over, so as we push into Q2 with the sales momentum persisting.

Yes, Brian. No, I mean, look, the tax refund year-over-year impact was in absolute dollar size of returns year-over-year. It was the phasing and the timing of those returns didn't necessarily change. And so like everyone else, that money was sort of put back in the consumers' hands in late February and then played itself largely over the next few weeks and then a bit -- there's always a bit of a tail towards this. So no. I think the short answer is, particularly in the year-over-year, did it meaningfully reshape the quarter for us, or was it a specific driver and specific, the answer would be no.

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

It sounded like, Winnie, in your comments that Beauty and Fashion might be a little bit behind the other categories just in terms of performance. And we were wondering if you would say some of those assortment changes are behind that? And if so, what can we expect to see out of these categories over the next couple of quarters?

Kate, thanks so much for your question. Actually, I'm so sorry, Beauty and Fashion performed well. And we're actually seeing nice resonance across our assortments. When we speak to 15 out of 18 departments as the majority of the departments. There are a few departments that did not comp positively because we have strategically downsized them and down-trended them. So that's really what's happening. We -- I do think there's more opportunity in beauty fashion, especially as customers may select to trade down and look differently at where they purchase. And so we feel very good about the business and the go forward on both fronts.

The next question will come from Spencer Hanus with Wolfe Research.

I'm just curious how much run rate you think you have to continue to shift the mix to higher AUR products over time just as you try to mechanically cycle some of these tough comps if the underlying rate here is a high single-digit comp. And then just on the success of this dumpling event in the quarter, do you see an opportunity to run that playbook across other products and categories over time here as well?

Thanks, Spencer. I'm going to start with the dumpling question because I think it's a really good one. I think the playbook is really what we walked away with and how we did it, not necessarily how many dumplings do we sell. And it's certainly something that we want to leverage and activate again. There is something about social listening, amplification getting really in the midst of a viral trend and then fueling it and having an event that in stores was really compelling. Customers, including parents walked away really happy with the event and thought it was pure retailtainment. So those are things that we definitely would like to replicate and use again when appropriate. We are constantly looking for the next new both from the vendor community, but also with the customers. What are they talking about? What's going viral today, and how do we engage with them. And then in terms of price, we have more room to explore price and looking at a strategic lever for growth in the future. With that said, where I think we've really won is, again, cost of entry being a buck offering this amazing specialty retail experience and having the majority of our product at very accessible price points. I'd like to say that we make the aspirational accessible and that is our main aim. What our [indiscernible] on price did for us last year is, it allowed us to explore price points that didn't go from $5 all the way up to $25, but what's great value at $10 and $15. And it opened up our ability to allow more interesting merchandise into the assortments that we maybe wouldn't have looked at in years past. So definitely more opportunity. But again, we're going to stick with our guns in terms of delivering great relative value and making again, aspirations accessible.

The next question will come from Joe Feldman with Telsee Advisory Group.

I wanted to follow up, and it's been asked a little bit about how are you guys driving the trends? Like are you -- it sounds like you're getting better at monitoring trend activity, social media. Like are you are buyers maybe leveraging new tools like AI to help ingest a lot more information about what trends are? Or is it that you guys are actually creating a trend and pushing it through social media that then spurs people into the stores? And I was just hoping you could share a little more color on that.

It's a great question, Joe. I would say that a couple of things happened, and it really started [indiscernible] last year. When I joined being a merchant, I saw the tremendous opportunity and talent we have with our teams, and we literally unleashed them. We said go forward and find great things. And with tariffs, it also pushed us to diversify our vendor base and look further and really explore the market and see what was out there, both domestically as well as abroad. And so I think that part of this is the funnel has broadened, and we have more product and more trend ideas going through the funnel. Then with our switch to social media naturally, when you switch your media buys into social, you're much more engaged from what's happening in social. And I would say that our teams were always kind of looking at it, but now we're really studying it. And it's really great because I would say social trends have picked up and amplified even faster in the past year. And you can do that across everything from like food to room decor to fashion and beauty and toys. And so that's been amazing to have our attention and our curiosity really peaked by what's out there. And instead of waiting for the next cycle, we chase it. And our ability to chase, go after things, try to be first to market or a fast follower is at the heart of what our buying teams do. I also think there's a lot more opportunity in terms of leveraging AI and trend detection, and we're excited to keep exploring those options. The last thing I will say is, I would love to say that we created the dumpling trend. The dumpling trend is something that we've -- it's an item in our assortment for about 5 years, we started seeing it pop up with social. What we did was amplify what was becoming hot. That is a special scale, and I do think we can use it to then create trends on a go-forward basis. So lots in our toolkit that we're developing this year and that we can apply to future.

The next question will come from Randy Konik with Jefferies.

I just want to go back to the squish dumpling impact on the business. I think you said that it negatively impacted basket size yet, but you're talking to this idea that there's a lot of breadth in the business, which kind of makes sense. So do you think that when you look at, let's say, if you hindsight the company, think about years assets fidget spinners and other things that kind of positively impacted the business in the past. Can you kind of give us some perspective of how you looked at how the business kind of performed on, let's say, a trend like that in a big way in the past to say, 10 years ago, whatever it was, and how you kind of see that as different today, and how you're getting more attachment in the business versus maybe you didn't in the past. I'm just curious if you've done that highisighting and looked at a prior trend that was huge back in the day and look at it, and how it's different today versus the past? That would be super helpful on how you've seen that and how you think about that going forward?

Yes. It's a great question, Randy. I think what our teams have done in terms of analyzing the trend and the trends of the past, it's pretty remarkable. We've got a lot of data, and we've got a lot of different through lines on trends in the past, be it fidget spinners, rainbow loans, or Squishmallows. So we have most those curves to see what demand looks like and when did they peak and when do they climb down? We've looked at seasonality of trends. I think what was unique about the squish dumpling trend is, one, it is bigger and hotter than the other trends. And I think in part because of social media. The exposure of this trend on social and engagement by the community has been tremendous. And the virality of that trend has made the demand peak in a very, very consistent and high way. And then for us, it was interesting just engaging in social media with creators and with our customers. The dumpling of that was meat because we tease the campaign in social. We could really get the news out. We could get the excitement out. And that, again, is a skill and a toolkit that will take away from it. With that said, we have worked very hard to try and build an assortment business that goes beyond a single trend and a single item. And so I really see it as a portfolio. And portfolio management suggests that like we just need to make sure we've got lots of little trends [indiscernible] and to listen to and perhaps amplify as we see these trends hit their peak and start to die down. The last thing I'll say about squish dumplings is that what makes them unique was; one, the rare; number two, the element of surprise. And so some of those ingredients and what makes it special or also ingredients will look forward in terms of new products that come to the line that we think are trend worthy. Hope that answers your question. Thanks, Randy.

And that will conclude our question-and-answer session. I would like to turn the conference back over to Ms. Winnie Park for closing remarks. Please go ahead.

Thanks so much. As you've heard, we're making really good progress in executing our customer-centric strategy, and we're really excited for the rest of the year. I want to offer a huge thank you to the Five Below crew, who put so much hard work and heart into our brand. And I want to thank you all for joining us on this call today, and I hope to see you in our stores this summer. Thanks so much.

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

Good day, and welcome to the Five Below Fourth Quarter 2025 Earnings Conference Call.

[Operator Instructions]

Please note, this event is being recorded. I would now like to turn the conference over to Christiane Pelz, VP, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thanks for joining us today for Five Below's Fourth Quarter 2025 Financial Results Conference Call. On today's call are Winnie Park, Chief Executive Officer; and Dan Sullivan, 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 expense. 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 Investor Relations page of our website at fivebelow.com.

I will now turn the call over to Winnie.

Thank you, Christiane. Hello, and thank you all for joining us this afternoon. We're excited to share our outstanding fourth quarter results that capped off a transformational year for Five Below, one that reaffirmed that Five Below is the destination for the kid and the kid in all of us. We are a unique brand and our incredible financial results in 2025 tell only part of the story because what made this year truly exceptional is how we achieved the results. We made a fundamental shift in how we operate, how we engage with our customers and how we strategize and deliver growth of the business and the brand. And our maniacal focus on our target customer has pushed us to be more agile in delivering newness at great value and as importantly, communicating with our customers in the social media channels they live in.

In 2025, we invested in curated product stories bought with authority. Better in-stock position supported by a store labor model focused on replenishing product and serving customers during peak periods led to a better experience for our customers and drove sales. For the year, we delivered sales growth of 23% to over $4.7 billion, a comp of 12.8%, operating margin expansion of 70 bps to nearly 10% and adjusted EPS growth of 32%. We grew our store count by 8.5%, opening 150 net new stores with strong results, capped by 8 record-breaking grand openings in the Pacific Northwest in the fourth quarter. This performance was achieved during a challenging macro environment that required tremendous urgency and agility from our incredible crew, who are the real secret to our success in 2025.

These results incorporate a better-than-expected end to the year with our strongest holiday performance since becoming a public company. We delivered fourth quarter sales growth of 24%, including a 15.4% comparable sales increase. Importantly, this growth was both broad and balanced as we further strengthen our position as a portfolio-driven product business. We saw strength across all our merchandising worlds, and we grew in all 170 districts, all vintages of stores and across all income cohorts. We drove both traffic and ticket growth resulting from improved marketing, amazing new product packed with compelling value, better in-store execution and positive customer response to our simplified pricing strategy. I'm so proud of our crew for their focus and dedication in producing these results. I'm equally grateful for their hard work and commitment as we united and embraced change.

It was a year of transformation as we successfully delivered 6 hard nut moments with a new go-to-market process focused on storytelling and product newness. Tackled tariffs, overhauled our marketing to focus on social media, expanded our omnichannel capabilities with third-party delivery service and bolstered the executive team with new leaders in marketing, finance and merchandising, all of which has laid the foundation for continued growth. And most importantly, over the past year, we defined and executed our new strategy, which is underpinned by 3 pillars: a maniacal focus on the target customer, delivering a connected customer journey from social to in-store and collaborating cross-functionally to enhance execution throughout the year.

Our strategy reinforces our position as the true destination for the kid and the kid and all of us. First, we further defined our target customers, sharpening our focus on Gen Alpha, Gen Z and millennial moms and ensuring our product, marketing and store experience resonate with their needs and more importantly, what is trending and what they are following. Second, we met our customers where they are, namely in social, where we can dynamically engage with creator content and amplify viral moments like the current Squishy Dumpling craze. Speaking to our customers in social channels and following up through targeted content and direct communications by capturing customer records will drive even more resonance and repeat visits as we develop our CRM capabilities. And third, changing how we work. We aligned merchandising, marketing, supply chain, IT and store teams around 6 curtain-up moments. operating with urgency and discipline to ensure a seamless flow of content and newness to our stores.

This structural change through a disciplined cross-functional go-to-market process has activated our flywheel of delivering timely newness, compelling storytelling and great in-store experiences like events and curtain-up floor sets. The result is an improved customer experience, generating more visits from new and existing customers. On merchandise, we have systematically delivered relevant newness throughout our world with curated assortments at great value. We continue to focus on differentiating our offer through amazing price value for the quality we provide from the hottest license lines to viral trends in beauty, fashion, candy and collectibles. We've also launched exclusive licensed product for our old favorites like Stitch as well as newer franchises like Wicked. This holiday, we aspire to be the greatest little toy store in America. And to this end, we offered everything from LEGO to cracking kits and remote control cars, all at amazing value.

In addition to compelling gifts from toys to beauty sets and yummy holiday PJs to ginger bread house kits, we offer customers a one-stop shop for holiday decor, gift wrap and party essentials.

Value remains a critical linchpin for our offering, and we demonstrated that we can effectively provide exceptional value at $5 and below as well as at $7, $10, $15 and beyond. Customers recognize the compelling value across the assortment and at all price points and their receptivity to our expanded offering above $5 reinforces our belief in the tremendous relative value that our products provide. Moving to more rounded price points also helps simplify and improve the shopping experience for our customers and the crew.

In terms of marketing, we redirected spend towards social and creator content so that we could be faster and more agile in communicating newness and amplifying viral moments that customers were generating on their own. We have just begun building a customer database, which will sharpen our ability to direct personalized social and direct marketing content to better engage with our customers and develop a relationship with them. While we're still in very early innings with the strategy, we are very pleased with how it drove traffic and sales growth, both online and in stores throughout the year.

On to the store experience. We bought into newness and trend with conviction, delivering improved in-stock levels. We also invested in labor at peak periods to ensure that our shelves were restocked and customers' needs were met. We met -- we made our store easier to shop for our customers by beginning to move Five Beyond products in line with the categories where they logically belonged. As we simplified operations and improved communication and collaboration, our crew was even more engaged, leading to better execution and attentiveness to our customer, the boss. Providing a terrific experience for our customers while also driving greater productivity in our stores remains a priority.

We also became more planful in our approach to new stores. We dialed back the pace of unit expansion to sharpen focus on the quality of locations and ensure that grand openings were brilliantly executed. With our customer-centric strategy well underway, strong comp performance and accelerating new store productivity, we're confident in the long runway of growth ahead.

The results of 2025 offer clear proof points that our transformation is gaining traction, and we have more runway. As we enter 2026, we believe the business is well positioned for consistent, durable top and bottom line growth. Continuing to execute on our customer-centric strategy provides us great opportunity to further strengthen the Five Below brand and deepen the competitive moat that our unique retail concept provides. With our growing scale, we are focused on expanding our brand and customer reach across our communities, bringing joy to kids, adults and parents as we help them to play, live, give and celebrate. As we evolve, I am confident that we will retain our strong customer-focused and entrepreneurial culture and remain unrelenting in our commitment to provide unmatched value to our customers.

With that, I'll turn it over to Dan.

Thanks, Winnie. Good afternoon, everyone. I'll begin my remarks with a review of our fourth quarter and fiscal 2025 results and then discuss our outlook for the first quarter and full year of fiscal 2026. My comments will refer to results on an adjusted or non-GAAP basis. As Winnie mentioned, we were very pleased to end the year on a strong note with sales and profit exceeding our expectations. In January, we saw stronger-than-expected traffic growth, which converted well and broad basket growth that was fueled by AUR expansion. For the fourth quarter, net sales increased 24% to $1.7 billion, supported by a strong comparable sales increase of just over 15%, which was driven by growth in comparable ticket of 8% and comparable transactions of 7%.

Importantly, operating profit grew ahead of comp sales growth, further evidencing the strength and efficiency of our business model. We are operating in a highly dynamic environment, and the end-to-end execution of our crew was noteworthy. In the fourth quarter, we opened 14 net new stores across 8 states compared to 22 net new stores in the fourth quarter last year. In 2025, we grew our store count by 8.5% and ended the year with 1,921 stores in 46 states, including the 2 new states of Oregon and Washington. Adjusted gross profit increased 24% to $697 million or 40.3% in rate of sale, a decrease of approximately 20 basis points compared to the fourth quarter last year. This was primarily driven by transitory tariff costs of 160 basis points, which were mostly mitigated by fixed cost leverage on the strong comp sales and improved shrink results.

For shrink, the results of the physical inventory accounts we conducted in January were actualized and trued up for all stores for a total benefit of 50 basis points year-over-year. Adjusted SG&A expenses totaled $385 million in Q4 or 22.3% in rate of sale, which was consistent to last year's fourth quarter rate. The benefit of fixed cost leverage fully offset increased incentive costs and the incremental investment in labor hours that we made in the stores during the peak holiday period. Adjusted operating income grew 23% in the fourth quarter to $313 million, and adjusted operating margin decreased approximately 10 basis points to 18.1%. Net interest income was about $6 million for the fourth quarter or approximately $2 million higher than last year due primarily to a higher average cash balance throughout the quarter.

Adjusted net income grew 25% to $240 million and adjusted earnings per share increased 24% to $4.31 per share. For the full year, net sales increased 23% to $4.8 billion, driven by a strong comparable sales increase of nearly 13% that was largely equally driven by both transactions and ticket growth. Adjusted gross profit for the year increased 25% to $1.7 billion or 36.1% in rate of sales, an increase of approximately 50 basis points compared to last year. Adjusted gross margin accretion was primarily driven by fixed cost leverage and improved shrink results, partially offset by the net impact of unmitigated transitory tariff costs. Adjusted SG&A totaled $1.2 billion in fiscal '25 or 26% in rate of sale, which represented a 20 basis point decrease compared to last fiscal year. This was driven by fixed cost leverage on the strong comp sales, largely offset by higher incentive costs and investments in store labor during the holiday.

Adjusted operating income grew 33% for the year to $472 million and adjusted operating margin increased 70 basis points to approximately 10%. Net interest income was about $23 million for fiscal 2025 or approximately $8 million above last year due mostly to a higher average cash balance throughout the year. Adjusted net income for fiscal 2025 grew 33% to $370 million, and adjusted earnings per share increased 32% to $6.67 per share. We ended the year in a strong cash position with approximately $932 million in cash, cash equivalents and investments. Inventory was approximately $847 million at the end of the year, an increase of 28% with a commensurate 18% increase in units versus last year. The increase in inventory reflects both the higher store count and the impact of tariffs on average unit costs. Average per store units were up about 9% at year-end, reflecting the pull forward of inventory and our commitment to driving higher in-stock positions in store in support of our growth objectives.

Capital expenditures, excluding the impact of tenant allowances, were approximately $175 million or 3.7% of net sales, which includes 115 net new store openings and investments in technology and infrastructure. We continue to allocate capital in support of growth with a clear view towards delivering the best return on that investment and with each dollar we deploy competing for the highest return. We generated strong free cash flow and plan to continue to focus on reducing our working capital in fiscal 2026 as we cycle the impact of tariffs.

Overall, 2025 proved to be a year of transformation for our business and the successful execution of our strategy delivered outsized top and bottom line growth. In a challenging and dynamic macro environment, we operated with both urgency and discipline and with maniacal focus on the needs of our customers.

Now on to our outlook for fiscal 2026. We're operating in a highly dynamic and increasingly complex macro environment with significant geopolitical uncertainties and difficult to predict implications for the consumer. We believe this backdrop provides the rationale for a measured, prudent outlook. This year also has a few nuances, primarily related to the cadence of sales and the impact of tariffs. With respect to tariff rates specifically, for 2026, we have assumed that the global tariff rates that were in place as we entered this fiscal year will remain in place all year. Our outlook, therefore, does not contemplate the impact of the recently enacted Section 122 tariffs, which are only in place for 150 days.

Now with respect to our outlook for the year. Sales are expected to be in the range of $5.2 billion to $5.3 billion, an increase of 10% at the midpoint and comparable sales growth is expected to be between 3% and 5% or approximately 17% on a 2-year stack basis at the midpoint. Adjusted operating margin at the midpoint is expected to increase 100 basis points to 10.9%, driven by gross margin expansion, net of increased marketing investments. Adjusted diluted earnings per share is expected to be $8 at the midpoint or growth of 20% versus 2025 on 55.7 million shares outstanding. As a reminder, our outlook does not include the impact of share repurchases.

We expect net interest income of approximately $26 million and a full year effective tax rate of approximately 26%. Capital expenditures are expected to be between $230 million and $250 million, excluding the impact of tenant allowances, which reflects approximately 150 net new store openings and increased investments in technology and infrastructure.

On to the guidance for the first quarter of 2026. We expect total sales in the range of $1.18 billion to $1.2 billion or growth of 23% at the midpoint versus last year's first quarter, with comparable sales growth of between 14% and 16%. The first quarter is expected to be our highest comping quarter of the year, in part due to the un-anniversaried benefits of the rounded price simplification strategy that we implemented last year. We expect to open approximately 45 net new stores across 24 states in the quarter. Gross margin in the first quarter is benefiting primarily from fixed cost leverage on the strong comps, higher merchandise margins related to the net benefit of pricing and lower shrink. Adjusted operating margin at the midpoint is expected to be 9.7% versus 6.1% in the first quarter last year, with the majority of the 360 basis point increase driven by gross margin expansion and to a lesser degree, leverage over SG&A expenses.

Adjusted diluted earnings per share at the midpoint is expected to be $1.63 per share or growth of 90% versus last year. In summary, we're very pleased with the underlying performance of the business and the continued execution of our customer-centric strategy underpins our confidence in this outlook for 2026. We remain focused on executing at a high level and continuing to deliver on our top and bottom line growth for the business.

With that, I'll hand the call back over to the operator to start the Q&A session.

[Operator Instructions]

The first question will come from Matthew Boss with JPMorgan.

Congrats on a great quarter and the continued momentum. So Winnie, could you help by breaking down the drivers behind the magnitude of comps that you're seeing near term, mid-teens comps the last 2 quarters? And if you could speak to the acceleration that you've seen in the first quarter or maybe even larger picture, if you could just walk through the structural changes to the organization and maybe some of the new customer acquisition metrics that support this as durable or drivers off of a higher revenue base from here?

Thanks so much, Matt. It has been a tremendous quarter, and we're excited to see that momentum continue. And really, I would say that there is one word that characterizes our success, and that is our crew. And I say that because what we've done is we have basically taken a year of pretty significant change and driven amazing results of that change and that transformation. The change started with a real focus on the customer and getting back to our roots and focusing on the kid and specifically Gen Alpha, Gen Z and millennial parents, who love to reward their kids with the trip to Five Below.

The second piece is really focusing in on how our customers basically become aware of us and how they get to us and how we announce newness to them and creating what we're calling a connected customer journey. And we're meeting our customers where they live, which is in social media. So we redirected our marketing to focus on social media. We've also just begun the journey of actually capturing their records so that we can continue a dialogue with them and invite them back, which we think is going to be a major lever for growth in the future, just driven off of repeat visits and again, engagement on new content.

The last piece is the team pulled together and executed brilliantly. And I call this the flywheel effect, and it really was about cross-functional collaboration across the organization. We honed in on the 6 curtain-up moments or new floor sets. But instead of just passing the baton between the merchants and marketers and stores, we basically start the season together, really hindsighting together what just happened. And then as we move forward through the season, being connected throughout. And that culminates in a call with our 1,900 stores to really tell them what is, number one, the newness that we're bringing forth. Two, what is the marketing message, what are we going to be activating in stores and beyond and then staying really connected in terms of how we drive the product into the stores and ensuring that they've got, honestly, good in-stock positions.

So it is a bit of retail 101, but executed really, really well. And I think that moving forward, this is early innings. I joined a year ago, so we've just started executing against the strategy, and the team has executed very well. But we've got more growth ahead of us that I think is incredibly durable. And one of the things that makes it so relevant is the fact that we've got a unique retail concept. So we're operating as a differentiated specialty store for kids, but with the discipline of an extreme value retailer. So all very good. Thank you so much, Matt.

The next question will come from Edward Kelly with Wells Fargo.

I'd like to add my congratulations. I would like to ask you about just the comp momentum, and there's a lot of excitement about what you've been seeing so far in Q1. And I was hoping that you could maybe talk about what you think is driving that, particularly from a trend standpoint. And then as you take a step back and think about the Q1 comp guidance versus the full year comp guidance, can you just sort of help us bridge the way you're thinking about full year given the robust start out of the gate?

Thanks so much, Ed. I'm going to kick us off and talk to you about like the business that we're seeing now and then also have Dan lean in and talk about how we're going to bridge quarter-to-quarter. So we're really excited. I think what we saw in consecutive quarters last year continues this year. We really do have right now in Q1, broad-based growth. And it's across our entire assortment. We're excited that our worlds are all comping, and we have been very intentional to take more of an assortment approach as opposed to relying on a single item. So what you do is you take that growth across all of our worlds that's being kind of driven by great traffic, great transactions, also AUR. But then you layer on top of that some compelling trends that are happening right now.

And in the past, when those trends happened, we weren't communicating directly with the customer vis-a-vis the channels that they live in like social. Today, we can engage directly. We see something pop on social like the squishy trend. And what's really nice is that we can amplify that through, honestly, what we say and do, but also watch it carefully. And we've got a whole community of stores that's also engaging as well as brands. So it's been really nice to see that, and we're enjoying that in this quarter in particular.

And I'm going to let Dan step in and just help us bridge a bit.

Yes. Thanks for the question. You're right. We're off to a good start here in the quarter that we're in, and I think you all see the same data that we see. There's great momentum coming out of the holiday, which we're super excited about. And the midpoint of our Q1 guide on comps puts us right smack in line with run rate trend, which we think is appropriate. As we go to sort of the balance of the year and to give you a little bit of the thinking on how we constructed the guide, I think the most important thing that I would highlight is what we're up against as we think about Q2, 3 and 4. We're going to start comping some really, really tough growth quarters. And I think just pure math, when you think about a Q2 last year at plus 12%, all the way up to plus 14% in Q3 and plus 16% in Q4, that's real, right? That's math and that matters. And so that obviously factors in.

I think the second thing I would highlight is just the state of the consumer and the macro environment in which we're operating. And we just don't think it gets easier from here, whether it's the prices at the pump or this sticky inflation that seems to be hanging around or a job market that is somewhat sluggish. We think the environment here is going to continue to be challenging. And so we sort of factored that in as we thought about the plans that we have, the execution and the newness and the strategy that Winnie referred to and then ultimately, what we're up against in terms of back half of the year and trend.

The last thing I'll say is when you look at Q2, 3 and 4 of our business on a 2-year stack, which is, I think, really important because it takes the noise out of a moment in time. Over those quarters, you're seeing mid-double-digit growth consistently Q2, Q3, Q4. So that tells us we're still in a real strong growth position, and I think we've put the guide together in a pretty constructive way.

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

This is Pedro Gil on for Simeon. Great quarter, fantastic momentum. Congratulations. My first question is for Winnie. In your prior roles, have you experienced a period of such strong growth as you're seeing right now? And what are the learnings that you take from those positions, from those roles that you can apply to comp the comp here into 2026? And then I have a follow-up.

Thanks so much for the question. So I actually have seen strong growth in my past life, especially when I was engaged in international and in international luxury. What's nice though about Five Below is that we really think we've got I guess, a toolkit for durable growth as we move forward. And we think the strategy is compelling. I mean you really start with the fact that we have a unique retail concept that's focused on kids. And I think that, that's compelling here in other places.

The second piece of this is our execution is really, really strong. And I think you can have a brilliant strategy, but if you can't execute, and with our teams and our crew, the execution is about collaboration and being really one team, one dream, being very close in terms of the trends that we're seeing and reacting quickly. And I would say the last piece of this is we're just really excited to be able to engage directly with the customer. The customer is responding well, I think, in part because we're talking to them. And it's not a one-way dialogue, traditional advertising where you just put it out there. We're engaging with them constantly. And through our new marketing efforts through social media, we can be incredibly agile. If something is popping, we can immediately react.

And the other piece of it is we've got a rich source of information because we can see what's trending out there and again, react. So I would say that all of those things give us a lot of confidence. And I do think this growth is special, but it's also durable. Thanks so much for your question.

The next question will come from Michael Lasser with UBS.

It's really on investments that you can make in order to sustain this momentum moving forward, and it comes in 2 parts. First, Dan, you mentioned that you're expecting 100 basis points of gross margin expansion this year. How would you break that down from factors that are unique to this year versus letting more of the goodness flow to the bottom line rather than reinvesting in? And does that create some tension over the long term if Five Below is not reinvesting all of the scale and other benefits it gets from being a bigger organization?

And then as part of that, if you could just talk about how we should be modeling the contribution margin if indeed you are able to sustain this comp momentum above and beyond your guidance, would you choose to reinvest some of this outperformance back to be able to sustain this comp beyond 2026?

Michael, thank you very much for the thoughtful question. So look, if you look at 2026 as a whole, we've got actually 130 basis points of gross margin accretion year-over-year and about 100 basis points of operating profit accretion. That's the model that we've built, and that's on the 3% to 5% comp that we put together. The way we get there, to answer your first question on sort of what's driving that margin, taking away sort of the leverage point and the shrink point, I think you've got 3 fundamental drivers. You've got price, which we won't anniversary until late in 2Q. You've got the cycling of the transitory tariff headwinds of a year ago. and you've got a structurally lower tariff rate versus a year ago, mostly related to the reduction in the fentanyl tariff in China. Those are the predominant drivers of the gross margin accretion, and they'll play differently between half 1 and half 2.

I think to your second question on the investment stance of this business, look, we feel really good that we are remaining committed to a growth stance for the business. That growth stance shows up, in my opinion, in a few different ways. We are incrementally investing in marketing this year, and you've heard Winnie talk a lot about the vision for how we want to engage, how we want to build awareness for this beautiful brand and talk to our customers in a different way. That's about 20 to 25 basis points of incremental year-over-year investment. We are continuing to invest in labor. We have seen the benefit of what happens when we put the right profile on the shop floor at our busiest times. And so we're committed to getting that model continue to be optimized.

And then thirdly, we're going to continue to lean in on capital and support the growth of this business, both in new stores, but also in capacity within our distribution network to make sure that we're ready not only for 2026, but beyond. So I think we've got the right balance here of fueling and funding this growth, but also being thoughtful about what flows to the bottom line.

Look, to your second question, what happens if we outperform this? That's a long way away for us. We would love to entertain that. We're certainly thinking about that every day, but we'll have more to say about that should that situation arise.

The next question will come from Scot Ciccarelli with Truist Securities.

Dan, I think you mentioned you're seeing the same data that we're seeing on the outside. But I think what we're seeing on the outside would suggest you're providing a relatively conservative guide, at least at this point for the first quarter. Is that based on just conservatism? Is it because we still have Easter ahead, et cetera? If you just could provide more clarity around kind of the thinking on that.

Absolutely, Scot. Thanks for the question. Look, we're seeing the same data. You're seeing -- we're thrilled with what's happening out there. I think we've got to put context here, though, as well. We're 7, 8 weeks into the quarter. These are relatively low volume weeks. And I think that's important to note. It doesn't take away from the performance. But I think this quarter is going to be delivered based on what's in front of us, not what's behind us. Easter is a big deal. Those are 2 really important selling weeks for us. It's an early Easter this year, which is not ideal, but survivable.

And we've got to get that right, and we know we will. I think the second thing I'll go back to Winnie and I both talked about it is, look, the state of the consumer is not as strong as when we exited the year. And I think we have to be thoughtful about that as well. There's a threshold here in terms of wallet and the consumer is under a lot of pressure. And so I don't think we're trying to be conservative. It's not our intent. I think we're trying to be thoughtful halfway through the quarter, knowing we've got a lot left to do, particularly around Easter to land the quarter. So hopefully, that answers your question.

The next question will come from Paul Lejuez with Citi.

Can you talk about your AUR and ticket assumptions for the first quarter versus transactions? And then I'm curious, as we think about 2Q to 4Q, are you looking at those quarters as being consistent on a 1-year basis as you move throughout the year? Or are you looking at them as being consistent on a 2-year basis? Or are you building in a stronger second quarter coming down a little bit, decelerating as we move throughout? Anything you could share on that second quarter to fourth quarter cadence and the AUR ticket and transaction assumptions?

Great. Thanks for the question, Paul. Yes, look, let's start at the macro level. We've got comp growth built into every quarter in the year. So I want to reinforce that point. I think we made it in the opening remarks, but I think that's important to note. Obviously, yes, you're right, the sequential growth will slow as the cycling effect is more pronounced. And '25 got stronger as the year went on. which means the cycling challenge is harder in '26 as the year goes on. In terms of how we thought about sort of ticket and AUR, I would sort of maybe ladder up and just think about it in terms of half 1 and half 2.

We've modeled very consistent trends that we saw coming out of the year, particularly in Q1 around ticket growth and AUR-driven ticket growth. It's what we saw in the fourth quarter. It's what we expect to see in Q1. That will obviously moderate as we move into Q2 and we anniversary the price increase. And then over the back half of the year, yes, you're going to see a little bit more balanced, a little bit more moderated growth between both ticket and transaction. We do expect growth in both, but it will be more modest given what we're cycling against.

The next question will come from Robby Ohmes with Bank of America.

I was just curious on the first quarter and the strength you have there, and it might be hard to see behind it. But is there any -- was there any storm impact coming in the first quarter? Does early Easter mean anything for you guys? And maybe to call out historically, how has tax refunds helped or not helped Five Below's business? And are they helping right now?

Yes. So all that certainly went into how we thought about the first quarter. There is certainly tax proceeds in the market. They came a bit earlier than what we've seen previously. We think that's a bit behind what we're seeing in the early results in the quarter. That's been favorable. Look, I think in general, an early Easter is less advantageous than a late Easter. It sets up that post-Easter time line where it's still unfortunately a bit cold and you don't get the full spring/summer sets going. But that's de minimis. That's probably on the rounding. I think at the end of the day, Easter is still a pronounced piece of the quarter for us earlier or later. It's a big piece of how we think about the quarter.

And so yes, you've got a bit of tax funding that's worked its way through earlier than maybe we would have expected. You've got Easter out there. I think all of that has factored into how we constructed the first quarter comp guide.

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

Can you guys unpack the traffic between new and existing customers? And then separately, on store growth, what it would take to accelerate unit expansion from here in '26 -- sorry, in '27 and '28? I guess what are you guys looking for given how strong NSP has been over the past year?

So we've seen growth in both new and existing at equivalent levels and actually at really, really great levels that we haven't seen in the past. As I mentioned before, I think that the marketing strategies that we've deployed are -- they're very effective. They're working. And as we gather customer records, I think that we'll be able to see further growth, especially with that existing customer base and hopefully, growth in that customer lifetime value, especially as kids enter and they grow up, see us at college and maybe one day become parents and come back to us.

So really, really good potential out there. In terms of store growth, I think overall, we've taken a position of being incredibly disciplined. I think that's the difference in the past year. And that discipline means evaluating the best locations and more importantly, opening with maximum impact. So ensuring that we've got the right level of inventory, ensuring that we've got a crew who are well trained and really, I think, bringing back grand opening marketing and shouting to the community that we're there has worked.

And so we really want to focus on the number of stores. I think there's a lot of white space out there for us, but it's more important that we get the right ones and the right level of execution against them. Thanks so much, Chuck.

The next question will come from Zhihan Ma with Bernstein.

Winnie, I wanted to follow up on your comment about pricing and various price points above $5 to $7, $10, $15. Now it's not the first time that Five Below is going beyond the $5 price point. What do you think has changed in terms of you seeing the customers giving you the permission to realize more pricing power this time around beyond the $5 point?

Thanks so much, Zhihan. So a couple of things have changed fundamentally. One thing remains the same. We remain very committed to delivering as much value and as much assortment at $5 and below. It represents about 80% of our business in terms of units sold. We're very excited about that number. We're proud of it. We want to be a resource for customers where the price of entry is $1. And so building in great value is always going to be central to what we do.

We took a very different approach to pricing above $5. A couple of things. One, we evaluated every single product and really looked at if you're going to bring in a price point above $5, does it deserve to be at $7, $10 or $15. And so an example over holiday was really compelling gift sets and bundled products that were at $10. That makes a big difference. And again, focus on relative value and also making sure that we are honestly priced better than competition. So that all goes in the mix. The other aspect of how we think we've gotten permission from the customer is we basically merchandise the store the way they shop. In the past, all of these goods would be in the back of store in the Five Beyond area. And we work very hard to actually try and expand that and actually put these really compelling wow value items in the zones where the customer is shopping.

So I'll give you the example of a great speaker and the speaker table. You don't need that to be in the back of store. If you put it in the tech section with the other speakers, the customer sees the value in it. And so I think really leaning into how the customer shops, ensuring that they're getting great relative value and remaining very, very focused on what the competition is pricing at versus what we price at has been tremendous. The last thing I'll say about Five Below that's really great is we're about newness. And so as we introduce new products at higher price points, they're not comped to old products that were in the price -- in the line. So we can really step out and do something unique. And the customer has responded well and is giving us permission to do more at different price points. Thanks for your question.

The next question will come from Brian Nagel with Oppenheimer.

Great quarter. Congratulations. So the question I want to ask, focusing on sales, and look, we have laid out the guidance. I mean you talked about continued strength through the year, but really in the first quarter. But as we think about 2026, how should we -- are there factors that are beyond what you're already doing, new factors that should amount to key sales drivers for the year that we maybe did not see in 2025?

So Brian, thanks so much for your question. Honestly, I would say that in 2025, we planted a lot of seeds for growth, and we see a lot of green shoots. And so our intention during the course of the year is actually to amplify what we've already planted and started to read. And I will give you the example of our ability to actually react to trends as one of those ideas. So in the past, there could be trends that were really hot, especially for kids. And we were passive. We were able to provide the product, but we weren't able to engage with the customer and amplify those trends.

Today, we've got a different toolkit. So we really can actually build community and engage with the customer about what's hot and also react much faster than in the past at addressing that trend. We also are going to take permission to look at those trends and introduce new trends along with that. So I think that, that is something we're beginning to exercise and we'll exercise throughout the year. We also -- honestly, last year, we had the tariffs hit us. And so we weren't able to actually buy or attain all the products that we wanted to fill out some of our worlds.

And this year, that is not an object. We've worked very hard to diversify our store space to negotiate. We do have the benefit of being able to price at great value above $5. All of this is going to lead to greater range and greater growth in certain categories that we weren't able to really service last year. I hope that answers your question.

The next question will come from Jeremy Hamblin with Craig-Hallum Capital Group.

And I'll add my congratulations on the success. First, just a clarifying question on the embedded tariffs in guidance. So I think what you said was that you're modeling actually like, for example, for China, what the ending 2025 tariff rate would be like 20% for China and not the 10% for the current global tariff rates. So just a clarification on that.

And then my other question is, if you think about the long-term model here, and you guys for a very long time, for a decade did roughly an 11% to 12% EBIT margin every year. And you've been building back towards that through a combination of improved operations and clearly higher AUVs. Where do you think you would need to comp at? Or what do you think the average unit volumes would need to get to get back to that 11% to 12% EBIT margin?

Thanks, Jeremy. Let me take the tariff question first, and then we'll talk about the business model. And maybe I'll just take a step back and confirm for the group, how have we thought about tariffs in total in this outlook. First of all, and I think you were in the right place to start. We have essentially assumed that the tariff rates that were in place as we started the fiscal year on February 1, remain in place. So in rough terms, that means that the IEEPA tariffs that were eventually struck down later in February, we have assumed those are still in place for the year. We think that's the best proxy in a very, very uncertain world given the comments that we've seen from the administration to get back to that level. So that's what's embedded in our outlook. Equally, we have not contemplated the impact in our guidance of this 150-day 10% global tariff rate, the infamous Section 122 tariffs. We have not factored that into our guidance. We don't believe that, that impact is material to the guidance. So that's how we thought about tariffs.

On the business model question that you're asking, look, I think we're not running this business to achieve a certain number, 12%, 13% op profit. What we're doing is designing a model that provides durable growth. And I think this year is a great example of that. The ability to comp on top of 2025 speaks to the durable growth. We're going to be super smart and drive margin accretion and that margin accretion is going to balance reinvestment and bottom line operating profit growth. How that model plays out and over time, what does that balance look like between reinvest versus grow the bottom line? I think that's what we will ultimately decide as we engage over the years.

But I think it all starts with a trusted, durable growth profile that based on the strategy and to Winnie's comments, the way we're executing the strategy, we feel really, really good about our ability to do that. And then I think over time, we will get the mechanism right and the balance right of reinvest to continue to fuel that growth versus grow the EBIT margin line. And that's what we will do over time.

The next question will come from Krisztina Katai with Deutsche Bank.

Congrats on a great quarter. So Winnie, I wanted to ask on the 6 pertinent moments that delivered newness and the great in-store experience that you talked about. Just how many curtain-up moments are planned for 2026? If you could talk about the expected percentage of newness within the assortment that you aim to achieve through these? And then just lastly, some of the key categories that you anticipate driving the most excitement in the coming year.

Krisztina, so we will also feature 6 curtain-up moments this year like we did in 2025. And they really are the seasonal moments that our customers focused on, be it New Year's, followed by Valentine's through to spring, Easter, et cetera. So it really is their moments. And what's really nice is that between those moments, we can always layer in newness. And we actually have newness in each of our worlds that occurs between those moments, and we have the ability to now talk to the customer about when those moments deliver.

The key to our business success this past year has been getting the right product at the right price. And I think that, again, it begins and ends with the focus on the customer. And when we talk about key categories that we think are important, we set off last year with a mission to really be the destination for the kid and the kid and all of us. And with that, really doubling down on games, toys and crafting those thought processes that we really stand out, both in terms of our position but also in terms of our unique concept. We've got 9,000 square feet on average. It's a fun place to shop, and it's a fun place to host kids.

And then beyond that, really looking at teens and tweens. And so we continue to fuel our businesses like beauty as well as our lounge business and accessories. And so -- and then this year, I think we are really excited about doing more in terms of room and dorm. And so lots of great newness throughout our categories and our worlds. But again, with that focus on the kids and what they care about.

The next question will come from Anthony Chukumba with Loop Capital.

I guess I have a quick one for Winnie. This has just been such an amazing first year. Are you sure your first name is Winnie and not Winning?

Anthony, that's very kind. It's Winnie, like the Pooh. Which is also a great product in the line right now.

The next question will come from David Bellinger with Mizuho.

I don't really know how to follow that one. But my question is on social media. I mean, Winnie, you mentioned some of the influencer, TikTok, Instagram marketing. Are you looking at those sales as truly incremental at this point? And just can you help us think through any of the economics around that? Do you pay for a post to the influencers, participate in any upside? Just help us understand the economics and the incrementality at this point.

Yes. So David, what we've done is basically redirect what used to be spent on traditional TV commercials into social media. And it's a whole range. It's both engagement in terms of creator content with creators and influencers. But it's also just ensuring that if you're watching -- if you're on social and your Gen Alpha and you're watching a great video about Stitch and your interest in Stitch product, we're serving up the right content to you. And so it's a multipronged strategy. It's not as simple as just going out and paying for influencers. I think that what's been really, really great, especially this year as we look at the first quarter is that it's less about influencer content, and it's much more about our ability to amplify what is user-generated that's out there.

People are talking about these products. We're able to lean in and say, we've got those products, we've got you. Even our stores are engaged and talking about like this product just landed. So I think it just gives us access to a remarkable channel that, again, is agile, incredibly effective in terms of return on ad spend. And honestly, the last piece of this is compelling. It's something that the customers want to engage in. And so all those pieces give us courage to do more, but we always have a test, learn and ramp approach on anything we do. And so I've been really excited by what we've seen thus far.

The next question will come from John Heinbockel with Guggenheim.

Winnie, a quick question. I know in the past, you guys would run events in stores on the weekends. Your thought on that, the labor required for that? And then could you do birthday parties and other related parties or that's too complicated labor-wise?

Yes. John, great question. So first of all, on events, we continue to host events. We just had an amazing Pokémon event. We've been really pleased. And I think part of it is those events are incredibly sticky and create community. And it's something that certainly our brands and vendors want to help activate. So it's a 1 plus 1 equals 3 equation. And the sales that we generate in general, really do fund -- more than fund any labor that we put towards the events. I do think it's an interesting and compelling question with regards to birthday parties and other activations. We haven't contemplated that really fully.

However, what we are trying to lean into is try to be a one-stop destination for your birthday needs. And so we're excited about our balloon business. We don't aspire to be all of balloons, but the best of balloons and really think about our target customer and then offering really great party celebration items that complement what we've always done, which is party favors and gifts. So those are some thoughts. But certainly, as we focus in on kids, we look at all avenues of potential growth and what that could do for us.

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

I was going to ask, could you just summarize for the year where tariff headwinds ended up falling out for you? And then I believe in the first round of tariffs, it was roughly 1/3, 1/3, 1/3 offset from pricing, cost out and then vendor leverage. So I'm just wondering if you could provide an update on how that has played out so far.

Yes. Thanks, Mike. So we ended up largely where we thought we would a quarter ago, about 90 basis points full year headwind in 2025. In terms of sort of what we -- how we addressed those impacts, I go back to what I think is like a really important point with this business, which is we offset tariffs penny for penny at the item unit level. And that's obviously super important to the economics, and you see the benefit of that in 2026. because some of the gross margin tailwinds that we are getting right now is as tariffs have eased, we've got unit economics in a great place, and we've got margin accretion.

So I think it's noteworthy that the team was able to offset all of the tariff headwinds at the item level. How they did it, I think you've got the 3 buckets, right, in terms of the pricing benefit, the ability to negotiate and the ability to reengineer and redesign product. I think all of that factored in. I don't know that I would size it 1/3, 1/3, 1/3. I think pricing was probably a bit more, but I'll leave it at that for now because I think you've got all 3 of the right levers.

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

What a great year. Question on the step-up in CapEx, Dan, just what's that going towards? Any interesting technology or supply chain opportunities? And how are you thinking about perhaps getting back into some of the store refresh store remodel programs that have been in the past?

Yes. Thanks for the question. And you're right, it is a bit of a step-up year-over-year in CapEx. We plan to be somewhere just over 4% of net sales in capital, which is slightly higher than where we ended 2025. I think the capital is largely going to continue to be focused on the network and the stores and building out the next round of 150-ish new stores. That's obviously the priority.

The second piece, and you're right, we are making investments in the distribution network. We've got to build for more capacity to support this growth. And so that process begins in 2026, and we've allocated capital for that. And then we are putting a bit more capital behind technology. We're seeing real opportunity here structurally to enhance technology. We talked earlier about our digital business and the website. We've talked about how do we make the merch teams more efficient and optimize end-to-end management of this business. So there's a technology investment.

And so you've got the new stores, you've got investments in the network and in capacity, and you've got a bit more going towards technology to support the growth.

The next question will come from -- sorry, go ahead.

I was just thinking, Brad.

The next question will come from Phillip Blee with William Blair.

Congrats on a great quarter. So Winnie, you've spoken a lot about the contribution of the crew and incremental investments in labor over the past few quarters, how that's led to better conversion and in-stock levels. Do you think stores are appropriately staffed now? Or do you think that there's room for further increases in either hours or headcount, particularly as you ramp up omnichannel efforts? And then if so, how do you think about the opportunity to make additional gains in conversion? What kind of contribution could that have? Or has most of the low-hanging fruit been taken already here now?

Yes. Thanks for your question, Phillip. Great question. It's interesting because I think last year, we made an initial investment in terms of labor to ensure that we could do kind of the basics, which is to get product -- move product from the back to the front and to drive the conversion. And as the quarters progressed and we started to hit peak periods like holiday, we took a really thoughtful approach to match up peak traffic, peak days with recovery in our stores and ensuring that not only did the customer see the product on the shelf, but they got a better level of service.

And so we will continue with that model. And as it relates to kind of future endeavors like omnichannel, we are very much in a test, learn and ramp mode. We have initiated buy online, pick up in store. We've seen actually big, big growth with third-party delivery. And so we're going to continue to look at those avenues because we've got to meet the customer where they are. And I think particularly for the younger customers, specifically Gen Z, convenience is critical. And we think there's -- it's actually an opportunity to acquire new customers who may not have considered us or walk away just because it's not convenient.

And so we'll take a test, learn and ramp approach in terms of how we look at that. But we think that turning on omnichannel is just going to actually lead to greater acquisition and greater conversion moving forward. Thanks for your question.

The next question will come from Spencer Hanus with Wolfe Research.

Just curious what you're seeing in terms of growth from like new and then existing customers. And then any change in how the recent results are just impacting your view on where this business can comp like durably out in the future? Like has your expectations moved up about sort of where comps land sort of in '27 and '28?

So Spencer, in terms of new and existing customers, we actually had what I would call a banner year in terms of both acquisition as well as repeat visits. And I would attribute that to more effective marketing and really, again, meeting customers where they are. I talked about the fact that we've just started collecting records for customers. And we think that our ability to, again, get additional repeat and to drive our current customer base in terms of their value is much higher as we move through the year, and that's one of our major initiatives for the year. We will also continue to focus on new customers and driving our brand awareness. So all really, really good stuff.

And then I'm going to pass it on to Dan to talk about comp in the future.

Yes. Look, we're super bullish on the growth profile of this business, right? You have to be -- you look at the comp growth that we have delivered, you look at the new store growth. We haven't talked about it on this call, but what we've seen in 8 new stores in new markets in the Pacific Northwest. So we've got a business that we think has an optimal opportunity to comp strongly with a lot of white space. And that is a very, very unique concept within retail. And so that's how we feel about it. I think going back to Winnie's earlier comments, we've got a compelling strategy. We're executing at an incredibly high level with a talented crew, and there are so many things left to do here. We have not scratched the surface on what's possible.

And so you put all that together, I'm going to stop short of putting a number to it. But certainly, we are bullish with the growth aspects that this business offers us, particularly with this strategy. Thanks for the question.

The next question will come from -- and the final question will come from Joe Feldman with Telsey Advisory Group.

I pressed late, I guess. But I did want to ask you guys because I know you've talked about with maybe thinking about a new format for the store now that you've brought out the Five Beyond items back into the aisles and have a more fluid merchandise flow, I was just wondering if you guys have been playing around with a newer format and what you're thinking there.

Joe. I think we're always looking at ways to make the shopping experience that much more inspiring and frankly, just easier. And certainly, with the evolution, I would say, of the Five Beyond area, we have opportunity to take the back of store and make it even that much more productive. And so we are looking at how to create better flow within the store without that Five Beyond area in the back and testing how we honestly convert stores in the network, but then also looking at new format work that allows us to really truly bring to life this idea of these worlds that customers can shop in and move from.

And we are serving some distinct customer groups, the youngest customers with Gen Alpha, Gen Z, more teens, tweens and young adults and millennial moms, and they have very different needs. And so we're thinking through how do we optimize the experience for each of those cohorts. So more to come on that, but thanks for your question.

This will conclude our question-and-answer session. I would like to turn the conference back over to Winnie Park for any closing remarks.

First and foremost, thank you all so much for your support, and we hope to see everyone in our stores for all your spring break and Easter essentials. We appreciate you. Please convert with us, and thank you for your attention on the call.

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

I am Michael Lasser, the Hardlines, Broadlines & Food Retail analyst from UBS, and I could not be more thrilled to be spending a little time with 2 fantastic people and a third sitting in the front row. Winnie Park is the CEO of Five Below, having just surpassed her 13th month in this role. Boy, how time flies when you're having fun. And Dan Sullivan has just surpassed his 3-month tenure at Five Below, and everybody knows Christiane Pelz. She does not need an introduction as the incredible Head of Investor Relations at Five.

I don't know that there's been a management team that's had more of a boom coming out of the gate than Five Below over the last year. So it's been pretty fun to watch. We'll get into the holiday performance. But Winnie, where I want to start is you've been in this role, as I mentioned, for a year. The business has returned to really compelling growth capped by quite a remarkable holiday season. What, in your mind, has driven this really notable turnaround over the last year?

Thank you so much, Michael. And gosh, I can't believe that we just were reminiscing about being here a year ago. And I think the thing that's so compelling about Five Below is the journey I took with the brand as a customer when I started shopping Five Below 10 years ago. And that was with the kid, my daughter. She's 10 years old. And I think that our true North Star is that focus on the customer and reclaiming our position as a destination for the kid and the kid in all of us. It's a special place in retail. There's not a lot of us out there that are focused on the kid and really doubling down on that in every way, getting close to the customer, their needs, getting close to their trends, which are actually multifaceted, it's not about a single item and getting the team geared to really, really understand that the customer is our boss. I'm not the boss. The customer is our boss.

So in service of that kid, we also did a second thing this past year when I started, which is, let's speak to them in a relevant channel. And that's really looking at the fact that we've got Gen Alpha, Gen Z and millennials. They're digital natives, but they're really social natives. And so when we communicate and create that connected customer journey, the journey has got to start in social. It's got to start with storytelling and curated storytelling that's compelling.

And from there, greet them at the store with the same stories, which leads us to kind of the third pillar of the strategy for growth, and that is how we work. It's not just what you do, but it's how you do it. And collaboration and cross-functional alignment has been so key. I come from years in the fashion industry. We take go-to-market very seriously and bringing the disciplined go-to-market with our 6 curtain-up moments where it is around merchandising, working very closely with marketing upfront in terms of what's trending, what's hot, what's new, how are we going to talk about it. But also, we take that same information to the stores.

Before we deliver the product, we have a curtain-up call with all of our associates, so they really get a feel for what's coming their way. And then, of course, that tight coordination between allocations, our distribution and our stores, that means everything. So when the customer gets there, curtain up, you're walking into holiday, you're walking into Halloween and it's compelling. Retail is the last great team sport outside of football, and we mean to play and leave it out in the field.

Well, I will stay away from the football comparison given what happened with Philadelphia last night. But Dan, would you say that...

We won't speak of these things.

Yes. Dan, would you say that part of the reason why you got hired was because of your TikTok presence? Or will -- that is enough...

Not entirely.

It has nothing to do with it. Winnie, so if I were to summarize what you had mentioned, it's, number one, reframing of the business back on the core teen, preteen consumer; two, speaking to that customer in a more current relevant way through social media; and three, really unifying the organization. And those are 3 areas that you've focused on. Presumably, all those 3 have led to some of the benefits that you saw during the holiday. Were there other factors that drove the holiday result?

And you spoke to this not being one particular trend, which I think is important because as you get into next year, there's a constant dialogue from this community, which is, oh, they're going to lap X, they're going to lap Y. But given the diversity of the trends, doesn't that give you a little bit more confidence moving into next year, coupled with the momentum of the business?

Absolutely. I think what was terrific about holiday, you take that strategy focus on those 3 Cs, but then the way we executed it is to deliver assortments. It wasn't about a single item and delivering really compelling statements across a number of different businesses and worlds and customer worlds as we like to call it. And the trends are now not just about one thing, there are multiple trends, and we're constantly chasing them. And now we have the discipline of test, learn and ramp. We want to get fewer, bigger and better ideas and really go after them. That is a way of working that we've brought into Five Below, not just for this holiday, but beyond.

The other piece around holiday is we are very intentional and strategic in our investments. We invested in the inventory and in the merchandise. We had full shelves of the right product. We invested in marketing. We made sure that we got the news out there, starting with our holiday toy catalog, which delivered in November, and our vendor community was so wonderful in helping to participate in that.

And then the final thing is we invested in the labor in the store experience. If the product is in the back room, they can't see it, they won't buy it. So making sure that we were replenished every day, especially those critical 14 days leading up to Christmas. And so all of those things, it's, again, a discipline that we apply, and we'll continue to apply that to comp the comp.

Got you. Well, we'll talk about that in just a minute because that's top of mind for folks. Dan, I want to bring you into this conversation. Coming in, this has probably been an eye-opening experience on a number of levels. But as you look more and reflect on over the last 8 weeks during this holiday period, what outperformed? Because essentially, you doubled up what -- or Five Below doubled up what you expected to do? Is this across all categories where there standouts from a geographic perspective? Anything that you think is important to identify?

Yes. We obviously had a terrific holiday. Look, I think a couple of things jump out to me. One, as you've heard Winnie say, we are a differentiated retail concept. That is who we are. Two, we've got a pretty compelling strategy, the Chief Architect of it is sitting to my left. And three, we've executed at a really high level. And so when those 3 things happen, you're going to tend to perform. The way I think about holiday is 2 words: breadth of growth and balance of growth.

The breadth means we grew just about everywhere. We operate in about 170 districts here in the U.S. We grew in all of those districts. We saw consistent growth across every store vintage we operate, across all income cohorts, across all demos, 14 of the 18 departments we operate in grew. So this notion that we are relying on a single trend, a single item is simply not what we've seen. And this isn't unique to the holiday, by the way. We saw this over the course of the second half of the year. So that's the breadth piece of the discussion.

Then you get to the balance side of it and you unpack that comp, 14.5% comp is what you all would have read this morning. That was our single best holiday performance since we become a public company. And it was driven in a really balanced way. About 8 points of that came from ticket, which means about 6 came from transactions. And so as Winnie talked, as we invest in marketing dollars, we drive traffic. As we get good in-stock position, good labor deployed on the store, we convert well. All of that came together in the holiday period. Super, super proud of the team and the work that they did and obviously excited for the path forward for our business.

Very helpful. If there is a debate or a question, it's how are you going to be able to sustain this momentum? Winnie, you've been able to identify some key areas of opportunity early in your tenure as the leader of this business. Where does Five Below stand on this journey, whether it's using social media, making changes to the store experience? And one of the hallmarks of what you've done early in your tenure was to move some of the Five Beyond product from -- out of the back of the store and move it into relevant sections throughout the store. Those are really interesting and useful examples of giving us a sense of how much more there is to go. So how do you see that from here?

We are early days; very, very early days. I truly have only been here a year. We just assembled the team, Dan joining us in October; Michelle, our Chief Merchant, joining us in October. So from a team perspective, we've got the team, we've got the right team. And then beyond that, I will say that what we've done is institute a system in terms of product and product newness that goes after trends. And the trends are not about one thing, it goes across the assortment. And again, it's that test, learn and ramp approach to how we do things that's so critical.

We have, because of the tariffs, never waste a crisis, really taken the opportunity to broaden our source base, invite more vendors to help us identify the trends, really diversify our source base in terms of country of origin, look at goods outside of China. And so all of that helps us with more information in to identify what's right and what's going to happen, what's new.

And then I will say that price has been such an important component of us driving comps this year and sales growth. But we were incredibly strategic about where we took price. Again, the tariffs basically forced me to look at every single item. I sat down with the MP&A teams. We spent weeks going item by item so I could understand the role it played in the assortment, literally the volumes, and then, again, price value, how much are we paying for it and how much are we going to put it out in the market for? We walked away from some things, and then we went after others.

When we came out of that exercise, we built an assortment and we said, okay, let's go test this. But let's test whole price points, let's simplify the shopping experience. When I got to Five Below and I was interviewing, there were something like 77 different price points. There were 25 endings, 55 endings. We got rid of all of that. We went to whole dollars and then we pushed the envelope. If you're going to go above Five, you better pack a lot of value in those products. And we tested it. Frankly, we rolled it out in Q2. And what was amazing is that the resistance to the price increases were not what we expected. Customers responded because the product was just so good.

From there, in the third and fourth quarters, what we did was we said, let's get rid of Five Beyond. Let's put those items in line because that's how the customer shops. If I'm looking for room decor, I do not need to go to the back of store to find a $35 gilt mirror. Let's go ahead and put it in line with the rest of room decor. That paid dividends. It made it easier. We saw those items being picked up better, and it freed up space so we can get more productivity out of the box. We were able to have 2 curtain-up moments, both in the front of store and back of store starting with Halloween, and we continue that through the holidays.

So all of those things are, again, things that we're going to leverage and continue to grow. We've just started understanding the customer. We just started in social. Of the hundreds of millions of customers who shop us, we only capture a few of them via e-mail. So that work is now just beginning, creating customer database, understanding things like recency, frequency, monetary value, so -- and finally, omni just started to scratch the surface. So we've got a lot of dry powder in the arsenal that we started to look at this year, but we're ready to really bring it to the fore over the next few years.

It does seem like 2025 was a year where Five really solidified that the customer is willing to buy at higher price points. As long as the value is there, what comes to mind is the $45 skeleton, that's a little scary, by the way, I will add...

The scarier, the better.

Scarier, the better. How far are you willing to push it? How far do you think the customer is willing to accept it?

I think the litmus test for us is how good is the product and relative value. So if that animatronic skeleton at $35 is out in the marketplace at $70, that's good value. If it works, great. If it's scary enough, that's good value. So that's our constant litmus test. And at Five Below, we are bred in the bone to not go above Five. Like literally, it is almost like tissue rejection. So it better be really damn good for us to push the price point and the value. And that discipline, again, is something that I really appreciate.

Yes. Got you. Dan, another key piece of the story is that Five is still in the middle stages of its life cycle in terms of unit growth. It's interesting now that you're expanding the aperture of what can be sold, does that influence how you think about the number of units that Five Below could ultimately operate? Right now, it stands -- the growth target is 3,000 plus. What's been your impression of that expectation as you've come in and studied it?

Yes. Super bullish on the opportunity here for further unit growth. 3,500 plus is sort of what we have said, super confident in that and quite informed by what we're seeing in recent new store performance. We just opened 8 stores in a new market for us, Pacific Northwest. Each of those 8 stores in and of themselves would have set a record for a grand opening. They happened to all launch at the same time. We continue to see robust response to the format and to the offering.

So definitely highly convicted upon what the growth could be and how we think about whether it's fill-in or whether it's new market entry. I think what has shifted a bit for us is the pace that we expect here. We're not going to chase a number. We're not going to chase a number of boxes. We're going to be super smart and disciplined. We've raised the bar on what it takes from market intelligence, site selection all the way through to when we open those doors. Every aspect of that has to work better for us. So we've anchored ourselves a bit.

The way we look at growth around high single-digit box growth is probably the right place for us in the near term. That's what we'll be this year, about 9% in new boxes. That's a pretty good proxy for us as we move forward. And again, setting ourselves up to think about what does really good execution look like, premium sites, great end-to-end execution and super grand openings. Those 8 stores that I mentioned, Pacific Northwest, just as an example, those are all former Party City boxes. So we're going to focus on premium location, good 4-wall economics, and then we're going to execute super well.

Shifting over to the model. One thing that was pretty remarkable in 2025 was how well not only Five performed from a top line perspective, but how well it was able to manage through the tariff environment? And given the sourcing that Five Below does, it was uniquely exposed to the tariffs. So Dan, give us a sense for how much the tariffs had an impact on the product cost, what was the mitigation strategies? And it's very likely that we're going to be in a dynamic tariff environment moving forward. What do you see as the opportunities and the risks from tariffs to Five's model moving forward?

Yes. This is Five Below at its best. The way this organization attacked tariffs and all that it could have been rewind the tape to what we were all thinking back in March and April. And this organization was proactive. It was aggressive. It was solution-oriented. And as a result of all of that work for the full year 2025, we're essentially offsetting all the tariff pressure at the unit economic level. Merch margins are essentially flat year-over-year. That is an incredible outcome.

We've done it through a number of different ways. Certainly, price strategy and price execution and importantly, less consumer pushback on some of the pricing that we've taken has been an important lever, but we've also done great work on the cost side in good hygiene around reengineer it, renegotiate it, put it into different countries of origin. Nothing was off the table in terms of the work that we've done. Now where we felt the pain, less at the unit economic level and more just in operating in a tariff environment, right?

Every aspect of supply chain and distribution and importation had some form of significant cost pressure to it. Surge pricing being a really good example of that. We see that as largely transitory here. It is not structural. We still have to work our way through a bit first half of 2026 because some of those costs are trapped in inventory and we will release as the product sells. But I think an important recognition of how this company operates is the work that was done to mitigate what could have been meaningful tariff pressure and then creating an environment where, to your point, Michael, this is fluid and changing and requires great agility, and that's how we operate the business.

And Dan the message, hey, let's look at what happened last year with respect to tariffs. Five Below was able to manage it in such a way, I think merch margins were flat, which is a remarkable accomplishment. And the message for folks should be, hey, no matter what happens, that should be a testament that we'll be able to manage through this under a variety of different scenarios.

Well, that's right. And you heard the CEO of the company spent her first weeks here tearing through item by item across the full portfolio. That tells you sort of the mindset of how we operate. So yes, I fully agree. It won't stay this way. That we know. There will be more change, more disruption, but we, as an organization, will stare into that.

With all due respect to any Eagles' fans, we already know that there's not going to be a repeat for one organization coming out of Philadelphia in '26. We are hopeful and confident that there can be a repeat for a different organization in 2026. Winnie, how do you comp the comp in 2026? How are you thinking about that?

So Michael, I've alluded to some of the things that we've got in play that we've just begun. And the thing that we did this year was set the base. We set the base. And we set the base not just to drive the growth and drive the year's comp, but to really think about multiyear how do we repeat this. And I think we've just begun to touch the potential with product and assortments. Some of the ideas that really shine this year like lounge went from 0 to 60 in the course of 9 months, and it was getting behind it.

And so I think there's a lot more we can do with regards to product trend. Again, price, thinking about how much more we can do with great value above $5 while keeping that screaming value at the center of how we go to market and who we represent to the customer. The last piece of this really is we've only begun to talk to our customers. We've only begun to talk to them via social. We've only begun to actually e-mail them and bring them back. And we know the value of a customer with an e-mail, and we know how much more we have to do there. And so before we even talk loyalty program, let's just get their names and start talking to them and asking them to come back for every curtain-up moment.

We also have an aspiration. You had mentioned earlier that, and you were there for the Five IPO, right? It was preteens and teens. I actually pushed this back to a younger customer. We're kids. And we have the ability to ladder up with that kids starting from when they get their first allowance at age 5, all the way through to self-expression at 12, 13 to college, decorate your dorm and when they become parents. And so monitoring that life cycle is something that there's a ton of opportunity in terms of customer lifetime value. And I would say that, that differentiates us from most of retail, even when we look at new store expansion, as we've been talking about beyond comping the comps, just pure growth, kid counts and communities, drive times for kid counts, how you actually delve into communities of kids. So there's a lot more for us to do.

Kids and kids at heart, too.

Kids and kids-at-hearts. We love our kidult.

Yes, I'm a kidult. Yes. Some people say I'm not even a kidult, but that's a different story. Dan, your stock has doubled in the last year. Part of the expectation is that profitability is going to continue to improve. At one point, Five had a 12% operating margin. How are you thinking about the profit profile for this business over the long run? And where are the biggest opportunities right now?

Yes. Well, look, we're a growth retailer. So any talk of operating margin is going to start with growth. You've heard Winnie, we're highly convicted that we will comp the comp next year, but more importantly, continue to deliver structural durable growth. We would expect that growth then is going to deliver leverage. That's how we operate the business. You see that in 2025 actually. Despite tariff pressures, other challenges on cost incentive and otherwise, we will deliver 40, 50 bps of op margin accretion this year. So we're going to grow.

We're going to thoughtfully reinvest, continue to direct our investments to where returns are the highest. We're going to stay maniacal on productivity and efficiency. All of that then creates op margin accretion and leverage. That's the model. That's how we operate it. Now I'm well aware of the 12% metric. I don't think about it personally as a moment in time or a number. I think the path at which we accrete, the path at which we drive that margin, we'll see, but it's going to start with growth, including in 2026 and then from there, deliver leverage.

The other thing I would say, just for 2026 purposes, remember, we will anniversary a lot of these onetime transitory costs. So the leverage requirement threshold, if you will, is a bit lower than it's been historically. That's a 2026 only comment. Long story short, Michael, highly convicted, we'll continue to grow this business. And as we do, we'll lever it at the operating profit.

That's awesome. I want to end where we started, which is, you're entering your second year as a leader of this remarkable organization. What are you most excited about? And what in your mind is just the opportunity here moving forward?

I think -- thank you for that, Michael. We have so much more potential. The potential for Five Below is big. And I keep going back to the point that we are a differentiated retailer. We're specialty retail geared towards kids that happens to operate at extreme value. That is an unstoppable combination. And so more to come, but I'm pretty excited. Dare I say, psyched and stoked about what we're going to deliver to the customer over the next couple of quarters. It's going to be good, amazing.

This was totally lit. On behalf of me and all the other kidults out there, thank you. Please join me in thanking the team from Five Below.

Thank you.

Thank you.

Good day, and welcome to the Five Below Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Christiane Pelz, Vice President, Investor Relations. Please go ahead.

Good afternoon, everyone, and thanks for joining us today for Five Below's Third Quarter 2025 Financial Results Conference Call. On today's call are Winnie Park, Chief Executive Officer; and Daniel Sullivan, 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 Investor 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 third quarter results, which exceeded our expectations. Before we do, I want to extend a warm welcome to our 2 new leaders Dan Sullivan, our Chief Financial Officer, who you'll hear from shortly; and Michelle Israel, a Chief Merchandising Officer, both of whom joined us in early October, Dan and Michelle are seasoned, highly experienced executives who have integrated into our amazing Five Below management team incredibly well. We're excited to support their contribution as we continue to grow and redouble our efforts to amplify our unique value proposition.

I would also like to thank Ken Bull, who served as interim CFO for his amazing partnership. We are excited to have Ken transition back into his role as COO as we enter the critical holiday season. Now turning to our fantastic results. In Q3, we delivered our second consecutive quarter of over $1 billion in sales and double-digit comparable sales growth. Our customers continue to recognize Five Below as the destination for the kid and the kid in all of us.

I'm really proud of the work our teams are doing in support of our boss the customer. We are seeing clear proof points that our customer-centric strategy is working. And as a result, we've taken up our outlook for the remainder of the year, which Dan will discuss in more detail shortly. In Q3, net sales grew 23%, with comparable sales growth of over 14%, driven by both transactions and ticket. With disciplined expense management, adjusted diluted earnings per share grew 62% over last year to $0.68.

Store growth continued to be strong at 9% over last year. We welcome 49 net new stores, the Five Below family, including our new store in Rogers, Arkansas, which became our best ever fall grand opening. And we ended the quarter with over 1,900 stores. The success of our new store openings continued into the fourth quarter with our entry into the Pacific Northwest or each of our 8 new stores set all-time grand opening records.

Notably, all these grand openings were supported by marketing and in-store activations that drew thousands of customers on opening day. The strong positive reception to Five Below in these new markets strengthens the conviction we have for the significant growth ahead of us. The results in the quarter again exceeded our expectations and we were very excited to see broad-based growth across merchandising departments and our entire network of stores. This growth is the result of maniacally executing our customer-centric strategy, which is supported by 3 core pillars. The first pillar is a sharpened focus on the customer, the kid, and for us, this means understanding the trends, life stages and how to influence Gen Alpha, Gen Z and Millennials. We deepened our understanding of what our customer wants, how we can build connections with them and ultimately, how they shop our stores. This relationship with the customer is our true north and underpins our merchandising, marketing and store operations approach.

The second pillar is delivering a connected customer journey, acknowledging that awareness begins on digital channels and social media and ends with an amazing in-store experience. By curating compelling stories in social that lead our customers to pre-shop on our website, culminating in a trip to our stores. The customer should see our big ideas come to life with a consistent look and feel.

The third pillar is coordinated cross-functional execution in our go-to-market for our 6 Curtnet moments from New Year's and Valentine's to holiday. The way we work has fundamentally changed as the team aligns earlier, resulting in the full engagement of our 1,900-plus store managers prior to launch on merchandising, marketing and the critical flow of newness to our stores. Underpinning these pillars is a mindset of operating with urgency and discipline as we saw in our tariff mitigation efforts earlier in the year while also remaining relentless in our focus on efficiency. We now operate with an approach of test, learn and ramp to quickly introduce new products, price points and processes.

Test, learning ramp ensures that our bias towards action is also informed by insights and analysis. To achieve our results, the crew across Five Below pulled together as a unit, a true team who shared one focus, the customer, our boss. I'm incredibly grateful for our team's passion, grit and all-in engagement on working cross-functionally in service of our customers. Their hard work and commitment delivered these results. Thank you, Five Below crew.

In Q3, our customer-centric strategy allowed us to deliver a sharpened value proposition. Our merchandising teams were unleashed to deliver a continuous flow of newness across product categories. We weren't reliant on a single trend as the majority of our departments comped positive. Also, we took a disciplined approach to curation and managing the breadth and depth of our buys, resulting in better in-stocks for our big ideas throughout the season, like Halloween decor. With the focus on big ideas such as Hero license programs, the merchandising teams coordinated to deliver unified statements like Wicked, which incorporates products from nearly every merchandising category. Also, our merchandising teams are relentlessly focused on value and simplifying our pricing.

Today, value is not just about $5 and below. But ensuring we pack value into $7, $10 and $15 plus items. We are able to incorporate these multiple price points throughout the departments in the store to simplify the shopping experience. and our customers have responded well. This change allowed us to span the Five Beyond area and leverage this space to drive seasonal business. For example, we featured the last gas to summer in that area with back-to-school in the front when we kicked off the quarter. The newness and curated product stories that our teams merchandise were amplified by more effective marketing as we shifted our marketing channels and content to be more relevant for our target customers.

We increased our investment in social media, moving spend away from traditional channels, resulting in traffic growth, both online and in our stores. We also changed our content development strategy from studio produced to creator produce, engaging social influencers and amplifying user-generated content. We also renewed our creative online and in stores to deliver a single campaign with a distinct brand right look and feel.

The third quarter results are a real testament to our store crew. Who have embraced the mantra that the customer is our boss. The stores are where customer experiences come to life. We improved the store experience in several ways, namely better collaboration with our store teams, garnering better feedback from customers, simplifying operations and investing in labor to ensure our shelves are stocked, enabling the product stories to come to life. The execution of our strategy accelerated from Q2 to Q3. This flywheel effect is evidenced in our sales results, which were driven by growth in transactions and ticket. We packed the quarter with 2 big curtain moments Back-to-school and Halloween. We flowed newness throughout the store with a focus on ideas we're able to test and ramp.

Again, the key to our execution is the way we work cross-functionally with tight coordination between merchandising, supply chain distribution, marketing and stores. This type coordination also made the difference in our growth by new stores. Our 2025 fleet is exceeding expectations as we worked as a close-knit team for the ultimate curtain up, a store brand opening. We invested in grand opening marketing and activations in stores that were fully merchandise and crews who are well staffed and better trained. Looking ahead, the strong performance over the previous 3 quarters serves as a valuable proof point that our customer-centric strategies are starting to work.

As we prepare for the holidays, we will continue to surprise and delight our customers with unbelievable deals for decor, gifts and stocking stuffers, from gingerbread houses and advent calendars to an army of large nutcrackers, beauty bundles, toys and candy. Our performance is a testament that our unique place in retail of being the destination for the kid and the kid and all of us is a compelling, sustainable value proposition. While we are at the early stages of our journey, our progress to date is clear. And the team and I are highly committed to and extremely excited for the growth that lies ahead for our business.

With that, I will turn it over to Dan to discuss more details about our results and updated outlook for the fourth quarter and year. Take it away, Dan.

Thanks, Winnie, and good afternoon, everyone. I'm thrilled to join the Five Below team and excited to contribute to its continued success. I look forward to working with everyone on this call as well as our investor community. I'll begin my remarks with a review of our third quarter 2025 results and then discuss our outlook for the fourth quarter and full year. My comments will refer to results on an adjusted GAAP basis. As Winnie mentioned, we were very pleased with our third quarter performance, which exceeded our expectations for both the top and bottom line.

In the quarter, we saw accelerated comparable sales growth that was driven fairly equally by transaction and ticket gains. Importantly, the improving effectiveness of our marketing spend was evidenced in our traffic gains, which accelerated as we exited the quarter. Operational execution across our stores and distribution centers was also strong. And we saw the benefit of better inventory flow and improved in-stock positions on shelf. We allocated additional labor, both in support of the stronger growth and as a part of our preholiday preparations. We also saw a solid improvement in shrink results from our August counts, reflecting the initial benefits from our broader mitigation initiatives. The heightened sales growth converted well, delivering 110 basis points of adjusted operating income margin gains and 62% adjusted earnings per share growth year-over-year.

Now turning to the results for the quarter. Net sales increased 23% to just over $1 billion, underpinned by a strong comparable sales increase of over 14%. We were pleased to see this growth was led equally by increases in both comparable transactions and comparable tickets. In the quarter, we successfully drove more traffic to our stores, which led to better-than-expected transaction growth. Comparable ticket growth was fueled by AUR gains, reflecting the successful execution of our rounded hole price strategy. While also curating great value above $5 as we move these items in line with their departments.

Our comparable sales growth was widespread. Across most departments, new and retained customers and all household income cohorts. Our new store performance was equally compelling, with productivity levels in the mid-80s, which was in line with our expectations. We opened 49 net new stores across 26 states compared to 82 new stores in the third quarter last year. Year-over-year, we grew our store count by 9% and ended the quarter with just over 1,900 stores. As our performance in Arkansas and even more recently in the Pacific Northwest of firms, we remain bullish about the growth opportunities that lie ahead. Adjusted gross profit increased 26% to $352 million or 33.9% in rate of sale, an increase of approximately 70 basis points compared to the third quarter last year. Adjusted gross margin accretion was driven primarily by fixed cost leverage and improved shrink results that were partially offset by the net impact of unmitigated tariffs. Adjusted SG&A expenses totaled $307 million in Q3 or 29.5% of sales, which represented a 40 basis point decrease compared to last year's third quarter.

This was driven by fixed cost leverage on the strong comp sales, partially offset by higher incentive costs. Adjusted operating income grew over 63% in the third quarter to $45 million versus $28 million in the third quarter last year, and adjusted operating margin increased approximately 110 basis points to 4.3%. Net interest income was about $6 million for the third quarter or approximately $3 million above last year, due mostly to a higher average cash balance throughout the quarter. Adjusted net income was $38 million and adjusted earnings per share was $0.68, and both grew 62% year-over-year.

We ended the third quarter in a strong cash position with approximately $536 million in cash, cash equivalents and investments. Inventory was approximately $1.1 billion and average inventory on a per store basis increased nearly 25% versus the third quarter last year as we had expected. This increase was primarily due to our strategic decision to accelerate receipts in response to the global trade environment. We're very pleased with our inventory position as we head into the holiday season, and we expect that the growth in our average inventory per store will begin to moderate by the end of the fiscal year.

Now turning to our outlook. Based on our strong performance to date, we are increasing our outlook for the fourth quarter and full year. We now expect total sales in the range of $1.58 billion to $1.61 billion or growth of 14.7% at the midpoint versus last year's fourth quarter. Comparable sales are expected to increase between 6% and 8%. While it's early, we are pleased with the start to the holiday season, underpinned by Black Friday weekend sales that were in line with our expectations. Adjusted operating margin at the midpoint is expected to be 15.8%, inclusive of higher incentive costs and unmitigated tariff costs. We have not changed our assumptions for shrink associated with the results of the January physical inventory counts. Net interest income is expected to be approximately $5 million. Assuming an effective tax rate of about 26% at the respective midpoints, we expect adjusted net income to be $192 million and adjusted diluted earnings per share to be $3.45 and on 55.6 million diluted shares outstanding. As a reminder, this does not include the impact of share repurchases, if any.

For the full year, sales are now expected to be in the range of $4.62 billion to $4.65 billion, with a comparable sales increase of 9.4% to 10.1%. On a 2-year stack basis, this represents an approximate 7% comparable sales growth at the midpoint. Adjusted operating margin is expected to be approximately 8.9% at the midpoint. Net interest income is now expected to be approximately $22 million. With a 26% effective tax rate, adjusted diluted earnings per share for fiscal 2025 is now expected to be $5.80 at the midpoint. Representing growth of 15%. Capital expenditures, excluding the impact of tenant allowances, is expected to be approximately $200 million, which reflects 150 net new store openings and continued investments in systems and infrastructure. We're proud of the work the team has done over the past year to drive meaningful year-over-year top and bottom line growth and a much improved outlook for fiscal 2025 versus the beginning of the year. As we head into the critical holiday season, we are confident in our ability to execute our customer-centric strategy and continue to deliver growth in the years to come.

And with that, I'll turn the call back over to the operator to start the Q&A session.

[Operator Instructions] And our first question for today will come from Chuck Grom with Gordon Haskett.

Congrats on a great quarter. Winnie, your sales per store are on track to hit about $2.4 million this year. That's getting you back to 2021 levels. Can you remind us how your best stores performed today on sales productivity and what opportunities you see to drive sales even higher in the coming years?

Chuck, thank you so much. We are very excited to see our average store productivity return to historic highs. And I think that for us, what's been exciting to see is that across our network of stores, we're actually seeing really great performance regardless of kind of age of store or type of store. And I would say that there's consistency in what we're seeing in terms of the broad-based growth and what's driving that growth within the stores. That broad-based growth is really being driven first by a focus on the customer. And with that focus on the customer comes a really great focus on what they want. And I think our assortments are geared towards younger customers, geared towards trends and again, I use the word assortment. It's not about a single item, but it goes across a broad range of categories and departments.

So we're excited for that. We finally have the ability to actually talk about it vis-a-vis marketing, and that's worked especially what we've planted within social media has driven traffic to the stores, and we've seen really nice traffic growth and growth both in new customers as well as retention. So that's been terrific. And then finally, I think that what's really worked in terms of growth is our expansion of the idea of what value looks like. We still curate a great assortment. It's roughly 80% of the assortments, $5 and below. But we took a lot of attention for those items that were above $5 and specifically packing a ton of value at $7, $10, $15. And we inserted those items in line and really disbanded the Five Beyond area. We're getting more productivity with the disbandonment of Five Beyond because we're able to offer more seasonal stories and other things are relevant to the customer. And we basically put the product in line with how they shop. So those are the real drivers of what's getting us to those great productivity levels.

Your next question will come from Matthew Boss with JPMorgan.

Congrats on a great quarter. So Winnie, could you speak to the monthly progression of comps over the course of the quarter? Maybe help bridge the upside drivers to the 14% comp relative to the 5% to 7% guidance initially. And then if you could elaborate on the start to the fourth quarter and if there's the potential for a similar scenario, meaning guidance for the fourth quarter implies a sequential moderation. Have you seen that yet? Is that embedded over the rest of the holiday season?

Thanks so much for that question, Matt. Dan is going to lean in here.

Thank you for the question. I'll start with where you ended, which is how we thought about the fourth quarter. Largely, over the course of the quarter, the monthly year-over-year growth is fairly consistent, if you think about it relative to our guide range and our midpoint. You don't see month-over-month spikes. A lot of that, obviously, is what we're cycling from a year ago, but it's a fairly consistent growth pattern. That's number one. I would say number two, and we talked about this in the opening remarks, we're really pleased with the start to the season. That start is essentially month of November and then obviously, Black Friday weekend. And again, from a pure performance basis relative to how we're thinking about the holiday we're pleased.

So we sit here today, certainly not chasing anything that didn't happen over the weekend and a pretty consistent month-over-month comp growth profile. If I go backwards to the start of your question on Q3, you would see actually a very -- very similar trend in terms of comp growth. And I think what excites us the most is that our performance, and I'll define that particularly as I think about traffic growth, actually strengthened as the quarter went on. So we exited the quarter with traffic growth month-over-month at the highest level we had seen. So all in all, we're in a really good place, and we think we've got a really good view on fourth quarter.

Next question will come from Edward Kelly with Wells Fargo.

Congratulations on a great quarter. Winnie, I wanted to start, your results have been phenomenal, obviously. And it obviously begs the question around how you're thinking about lapping all of this next year. I know you talked about the strength being broad-based, but could you call out maybe some of the bigger trends that you think have been helping results? How you think about -- how those trends roll into next year and any continued benefit that you might see? And then what's out there that you're excited about? And I guess what I'm really kind of trying to ask at the end of the day is, do you think you could comp the comp, even against some of these results next year?

Thanks so much, Ed. Thanks for the question. And I want to start actually with what we put in place this year, and we've seen with each quarter an acceleration of this flywheel effect, it really starts with customer focus. And with the customer focus, I think what we've done is really leaned into broader trends and ideas that resonate with Gen Alpha, Gen Z as well as Millennials. So that it's really leaning into lifestyle statements as opposed to a single item. That thought process in terms of how we merchandise and how we go after trends has lifted across our departments, and it's something we will continue to pursue. And I think the second piece is when with that focus on the customer is being highly aware of the fact that their journey with our product and with our product stories in digital and online through social.

And so how do we -- we just started doing this. We started to redirect our marketing spend away from traditional channels into social. And as we learn more, and as we generate more content, both from users as well as influencers and align earlier between merchandising and marketing, we think we've seen this beautiful flywheel effect that has driven traffic to stores. As well as introduction to new customers. And so those 2 pieces is a 1 plus 1 equals 3. And I think next year, how much more can we do on that customer-connected journey, we haven't touched on one. We're really just beginning. And on marketing even getting down to the individual, we've just begun to capture customer records. And so we haven't really in earnest done anything in marketing in terms of reaching out one-to-one or personalization, much less really directing even, hey, new product launches.

You bought beauty last year, here something else that's happening. So those are the types of things that we have we're seeding for next year and that we've begun this year. And then I will finally say that the customers has given us license to play in price points beyond $5. And this was a concerted effort to move items above $5 back in line in their departments. And we really wanted to test and see what the receptivity would be, and it's been very good. We're excited about this. And as long as the team stays focused on relative value and packing a ton of value within the products that are above $5, $7, $10, $15. We think that there is a lot more we can do there in terms of customer giving us permission to really do more outside of the price bands we traditionally have played in. Thank you so much, Ed.

The next question will come from Michael Lasser with UBS.

Is there any scenario where you would start off the year next year guiding to a negative comp. And even if you started out the year thinking your comp was going to be flat given the performance this year, what would be the puts and takes of the model, especially as you anniversary and have to incorporate things like tariff off in the first half of next year? Is there a framework you can give us as we try and calibrate our models for 2026?

Michael, it's Dan. Thanks for the question. Look, it's obviously at this stage, premature to get ahead of ourselves for next year, let alone on a quarterly basis. But I totally appreciate your question. I would say a couple of things. One is just the principle at which we are operating this business, which is with a clear growth orientation. And I think you've heard in the prepared remarks and in Winnie's answers, the underlying drivers of that. Secondly, Winnie talked a lot about the importance of what this price action has signaled to us in terms of responsive customer, we also have to remember, we don't lap the price increase until half 2 of next year. So mechanically, that's going to be a tailwind for us for most of the first half of the year.

So look, we'll have a lot more to say about the business when we get to March and really talk in detail about next year. But I think where we sit today is confident in our ability to grow on top of growth. And you're right, we will navigate a tariff headwind as well in the first half, there's a lot of puts and takes that we're going to have to face into when we build the plan and and ultimately share the details. But I certainly want to emphasize the growth orientation we have and ultimately, the operating profit leverage that we expect that growth to deliver. And again, we'll have more to say on that in March.

Your next question will come from Simeon Gutman with Morgan Stanley.

This is Lauren on for Simon. A question on traffic versus get you said you mentioned they were fairly equal for the third quarter. Can you share if the strength was driven by maybe new customers versus returning customers?

So actually, the growth was equal between transactions and ticket. And one of the drivers of transaction certainly was traffic growth. And we saw growth about equal between the new customers and our ability to retain customers and bring them back. So -- and we've seen that pattern actually in the last 2 quarters pretty consistently. And then beyond that, of course, I think that we've been really excited with the tickets increasing specifically with customers accepting price and really shopping across the range of price. It's been terrific to see that and not limiting themselves just items at $5 and below.

Next question will come from Kate McShane with Goldman Sachs.

We wanted to ask a little bit more about licensing. It's very clear that licensing has a much bigger presence in the store across all different price points. And we just wondered if there was a way to quantify how much that's been integrated into the assortment, if it's attracting a different customer? And if any of these products are -- or how many of these products are exclusive to Five Below?

Thanks so much, Kate. Licensing has always played a really critical role in terms of adding not just a branded element, but something really special that the customer looks for within Five Below. I will say that what is different about how we approach licensing is looking at how we collaborate with licensees and bring full assortments across multiple types of product. So a good example of this is Wicked and the fact that you can find everything from beauty products to ready-to-wear products within the same assortment. And so this takes kind of working all the way back to the team at Wicked and Universal and thinking through with them how do we bring the story to life.

That's an approach, this collaborative approach that I think is going to be meaningful to us on a go-forward basis. And so for us, it's constantly monitoring, what new releases, especially with films and with shows are coming out. And then staying very, very close to other trend ideas and things that are happening out there. And I'm just -- the one thing I can say about my team is they get trend, they live on trend, and we now are kind of orchestrating all of that energy into single statements. Thank you so much, Kate.

Next question will come from John Heinbockel with Guggenheim.

Winnie, 2 things. Can you talk about sort of your product priorities over the next year, right? I know product development has been a key one. And then secondly, right, are you now finding vendors who -- or is there a big opportunity vendors who would not have sold to you before, either because now you've got brand awareness or scale and are now sourcing that product?

Thank you so much, John. So I'll start with your first question around product priorities. I am super excited to have Michelle Israel, to join the team, and I think that it's going to be wonderful to get a new perspective with an amazing team that I said lives and brief trend and has really, really close historical relationships with our vendors to kind of bring the best up to market. I think on a go-forward basis, our duty as merchants is really leaning into the broader lifestyle trends that we see out there and not getting caught being too reliant on a single item. And that really has been one of the underlying success factors of the quarter and will certainly be something that we want to pursue on a go-forward basis.

We also think there are new opportunities and new ideas that frankly, we house them currently, but we don't do a lot to distort them ideas like party and celebration. And so we're always looking for how better can we serve the customer and their needs. And with that as our beginning point, we're constantly curious about what's out there and what more we can do. And a good example, just this past quarter was lounge. It was a small idea that we distorted and it certainly has taken off. In terms of vendors, we are seeing -- like I've mentioned before, we've got some great relationships but we're definitely seeing more vendors come to the table with greater brand recognition and our ability to really do a 360 marketing effect so that we can play up new ideas. And it's not just about putting the product on the shelf, but it's great in-store displays. And it really works back from how we tell the story in digital and social and working in partnership with them. So we're really pleased with some of our new vendor introductions like LEGO and also, again, working more closely with licensed product. And so it's a journey, but there's a lot more to come. Thank you for your question, John.

The next question will come from Zhihan Ma with Bernstein.

So first on near-term question, just on Q4, can you talk about the near-term trends you're seeing relative to the guidance? Is there still an element of conservatism in the Q4 guide? And secondly, longer term, if the current trend continues, right, if you manage to comp the comp next year and going forward. Does that change your view on the pace of new store openings from here?

Yes. Thank you for the question. Look, no, I wouldn't say there's conservatism in the guide. I think what we've tried to -- to do here is be thoughtful. And what we're balancing is 2 distinct forces, right? A business with clear momentum that exited the third quarter with a pronounced growth profile to it. But we all know that the holidays are just different. The size and scale and magnitude of the business, the time period upon which it happens, the competitive lens, which this all needs to be viewed through and a bit of uncertainty around the ultimate consumer and where they are at as well and where will they be across the holiday.

So there's always going to be clear puts and takes within a guide, hence the range, but I wouldn't want to categorize anything at this point as conservative. We've tried to be really thoughtful. In terms of the new store growth plan for this business. I think what you're seeing right now is what really good execution looks like. And it's not about how many stores can we open. It's about how many great stores can we open. And when you see the results that we described in this quarter, particularly in the Pacific Northwest, which was just staggering what really, really good execution looks like and how the customer responds. That's what we're going after. We think that number is [ 150 ]. That's the number today could change, of course, but ultimately, we want to be great at launching new stores, and that's going to dictate the pace.

Your next question will come from Scott Ciccarelli with Truist.

One question and hopefully, one clarification. First, can you provide more details or maybe some examples around the marketing changes you've made? Because it sounds like there is a real step function change on that front. And then secondly, just one more question about the 4Q comp cadence you are not expecting much monthly volatility in your comp guide. Does that mean November was in that 6% to 8% range?

I'll take the second question, Scot, and then I'll hand it to Winnie on the marketing. The short answer is yes. The month in the holiday have lined up to where we would have expected them to be going into now the second half of the holiday season in line with our guide.

And then in terms of the marketing change, Scot, what we've done is actually redirect the spend into channels that we think are most relevant with young customers. And so while we were doing social, for instance, before, we've distorted the spend in social and really gone after better curated storytelling in conjunction with our merchandising team. So it's really merchandising and marketing working in unison. And so that has actually been terrific. We also tested a catalog for Q4 a toy catalog, which we're super excited about. It went to our best customers. And again, this is about marketing mix and evaluating what works, what resonates and getting the best possible [ ROAS ], and we're doing all those things currently. Thank you, Scott.

Your next question will come from Spencer Hanus with Wolf Research.

You mentioned the traffic accelerated as you exited the quarter. Can you just talk about what is driving that? And then in terms of elasticities from the price increases you've taken, have you seen any change in sort of the customer response to that? .

Yes. So I'll take the traffic question. So we have seen really great acceleration of traffic, and it is -- we started this journey with moving marketing spend into social and into digital, and it really was starting in Q2. And as we saw the results in the ROAS and actually a traffic increase week in, week out, we continue to pulse that. And that's really what we believe has driven the traffic. And it's not just about the level of spend but it really is about the content and generating good, good content. So we went from more studio produced content to creator content and again, seeing really great results. We also really pay attention to what's happening in social and user-generated content and play into things that consumers are excited about, like the rainbow challenge and leaning into this. So it's really trying to speak to Gen Alfa and Gen Z and Millennials in the most effective way.

And then to the second part of your question on unit performance over the quarter, we didn't see any real trends from what we saw in Q2. So said another way, the consumer response, the unit degradation, it remains well above what we had originally modeled, which is super encouraging for us and no material change from the second quarter.

And I will say the only difference in terms of what we saw was -- we did make the move this quarter in terms of inserting items that were above $5 in line and saw a good response to that as well.

Next question will come from Paul Lejuez with Citi.

Can you quantify the performance in products that are priced above $%, just curious about the year-over-year change. And then I think you mentioned that the majority of the departments comp positive with such a strong comp for the quarter. I was kind of surprised to hear that. So curious what was not comping positive? And then last, just curious how you're thinking about traffic versus ticket for the fourth quarter within that comp guidance?

Yes. So I'll -- let me try to unpack it from where you ended. In the fourth quarter, we essentially expect current to continue. It will be a ticket-driven growth profile as a headline, I would say that first. I think transactions, though, will provide growth in the quarter, but it will be ticket led. And we've essentially contemplated a very similar trend is what I spoke about earlier. In terms of what drives the ticket and overall unit performance. So I'll start with that. Winnie, did you want to?

No, I was just going to respond to the point in terms of what didn't comp. So we had less than a handful of departments that didn't comp. And these were, in large part, intentional in terms of we were seeing that the resonance of these particular departments were down trending. And so we intentionally said, "You know what, we're going to go ahead and comp them down so that we can put the dollars into things that really work. The other piece of it was we were hit in certain areas by tariffs and where we couldn't source product that we thought had the right price value equation. And again, that landscape continues to change with the global trade environment and how it changes.

Next question will come from Michael Montani with Evercore ISI.

I just wanted to ask a 2 parter. First, if you could just unpack a little bit in the third quarter, the dynamics with shrink. We thought there could have been some upside to the reserve there. It doesn't sound like that happened. And then also SG&A in the quarter, we thought there might have been a bit more leverage, given the strong comp? And then for 4Q, for correct, it looks like 240 bps of EBIT margin contraction at the midpoint. And I think maybe tariffs could be 200 bps of that. But just wanted to see if there's any offset there from leverage, given the [ 7% ] comp is well above 3% that we think you'd need to lever?

Yes. Let me take them in order. So in terms of shrink, Mike, we did have a pickup in the third quarter. It was about 70 basis points of a tailwind in the quarter. which we're super encouraged by. That is a great initial indicator that a tremendous amount of energy and focus and effort of this organization -- bear some fruit in the quarter. It's early. Shrink is a challenge, of course. And we're going to stay on it, but we were really encouraged to see that performance. It was about 2/3 of our fleet that was counted in the quarter, and we'll hit the other [ 1/3 ] in January. So encouraged by that. In terms of the fourth quarter, look, I think we have to go back and sort of remind ourselves what was our initial view of the quarter. What we had initially profiled was low single-digit growth and with that low single-digit growth, about 320 basis points of year-over-year operating margin declines.

That was our initial view. We've updated that view now. We're calling for mid-single-digit growth and about, you're right, 240 basis points of year-over-year decline. So the 2 drivers of the decline are not news, of course, right? It's the higher incentive costs, which got higher in the fourth quarter. That's what that third quarter comp will do for you. And the tariff headwinds year-over-year, it's actually got a little bit better. So the way I would think about the fourth quarter is the year-over-year headwinds are not new. It's something we've -- we've certainly been transparent and talked about. We're now delivering about $70 million of incremental sales, and that $70 million is flowing through in the mid-30%, which we think is a really good number for us. So I'll leave it there, thanks.

Next question will come from Jeremy Hamblin with Craig-Hallum Capital Group.

And I'll add my congratulations on the impressive results. Just want to come back here to the gross margins a little bit. So I think the 33.9% adjusted gross margins, maybe the best the company has ever had in a Q3 70 basis points year-over-year. I think you'd come into the quarter expecting a 160 basis point impact from tariffs. Just trying to understand, as we look forward and think about the implications here, and some drag for Q4, but the change we've also had change in tariff policy as it relates to China, and I think about 10 percentage points there of change. As we look ahead, has the gross margin outlook gotten a little bit better? And then just in terms of what's kind of gone on here in Q3 and record gross margins, just trying to understand that a little bit, given you haven't had kind of a pickup yet on the shrink accrual rates?

Yes. Great. Thank you for the question. I appreciate that. Look, let me start with the tariff piece of it because you're right, based on the executive order signed in early November, there is a 10% reduction the reciprocal tariff, if you will. That does not affect our 2025 results because we're obviously already baked in terms of products and what will flow through in COGS. So there will be no tailwind from that. I think your point is fair, though, on the margin profile itself. And I think what I would say is in both the third and the fourth quarter, the tariff headwinds, while meaningful year-over-year, we're a bit lower than what we had profiled and I think that speaks to the amazing work the team has done in attacking this topic both through the cost lever and through the strategic price discussion that Winnie mentioned.

And so we're really pleased with that. The overall tariff headwind is looking smaller than what we had profiled most recently let alone initially in the year. So you've got a lot of puts and takes happening in the margin profile. I think ultimately, what you saw in the third quarter is the shrink benefit run through. That's your 70 basis points of year-over-year gains. I think everything else leverage and some of these headwinds was a push. We don't have any shrink assumptions baked into our fourth quarter preview. So you're not seeing any pickup there nor are you seeing any headwinds. So that's the margin story. Hopefully, that's answered your question. Thank you.

The next question will come from Anthony Chukumba with Loop Capital Markets.

Congrats on a very, very strong quarter. I guess my question, so you said that the comp was roughly split between traffic and ticket, and maybe this is a difficult to parse on the ticket side. But how much of that was your price adjustments as opposed to maybe just like a mix shift to some of your higher-priced items, particularly the above $5 items?

So Anthony, thanks for your question. So yes, the pickup was in our comps was attributed to both increase in transactions and ticket that were about equal. On the ticket front, I should kind of unpack a little bit what we're seeing. We are seeing higher AURs and it's being driven by a mix of different factors. One is we did have a strategic pricing strategy that rounded up and down the simplification of price. Actually, we were able to maintain through that the same level of product that was being offered at [ $5 ] and below from the same quarter last year. So there was no change there. However, the receptivity at the [ $5 ] and above, we saw really nice momentum and growth. double-digit growth in terms of the pickup there. And it's thus leading to our higher AUR. And when you look at that, it really is coming from one smart decisions about where we did price up, packing enough value to the relative value of the items were really great.

And then secondly, again, putting those items in line. So if you're in the room department and you're shopping for pillows, you might see a $35 mirror. And by putting that in line as opposed to putting it in by beyond area in the back of store, the customer definitely responded better. And so those are some of the kind of strategic actions that we took and the customer voted for growth in those [ $5 ] and above items. I hope that answers your question.

The next question will come from Joe Feldman with Telsey Advisory Group.

I wanted to ask with -- where do you see opportunities in the merchandise mix? Like I'm curious now with the new Chief Merchant, Michelle Israel, coming in, what her initial feedback might be, like where there are some opportunities to lean in more, maybe pull back. If you could share any color on that would help?

Thank you so much, Joe. And we're excited to have Michelle on board. She started in October, so early days. And I think what's really exciting is the fact that the team, the merchandising team that we have here who are working with Michelle are really just experts in pros. They're amazing. And I think what we did with that team is something that Michelle will continue which is to unleash their energy and their excitement over chasing down the best trends in the market and the best value for money that they can find. And again, focus on that kid. And so early days in terms of where we'll take the assortment on a go-forward basis, but there are always opportunities within the current assortment that we've got in terms of levels of product looking at the depth of buys and refining that.

But we're just excited to see that the customer is again responding to so much of the assortment, and we really have taken much more of a broad-based approach as opposed to trying to hang our hat on one thing and a wide range of prices and value. And so we're going to continue to push the envelope on all those fronts. And the last piece I will say is the team has done a great job of bringing newness into the assortment in a disciplined fashion. And that constant flow of newness is what customers want. Thank you so much.

The next question will come from David Bellinger with Mizuho.

Thanks. Really nice results. I got the toy catalog by the way. So it says a lot about where my kids are spending our money. Another question on the branded items. You've seen much more of that in the stores lately, LEGO, Legal Stitch, SpongeBob. As you get more into those -- how do you think about the competitive forces, especially as you break above the $5 price point, so in $10, $15 items, can you start moving into this area where a Walmart or a Target does very well. So -- how do you plan to keep your edge versus those larger value-oriented players?

Thanks so much, David, and thank you for being a loyal customer. Thank your kids for that. branded items have always been part of the mix. I think what I'm really amazed by is the discipline with which our teams look at price value and relative value. And so for us, that is achieved through a lot of exclusives and working very, very closely with the vendors. And being very precise about if it's a LEGO, if it's a stitch, what do our customers want? What do they respond to? And then again, it's bringing a presentation together so that it's not just another item on a shelf, but really, there's a WOW statement. And we've been working very closely with the vendors to bring together visual merchandising, marketing, visual marketing in the stores that create presentations and ranges. So that approach, I think, is kind of our special sauce, and it really goes back to value and how to get that relative value and be the best value in the marketplace.

Next question will come from Seth Sigman with Barclays.

I wanted to ask about the trends that you're seeing throughout the quarter in terms of seasonal events versus just everyday business. Maybe help us understand the growth that you're seeing across through those different types of periods. And then I also just wanted to clarify on the quarter-to-date commentary. I think I heard a comment that traffic accelerated exiting the quarter, but then you also said quarter-to-date is in line with the comps range, the guidance for the fourth quarter, which would be a deceleration. So I think investors are just trying to reconcile that?

Seth, thanks for the question. I'll start, and then I'll hand it to Winnie. Two distinct comments, and I apologize if it was unclear. So what we were saying was the traffic performance across Q3 built month-over-month. We exited the quarter with traffic growth that had accelerated, and it was our biggest month-over-month traffic gain that we had seen. I was not making that comment about the holiday -- the fourth quarter that we're in, what I was saying with respect to the fourth quarter was now one month in and with Black Friday and Black Friday weekend behind us, I was answering the question that our performance is in line with our expectation and in fact, in line with how we had contemplated the guide. So hopefully, that clears that up. Winnie?

So trends in terms of seasonal events versus everyday business, we have these 6 current moments that really celebrate these moments in the customers' life, but we take advantage of those current net moments to really drive newness throughout the assortments. And so for us, it's less episodic about seasonal events and activations and much more about the everyday business. We know looking forward to the fourth quarter that we're a destination for that last-minute gift and the last-minute stocking stuffer. So we do -- we're looking forward to that surge in the last couple of weeks before the holiday, which is kind of a pattern that we've been able to repeat. So looking forward to all of that, but it's the everyday business that really drives us. Hope that answers your question. Thank you, Seth.

Your next question will come from Brian Nagel with Oppenheimer.

Great quarter, congratulations. So I'll ask 2 really quick questions here. The first, just with respect to tariffs. As we're looking to results now, are the tariffs or at least the tariffs that are now known are those fully reflected in what we're seeing in Transit Five Below? Then my second question, looking -- recognizing you've done a fantastic job of really repositioning a job, the business internally. But from an external standpoint, has there been any shift in the competitive environment that's helped to bolster results at Five Below Lily?

So I'll start with the tariff question. I want to make sure I understand it correctly. But look, our guide certainly contemplates further tariff pressures and headwinds in the fourth quarter. I think we put an original guide out that we expected that number to be about 225 basis points in the quarter. We think it will be slightly less than that now, going back to to the comments made earlier about the tremendous work the team has done to mitigate this. And of course, the great results we're seeing on receptivity to the price actions that we took. So it will be a bit less of a headwind. So it is contemplated in the quarter. I think as we're thinking about the future here, even in this operating environment, I would just remind everyone that while we have largely mitigated these tariff implications at the unit level, which is a tremendous result.

Some of the costs that we have incurred, are trapped in inventory obviously, and will release as we get into half one of next year. So we're not out of the tariff woods by any means, but it is fully reflected in both our actuals to date and in our fourth quarter outlook.

And then Brian, with regards to the external environment and the competitive environment, I think what has actually shifted is our approach. And we have redoubled our efforts to be a destination for kids. It is resonant in everything we do from product to marketing. And, I dare say there's not a player out there like us in retail that focuses on kids at great value. And I think that, that is a competitive differentiator that we're now shouting about, and we're telling the customers what we offer, and we're telling them in a way in which they listen. And so I think that's been a big shift for us, is adding that bit of marketing and doubling and doubling down on kids as our core.

Our next question will come from Phillip Blee with William Blair.

So it sounds like the improved inventory flow and in-stock levels has been a nice driver of some of the upside you've seen this year. How do you think about ways to further optimize inventory from here to keep that momentum rolling? And then should we be embedding some sort of more meaningful improvement in turns over the next year or so?

Thanks so much, Philip. We've been -- I'm really proud of the team in terms of what we've been able to do with inventory, especially in the back half of the year. Actually, throughout the year, the flow has gotten better and better. That's come through a lot of alignment between the teams, a live discussion about when we secure product and literally when does it land in the stores? And how is it going to land in the stores. And I think for us, there's always room for improvement. And we'll look at this even further. We are leveraging AI in terms of inventory management. But I think there's a lot more we could be doing even further upstream between merchandising and planning. And so that's part of, I think, what we're looking forward to with Michelle joining us is connecting all the dots along that journey. Thank you so much. And I think that was our last...

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Winnie Park for closing remarks. Please go ahead.

Thank you so much. We are really excited to bring the magic of Five Below home for the holidays. And I really believe that Five Below is the destination for the kid and the kit and all of us. We aspire to be the greatest little toy, candy and gift store in America this holiday. And we're also really proud to continue our partnership with Toys for Tots for the 16th year so that we can make holiday special for even more kids. I really want to thank all of you for your continued support. And we're looking forward to seeing all of you all in our stores and wish you and your family a wonderful holiday.

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

Good day, and welcome to the Five Below Second Quarter 2025 Earnings Conference Call. [Operator Instructions] 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 Investor 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 who 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 kid and the kid and 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 a 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 Redding, 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 the customer 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 source an amazing assortment of products, including licensed must-haves with exclusive collaborations like the Stitch Surf (sic) [ SurfStitch ] 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! products 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 hold 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're a go-to destination to help them celebrate, focused on 6 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 and 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 nonrecurring or noncash items as outlined in our earnings press release. Please refer to our earnings press release for GAAP results and all reconciliations.

Total sales in the second quarter of 2025 increased 23.7% to $1.27 billion from $830 million 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 2-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-80% range. Adjusted gross profit for the second quarter of 2025 was $343.3 million, an increase of 26% over the second quarter of 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 second quarter of 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 $55.1 million versus $37 million in the second quarter last year, and adjusted operating margin increased approximately 90 basis points to 5.4%.

Net interest income was $5.5 million 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 $44.8 million versus $29.7 million 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 approximately $670 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 approximately $800 million as compared to approximately $640 million 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 the third quarter of 2025, we expect total sales in the range of $950 million to $970 million or growth of 13.8% at the midpoint versus last year's third quarter. Comparable sales are expected to increase between 5% and 7% versus a positive 0.6% comp in the third quarter of last year, and 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 million 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 between $6.7 million and $13.2 million versus $23.3 million 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 the third quarter of 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 $4.44 billion to $4.52 billion 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 million, and the effective tax rate is expected to be approximately 26%. Adjusted diluted earnings per share is expected to be in the range of $4.76 to $5.16.

For fiscal 2025, gross capital expenditures, excluding the impact of tenant allowances, is expected to be approximately $210 million, 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?

[Operator Instructions] And the first question will come from Edward Kelly with Wells Fargo.

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 and excited about for the holiday season. And then, 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. But on the other hand, if you dig through sort of like comp sales per store or overall sales per store, I mean, the 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 in 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 leveraging 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 going to 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 backup store, and we're very pleased with what we're seeing with those results.

So I think that will be great. The last piece is messaging to the customers. We will be messaging and telegraphing what is landing, when it's landing so 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 from 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 there. And then 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.

The next question will come from Michael Lasser with UBS.

In the past, with Five Below has been comping up at this level, it was often driven by a particular product, rainbow looms, fidget spinners, sillybandz. 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 consumers' reaction to tariffs? And is the reaction 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 in the next few quarters or 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 6 out of the 8 worlds, the majority of our worlds. And we think that, that actually makes it 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 customer and the -- and 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 -- 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 to success this past quarter and clearly communicating that we've got an amazing assortment, the majority of which is at $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.

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, it's better execution. There's a lot of things you can put up on the wall. How do you boil it down 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 -- I'm 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, 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 and 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.

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?

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 (sic) [ SurfStitch ] 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.

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 going to do this as a 2-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 the criteria to take -- 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 the 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.

The next question will come from Seth Sigman with Barclays.

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 was a 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 could give us any more perspective on how to think about the ramp in AUR through the rest of the year, that would be helpful.

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 little changes in cost mitigation because we had made estimates before, and now we've got some better numbers. So that kind of 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 is an important one because our assortments 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 to 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.

The next question will come from Scot Ciccarelli with Truist Securities.

This is [ Shervin ] on for Scot. Just a couple here. Kind of on a topic from like where this momentum is coming from, various discretionary retailers like Temu were negatively impacted by the elimination of the de minimis exemption with data pointing to roughly 35% drops around the time of the 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 was 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.

Thanks for your question, Scott. In terms of Temu, certainly, there was probably some impact in terms of Temu and de minimis loop pool 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 is going to talk to you about gross margins.

Yes. 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 I think 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 result of the price adjustment we made and the lower unit degradation that we've seen versus our expectations.

The next question will come from Matthew Boss with JPMorgan.

Congrats on a great quarter. 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 5% to 7% third quarter 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, I 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 is 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 anniversary-ing or things like that. But overall, we feel really good about where the business is and feel that guide is appropriate.

The next question will come from Randy Konik with Jefferies.

I guess, Ken, for you. Can you just give us or remind us around the topic of shrink, where are we at with that topic, the strategies that have taken place, when is 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 of how you're thinking about sourcing strategies into '26? How are you kind of thinking about the supply chain given all the moving pieces out there? How should we be thinking about what you're going to -- those different strategies are going to take next year that are 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 accounts throughout the chain. It's actually one of the reasons why labor is slightly up in Q3 because we 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 going to take going forward to help us manage shrink. The results are -- we're right in the middle of those now, right? You take the accounts 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 Winnie, 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 next year. But as you know, we've done a pretty good job historically around this. And I think we're going to 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 planning and application 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 a somewhat volatile situation.

With regards to 2026 in sourcing, the other key in this that we started in '25 and is no different for 2026 is continually diversifying our source base 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.

Your next question will come from David Bellinger with Mizuho.

Really incredible quarter, nice flow-through as well. Just if 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 2 underperforming worlds across the business. And is there a potential to recover those sales? Are there things on the table like party or balloons or some categories that we can look for as a preview into 2026 of just how we keep this momentum going?

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 sight 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 of comping the comp, but now they're also, I think, have really -- the merchant team is 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 0 to hero. So we've got more business opportunity. We certainly, I think, have more business opportunity in terms of 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.

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. I 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 and the simplification that you're doing. So it sounds like you've moved away from $3.50 price points to $3 or $4 and so on and so forth. But also, you haven't heard as much about Five Beyond and kind of the upper end price points. So I 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 guiding previously. And you're right, we had estimated about 50 basis points of deleverage in incentive compensation, pretty much down in the SG&A area. And that's up about 20 basis points to about 70 basis points of deleverage for the year.

And then with regards to Five Beyond, Jeremy, we are still -- we still believe in Five Beyond. However, instead of isolating the product in the back of the 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. One of the statements we make is dorm decor. And while in the past, you had mirrors that were $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 to because I think 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 all the way up. And again, 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.

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 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 want to make a very clear shopping experience, but that flexibility and agility will help us in terms of not buying to fill a space, but really buying 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 and 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 like make it happen, be it a Netflix movie premiere, whatever is happening in the cultural guys, 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.

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

Winnie, I wanted to follow up on maybe a couple of different questions and ask it a different way. When I think of you joining the company after Tom 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 maybe couldn't focus on in the past?

For example, 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 at 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 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 and as a first team. What is critical, though, is kind of our core tenets of product, value and experience and going back to those core tenets and making sure that we don't lose sight of that is part of the discipline that Tom brought in, but 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, Brad.

Your next question will come from Anthony Chukumba with Loop Capital Markets.

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 seller, and that leads into my question. Three words, KPop Demon Hunters. How big of an opportunity is that for you? Halloween, Christmas, could this be as big as Frozen was for you?

So Anthony, who knew KPop Demon Hunters would be as explosive as it is. It's amazing. The teams are all over it. But right now, product -- I don't think even Netflix realized how big it was going to be. So we are trying to go after it in the ways 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 could 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 KPop Demon Hunters, how do we continue to follow the through line of that trend. So we have been talking about the influence of Asia, Korea, Japan and all the goodness that comes from that. Thank you for your question, and I hope you watch the movie.

The next question will come from Philip Blee with William Blair.

Congrats on a great quarter. So it seems like the investments and optimization of store 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?

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

Yes. To Winnie's point, Phillip, 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 lap 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 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 low price points and you also have a benefit from a signage standpoint.

So on a year-over-year basis from store labor and the impact to the financials, that will 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. But it's really the bigger side of the -- the other side of the equation there where we're going to look, to your point, continue to increase the efficiency there so we can repurpose hours into more customer-facing activities. Thanks Phillip.

Thanks Phillip.

The next question will come from Joe Feldman with Telsey Advisory Group.

Congrats on the quarter. I did want to go back to this comp -- position of the comp. And I 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 weighting the comp or if it will move more towards ticket. And again, it 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, it's normally been transactions that drive the comps, especially higher comps. And obviously, we saw that in Q2, and I think we also saw it back in Q1. If you look at our guide and our assumptions going forward, again, historically, 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.

The next question will come from Brian Nagel with Oppenheimer.

Congratulations. The question I want to ask, I guess, is maybe more qualitative just with regard to tariffs. I mean, clearly, Five Below has been managing tariffs and a lot other aspects of the business really well. The tariff environment remains [indiscernible]. But the question as you're looking forward, are there still significant risks with tariffs as you see them now? And what would those be?

And then should we interpret the guidance and the communication to suggest that the mitigation efforts of Five Below will -- the tariff mitigation will just evolve and take place over time?

So Brian, I think that tariffs is a reality and has certainly been baked into our forward outlook. I think that the key piece of this is the reaction to the tariffs 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.

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.

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

Just had 2 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 I just 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 bps headwind in 4Q? And how would you compartmentalize some of the offsets to tariffs? In the past, I think it was about 1/3, 1/3, 1/3 for the 2017 one. So how would you kind of characterize it this time?

Okay. Thanks, Michael. Relative to Q4, we are assuming about a -- 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 the fourth quarter overall remain unchanged for us. And the other pieces that are going on there, again, we 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 because, again, there really hasn't been a change in how we look at Q4.

We're going to have a little bit of fixed cost deleverage because it's going to be on a lower comp. So those are really your components. And of that full operating margin deleverage in Q4, you got about 70% of that up in gross margin and the other 30% deleverage on that 320 basis points down in SG&A.

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 $1 billion quarter outside of a Q4.

I want to reiterate that Five Below really is -- we aspire to be the destination for the kid and the kid and all of us, and 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 you all to experience Halloween followed by an amazing gifting season with holiday with Five Below. Thank you all so much.

Thanks, everybody.

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

Good day, and welcome to the Five Below First Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Christiane Pelz, Vice President of Investor Relations. Please go ahead.

Thank you, Drew. Good afternoon, everyone, and thanks for joining us today for Five Below's First Quarter 2025 Financial Results Conference Call. On today's call are Winnie Park, CEO and Kristy Chipman, Chief Financial Officer and Treasurer; and Ken Bull, Chief Operating Officer.

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 Investor Relations page of our website at fivebelow.com. I will now turn the call over to Winnie.

Thank you so much, Christiana. Hello, and thank you for joining us. As we announced last month, we had a strong first quarter with financial results that exceeded our expectations. I'm incredibly proud of the Five Below team for driving these results with a maniacal focus on delivering a great customer experience grounded in fun and extreme value. We remain committed to putting our customers first with a focus on product, value and store experience in order to achieve our vision to be the destination for the kid and the kid in all of us. We are the cool store for kids and the [ yes store ] for parents. What differentiated this past quarter was our heightened focus on the customer and working as a tight knit multidisciplinary team from merchandising, planning and allocations to marketing, store operations and supply chain.

We made great strides on one, sourcing amazing product focused on Easter, spring break, trend-right beauty, novelty, food and candy as well as relevant cultural zeitgeist moments like Minecraft; two, amplifying these products with end-to-end storytelling that started with social media through to compelling in-store floor sets; three, ensuring better in-stock positions with tight alignment between our teams at WowTown, our ship centers and the store fleet; and four, continuing to benefit from investment in labor hours and operating efficiencies, all while planning for the future within a dynamic tariff environment.

The result was a strong first quarter led by product that resonated with our customers. We had broad-based outperformance across the majority of our worlds, proving that our customer-centric strategies focused on product, value and experience are working. The Five Below team demonstrated that they can execute at a very high level in service of our customer and we'll carry this forward into the balance of the year. Our customers have validated our place in the market as a resource for fun and great value.

Let me share a few highlights from our first quarter performance. Sales and comps exceeded our updated guidance with sales of $971 million and comparable sales increase of 7.1%. We were excited to drive these comps through increased transactions of 6.2%. Our sales outperformance led to strong fixed cost leverage, and we delivered adjusted EPS of $0.86. We continued our store growth during the quarter, opening 55 new stores across 20 states.

2 of these stores located in Victorville, California and Joplin, Missouri, were among the top 25 all-time grand openings. We supported our new stores with the return of grand opening marketing activities. This first quarter performance reinforces our belief that Five Below with the right product and value, combined with an incredible store experience is the destination for our customers, the kid and the kid in all of us. Our mission remains to offer the newest, best products at extreme value to help our customers throughout their life stages to play, live, give and celebrate.

Now on to product. Providing fresh, trend-right and quality products at amazing value is what we are known for and what makes us special. In the first quarter, we featured great licensed product for customers to build their own special Easter baskets and we brought in our Easter candy offering. Our shelves were stocked with spring break must haves, including boogie boards, beach tows and the new assortment of on-trend totes. We drove sales by consistently flowing newness, most notably in beauty, style and novelty food.

In toys and games, we remain a key destination for collectibles. Finally, maintaining our in-stock positions in key areas like tech has grown sales and shown that we are the place for cables, chargers, phone cases and Bluetooth Audio. On store experience, we did a much better job wowing our customers compared to last year. The investments we made in our store experience, which began in the second half of last year, including increasing labor and simplifying and improving processes are paying off.

Our crew is now in a much better position to assist customers while also ensuring our shelves are stocked with trend-right products our customers want need. We remain committed to our crew into making the store easier and more fun to shop for our customers. On to marketing. I continue to believe that there's a big opportunity to better connect with our customers both in-store and digitally, and ultimately increase our brand awareness.

On last quarter's call, I mentioned 6 [ curtain-up ] moments to drive customers to our stores, which include the new year, Spring Break in Easter, summer, then back-to-school, Halloween and finally, holiday. We need to let our customers know that we're a go-to destination as they celebrate those special moments in life. And we've just started to do that with our marketing. In the first quarter, we highlighted value and invested in creator content for social media with encouraging results.

We have exciting plans in place for the remaining curtain-up moments throughout the year and look forward to sharing our progress. Now as we look forward, the tariff environment presents additional complexity and our teams have been working hard and moving swiftly on mitigation plans. Our plans include vendor negotiations, diversification of sourcing, continued investment in new value pack product as well as assortment and pricing adjustments with a focus on reducing the number of price points.

In a relatively short period with a heavy lift by the teams, we were able to accelerate the work that was planned for our assortment by quickly sourcing new products in different countries, expanding our vendor base and simplifying our approach to pricing. Our efforts have already resulted in a reduction in goods sourced from China by about 10 percentage points for the back half of the year.

In conjunction with these changes, we are working very closely with our partners to optimize our inventory availability and receipt flow for the balance of the year. We remain committed to providing extreme value quality products for our customers. The teams are working incredibly hard to control the controllables and mitigate the risks that the current global trade environment presents. We are also laser-focused on continuing to drive sales through executional excellence.

As always, we will act quickly and remain nimble and flexible in our approach as we react to macro news and find solutions to a changing environment. In summary, we're excited to see early signs of success across our core strategies of product, value and experience. We look forward to building on this progress with an unwavering focus on our core customer and are confident we will continue to provide our customers with amazing value and a fun shopping experience.

Now before I turn it over to Kristy to provide more details on our performance, I want to take a moment to discuss the announcement that Kristy will be leaving Five Below for personal reasons. I would like to personally thank Kristy for all that she has done during her time here. We're truly grateful for her many contributions and her partnership. We've begun a national search for a new CFO. And in the meantime, I'm very thankful that Campbell will take on the additional role of interim CFO. Now on to Kristy Chipman.

Thanks, Winnie, and good afternoon, everyone. I want to thank you, the Board and the team at Five Below for their support. I am proud of what we've accomplished during my time here, and I'm confident in the management team and the growth opportunities that lie ahead for this company. I will begin my remarks with a review of our first quarter results, and then Ken will discuss our outlook for the second quarter and full year of fiscal 2025. My comments will refer to results on an adjusted GAAP basis, excluding the impact of nonrecurring or noncash items, as outlined in our earnings press release.

Please refer to our earnings press release for GAAP results and all reconciliations. Total sales in the first quarter of 2025 increased 19.5% to $970.5 million from $811.9 million in the first quarter last year. Comparable sales increased 7.1%, driven by an increase in comp transactions of 6.2% and comp ticket of 0.9%. On a 2-year stacked basis, comparable sales increased 4.8%, driven primarily by comparable transactions, which increased 3.4%.

These results reflect better-than-expected performance in the key selling weeks leading up to Easter, and this momentum continued through the end of the quarter. We opened 55 new stores compared to 61 new stores in the first quarter last year. We ended the quarter with 1,826 stores, an increase of 221 stores or 13.8% over last year. We were pleased with the productivity of our new stores at 87%, slightly above our targeted percentage range of the mid-80s.

Adjusted gross profit for the first quarter of 2025 was $328.4 million, an increase of 24.6% over the first quarter of 2024. Adjusted gross margin increased by approximately 140 basis points to 33.8%, driven primarily by improved inventory health, requiring less reserves for aged inventory and fixed cost leverage on the strong comp sales.

As a percentage of sales, adjusted SG&A for the quarter of 27.7% was slightly lower as a percentage of sales compared to last year's first quarter. This was driven by fixed cost leverage on the strong comp sales results, offset by investments in store labor. As a result, adjusted operating income was $59.6 million versus $38.1 million in the first quarter last year, and adjusted operating margin increased approximately 140 basis points to 6.1%.

Net interest income was $5.6 million for the first quarter, better than planned due to a higher average cash balance throughout the quarter. Adjusted net income for the first quarter was $47.5 million versus $33.0 million last year. This resulted in adjusted earnings per diluted share for the first quarter of $0.86 compared to last year's adjusted earnings per diluted share of $0.60. We ended the quarter with approximately $624 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 first quarter was approximately $702 million as compared to approximately $630 million at the end of the first quarter last year. Average inventory on a per-store basis decreased approximately 2% versus the first quarter last year, primarily due to the write-down from fiscal 2024. We are pleased with the inventory levels and health of our inventory position. As we adjust to the shift in the global trade environment and position ourselves for the back half of the year by accelerating receipts, we expect our inventory levels at the end of the second quarter will be significantly higher than last year.

Now I'll turn it over to Ken to discuss our outlook.

Thanks, Kristy Chipman. Echoing Winnie's words, I am grateful for your contributions to Five Below. Your dedication to the company for the past 2 years and your passion for developing our people will have long-lasting benefits. Since issuing full year fiscal 2025 guidance last quarter, there have been changes in the tariff rate environment. Our updated guidance provided today reflects the impact of tariff rates that are currently in place.

This guidance also reflects the outperformance we delivered in the first quarter and a better than originally planned sales outlook for the second quarter. And as Winnie noted, our customer-centric strategy and focus on product, value and store experience are driving the desired outcomes.

For the second quarter of 2025, we expect total sales in the range of $975 million to $995 million or growth of 18.7% at the midpoint versus last year's second quarter. Comparable sales are expected to increase between 7% and 9% compared to a negative 5.7% comp in the second quarter of last year and we expect to open approximately 30 net new stores in the second quarter. Adjusted operating margin at the midpoint is expected to be 3.9% versus 4.5% in the second quarter of last year.

This decline is being driven primarily by SG&A deleverage related to higher incentive compensation costs and our investments in store labor. The majority of tariff-related costs in the second quarter will impact gross margin. And these costs are largely expected to be offset by fixed cost leverage resulting in only slight gross margin pressure year-on-year.

Net interest income is expected to be approximately $4 million for the second quarter and taxes are expected to be approximately 26%. Adjusted net income for the second quarter is expected to be between $28 million and $34 million versus $29.7 million in the second quarter last year, with adjusted diluted earnings per share expected to be between $0.50 to $0.62 compared to $0.54 in the second quarter of 2024.

For the full year of fiscal 2025, we are increasing our sales guidance to reflect the better-than-expected performance in the first half of the year. Our sales expectations for the second half of the year are largely unchanged from last quarter. Full year sales are expected to be in the range of $4.33 billion to $4.42 billion, with a comparable sales increase of 3% to 5%.

The midpoint of our full year operating margin guidance is unchanged from our prior outlook at approximately 7.3% or a decline of almost 200 basis points versus last year. While the full year sales and comp guidance has increased given expected first half performance, the associated flow-through of operating profit dollars are largely offset by the impact of absorbing incremental tariff-related costs, net of all our mitigation work.

Adjusted diluted earnings per share is expected to be in the range of $4.25 to $4.72. For fiscal 2025, gross capital expenditures, excluding the impact of tenant allowances, continue to be between $210 million and $230 million, which reflects approximately 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?

[Operator Instructions]

The first question comes from Michael Lasser with UBS. .

There's been a pretty remarkable pivot in the comp cadence of the business over the last -- this quarter and last quarter. How much of it would you attribute to actions that Five Below has taken versus other factors? And what would need to happen in the back half of the year in order for the momentum to slow as it is embedded in your guidance currently?

Thank you so much, Michael, for your question. So I think starting with the first question in terms of the momentum in sales and how much is attributed to action versus other factors, I think that the teams have worked incredibly hard and the actions that we've taken are definitively paying off.

We've seen sequential improvement in the business from the back half of last year, Q3 through Q4 to Q1. And specifically, what is really resonating is the selections we've made for product and the assortment. I think that the team has done a terrific job of identifying relevant trends and [ distorting ] them. We also had the benefit of great storytelling that started again in social and walked its way through to the site, all the way through to in-store execution with our [ floor sets ] that were really terrific.

We also refocused on value and ensured that we had really great outstanding value and relevant value -- and relative value in the marketplace that the customers have definitely reacted to. I will say also that the teams have worked very hard to ensure that we've got the appropriate flow of inventory and product. We've added labor to the stores. But what we've also done is really worked very tight -- in tight formations between merchandising, cleaning, our ship centers as well as allocations in the stores to ensure that everyone was aware of when that inventory was coming.

They move quickly from the back to the front. And we improve processes in the stores so that our associates could actually engage with customers at a higher and better level than they have in the past. So I think a lot of action really added up to the current results. And I think the second part of your question is what would need to happen for the back half of the year.

We're just looking at the back half of the year with great prudence. We are looking at 2-year stack comps across the next upcoming quarters of plus 2%. And certainly, every action we've taken thus far will apply to the back half of the year. With that said, we acknowledge that there still is a macroeconomic uncertainty. And so we wanted to take a very prudent approach to how we guided for the back half of the year.

The next question comes from Matthew Boss with JPMorgan.

And congrats on a really nice quarter. So Winnie Park or Ken, maybe just on the magnitude of comp strength in the first quarter and the momentum across [indiscernible] that you're seeing in the second quarter, are you seeing new customer acquisition? Are you seeing a basket build from existing customers? Just trying to explain the magnitude of comps that you're producing in the first half of the year.

And then for the back half, I guess, maybe could you just walk through the incremental opportunities that you see across product, value and marketing as potential improvement in the back half as well?

So in the front half in terms of the comp strength from a customer point of view, we did see a really nice lift in terms of transactions. They are up 6.2%, and we're actually seeing a nice growth, both in terms of new customers and comp stores as well as existing customers returning to us. And so all of that has really buoyed the business. And I will say that to get the traffic across the threshold is one thing and to get them to convert as a second. And we've also seen really nice progress in terms of conversion.

And customers are greeted with fresh new products that they can see, especially with some of the cleanup we did in the latter part of last year and the beginning of this year. And again, execution in terms of what the customers agreed to with at store level is -- has been a key to our success. In terms of the back half of the year, in terms of what we anticipate, we will continue to drive some of this positive momentum we're seeing in the business.

The majority of our merchandising world actually saw really great comp increases. And we are seeing some trends now that kind of began at the beginning of the year that we will actually continue to distort through the back half of the year. Those trends include some of the new beauty product and the flow of new beauty product the really great flow of new relevant food product in novelty candy has been terrific for our business.

And then we also are seeing really great progress in terms of -- and growth in terms of our style business that's been buoyed by our focus on lounge and lounge pants, along with our great graphic tees. So all of those things have been nice additions to the business. And then finally, I will say that in the younger segments of the business like toys and games, it's just been terrific to see collectibles take off.

The last piece of this is our in-stock positions are so much better this year than last year. We will continue to drive that. We have -- because of the great success of Q1 pulled forward receipts and continue to ensure that we've got great in-stock specifically in tech and that's been a really nice win in terms of some of the comps we've achieved. So again, applying the same set of actions and distorting trends that we're seeing right now through the back half of the year is what we intend to do.

And just -- and Matt, just to add to that, too, Winnie mentioned the store experience piece of it, which is important. We're going to continue to invest in the stores as we mentioned before. We started that last year. That's continued through this quarter, whether it's in hours for the stores or the simplification and reduction of workloads, so they can focus on those -- more of those customer-facing activities. And to Winnie point, keeping the stores fresh and those in-stocks high. .

The next question comes from Chuck Grom with Gordon Haskett.

Kristy, best of luck. Ken, just on the guide, can you unpack the annual compression in operating margins, it looks like it's roughly the same, down about 180 to 200 basis points relative to your prior guide. But it sounds like your tariff expectation might be up another maybe 60 basis points to about 160 basis points of pressure. Can you talk to that? And then if you're embedding any shrink improvement in the back half of the year?

Yes. Thanks, Chuck. And you're pretty close there, Chuck. In terms of the -- on a full year basis in terms of the impact of tariffs, net of any mitigation activities. We see it as about 150 basis points for the full year. And you're right, we're pretty much maintaining that 200 basis point operating margin deleverage for the full year.

About 60% of that resides in gross margin, and the remainder, about 40% is in SG&A. Relative to shrink, we've continued to maintain our reserves at the same level that we exited last year.

So we haven't changed that yet. We've got inventories coming up in August. So in the third quarter, we're going to be able to see if we've made improvement. If you recall, we did see improvement in -- at the January inventories last year, but decided to maintain our accrual level at the same rate until we see more of that consistent performance. And we should see that later in the year, but we've maintained that same shrink rate through the year from -- consistent with our last guide.

The next question comes from Scott Ciccarelli with Truist.

I guess just kind of a follow-up to Chuck's question. When we kind of think about the tariff impact that you just outlined, Ken. Can you help us kind of think about it on a go-forward basis? Like how much is kind of -- this is [ the hit now ] we're ale to mitigate, as Winnie referenced earlier, our able -- you're already expecting the back half to source a lot fewer products from China. So like what's the right way to think about this as we kind of like try to model out the following year?

Yes. Thanks, Scott. Yes, I'll try to -- I'll walk you through it here to give you a little bit of help. Based on what I mentioned in my prepared remarks around the second quarter guidance, again, on an overall basis, we are looking for about 60 basis points of deleverage on operating margin. A significant portion of that is coming from higher incentive compensation and also about 150 basis points embedded in Q2 of tariff-related costs net of mitigation.

Again, the majority of the deleverage that's occurring in Q2 is going to be in SG&A, again, with a higher incentive cost and investments in store labor. Again, a lot of that's going to be offset by some fixed cost leverage and then up in gross margin for Q2, just slight deleverage there, where the majority of any impact in Q2 for tariff costs are embedded in gross margin. And that, too, is going to be almost fully offset by leverage on fixed costs.

Now when we move through the rest of the year, just looking at what we've provided so far through Q2 and then you look at what we did for the full year, we're looking at pretty significant deleverage in the back half of the year. It's about 350 basis points of deleverage in the back half of the year and about 70% of that is in gross margin, obviously driven by the tariff costs and about 30% of that is in SG&A. So just to give you a sense kind of of how it flows as we go from the second quarter through to the end of the year.

The next question comes from Simeon Gutman with Morgan Stanley.

So it's a little bit related to the prior question. The question is regarding pricing and the approach. I think Winnie, you talked about simplifying pricing and understanding some prices going up, some going down. So now you have tariffs part of the picture, how much more complex is it? Do you feel confident on the elasticity?

And then, Ken, to the point you just made, I guess it doesn't sound like there's mitigating activities built into the guidance for the back half. So you -- it sounds like you're not changing price that much? Or you're absorbing costs if you can connect those thoughts, if you can?

Yes. Thanks so much, Simeon. Great question. So the mitigation activities that we got include, as I mentioned earlier, vendor diversification. And the other piece of this is actually assortment mix. And then as you mentioned, price adjustments. What we have done is modeled out the entire year. We've actually gone SKU by SKU product by product. just look at what we should and would price things at.

And we are looking at touching about 15% in terms of price, both up and down. And it's not just for tariffs. It's really looking at relative value in the marketplace. What we wanted to hold to was this notion of delivering value. And so we will still have 80% of the units that we offer in store at $5 and below. So a lot of this was a rounding exercise in terms of getting [indiscernible] some of the cent endings. We are going to be holding on to the heritage price point of $5.55, $5.55. But outside of that, we're really looking at just simplifying the shopping experience for customers and also simplifying workload for the crew. So -- and I'll turn it over to Ken to help you with the answer.

Yes, Simeon, just around kind of the assumptions based on what Winnie mentioned in terms of the mitigation activities. Relative to pricing, as we mentioned, we're going to maintain the same level of sales guidance that we provided on our last call. And the assumption there is that any benefit that we would get from pricing adjustments would be offset by unit degradation. So that -- when you do the math, that would lead to some margin erosion, and that's what -- in one of the prior questions that I responded to, that 150 basis points of operating margin drag, a big portion of that is due to the margin erosion from that assumption related to pricing. .

And so the tariff mitigation efforts and initiatives are embedded in the guidance. So just to be -- just to double down on that point.

Yes.

The next question comes from Edward Kelly with Wells Fargo.

I wanted to ask, I guess, sort of a similar question but bigger picture. Obviously, a lot of headwinds in the business from a margin perspective, particularly this year, but you've seen over the last couple of years, I guess. I'm curious, as you take a step back and think about tariff mitigation, changes in vendor sourcing geographies, that type of stuff and some pricing, where you think margin recapture could be moving forward? And what you think is the appropriate level of EBIT margin for the business to the extent that you have some decent visibility on that.

So one of the things I'll just say upfront is we've been really focused on driving sales and growth at the top line, which actually does a lot of great things. [ I say sales solve problems ]. And so that's 1 of the key pieces in this in terms of the future. The second piece of it is, I will say that, that some of the challenges we faced with the tariffs have accelerated work that we're doing on the merchandising front, both in terms of vendor mix and diversifying our vendors, and that's domestic vendors as well as factories that we work with abroad and really looking at price through the lens of relative value.

And I really think that we're going to deliver great value pound for pound versus competition for the product that we offer. We're also in a super lucky place in that, our assortments change constantly and so we're able to bring new things in and really test at different levels of price and value. And so those things are, I think, very unique to Five Below. And again, great acceleration in the work that we were going to do based on tariffs and the recent news.

And then, Ed, I'll add to that. I mean what Winnie mentioned there around the acceleration of our efforts around product and value that was definitely accelerated. I mean that's going to present opportunities for us down the road. And as Winnie mentioned also, our focus is on this year, right? This is a pretty challenging environment for us. So we're staying close to that. .

However, if we were to look longer term in a more normalized environment, I think I would see operating margin expansion. As we reap more of the benefits around the work that we're doing now, and then we maintain those disciplines in the business that we've always had that we feel that would drive operating margin expansion for us.

Yes. And leveraging off of [ great ] sales, strong sales.

Yes. Yes.

The next question comes from Seth Sigman with Barclays.

I'm curious if you could speak a little bit more about some of the operational changes you've made. You talked about adding labor hours. Where are we there? You also mentioned some other operating efficiencies things that do seem to be improving the customer experience in the stores. And I guess related, if you step back and think about the level of investment you're making this year, can you just remind us on that? And I guess given the early success, is there a thought that you could actually increase the level of investment at some point?

Great. Thanks, Seth. Yes, it's one of the things, if you recall, that we really kind of shifted in the middle of last year and focus more on the in-store experience. And one of the things that we did, we added on some additional labor hours when we looked at the work that needed to be done. We put some more hours out there for the stores that they could complete those jobs, getting the product to the floor and any customer engagement and interaction. That's continued on into this year. .

But there's also the other side of the equation and to the extent that we're able to make work easier for them, more efficient and actually eliminate any work that creates more time for them even within the same number of labor hours. So we continue to do that. I think we did some things last year around making it easier for them to close out on the registers.

If you recall, we updated shrink procedures where we moved from checking out customers to just to being up there and monitoring what the customers were doing from a shrink perspective, but it actually gives them more focus on the customer too and it ended up being a benefit for customer service. Those, we feel can continue. We're going to continue to get more efficient as we move forward and again, continue to push on the experience for the customer. .

The next question comes from Kate McShane with Goldman Sachs.

The strength of your business sounds more category-led than maybe trend led, i.e. strengthened like beauty and apparel than 1 specific trend like Squishmallows. Would you agree with that? And our follow-up question is just can you talk about what's sustaining the comp into May given April mostly have the benefit of Easter.

Thanks, Kate. Thanks for your question. It's actually both trend as well as category that we're seeing really when in terms of the strong comps that we've seen. And I'll point to 1 trend, which is this notion, again, with the younger segment of customers and collectibles, and we've seen a really great lift in terms of games and toys in our business there because of collectibles, which is definitively a trend business, also novelty candy, so much of the growth that we've seen is in specific items like pillars and squashes. And so we're very excited about some of the trends.

And again, taking a trend from ground level and just making sure we chase it and maximize it and being very, very specific about what we represent when you cross the threshold. So I would say that it is actually both that's helped us. And I think it's always going to be a balancing act between the 2.

We're also seeing some really nice trends right now in the business. We'll speak to next quarter that are specific to license business. and some of the cultural zeitgeist moments like Minecraft and Stitch that we really went after in a big way and represented in-store. And again, told the customer about in advance, drove traffic to the store so that they had this great presence on the floor.

The next question comes from John Heinbockel with Guggenheim.

Can you talk about -- I think when you talked about [ chasing ] some trends, but chasing inventory this holiday. And right because obviously you don't want too much. How long can you wait, right, in terms of trying to assess demand, can you reduce -- compress the door-to-door time from Asian factories, which I think is like 8 weeks.

And then what role do you think close out could or should play this year?

John, thanks so much for your question. So first of all, closeouts have been very important to us, and they will continue to be important, if not more important as we move forward. And so we have actually amplified the team with some specific additions that we're exactly focused on closeouts and going after business and going after existing trends and making them even bigger.

But also just taking advantage of available product. In terms of inventory flow, I would say this year is a little unusual given the tariff situation and kind of the stop starts and the pauses that we've seen. We specifically pause when the 145% tariff hit on China. And we have re-upped that the pause at 30 and our booking product in. We're actually ahead of time in terms of ordering product and just ensuring we've got the right flow.

On a go-forward basis, it goes back to diversification of the sources and the vendors, both domestically as well as what we get from partners and vendor partners abroad. And so that's been a big push for us. We are looking. We'll be adding, for instance, we've got a great global sourcing office out of India that we're finally really able to leverage. The team was on the ground in India within days of the tariffs going up. And so for us, it's about how many different sources we have, both domestically and abroad to basically provide ample product but also give us agility in terms of getting that product in shorter periods of time. .

And John, the other piece there, too, Winnie mentioned kind of the accelerating the shipments and making sure we're doing everything we can to kind of move that product as quickly as possible. The capacity that we have from a container perspective. And with our distribution centers, we've made sure that we have ample capacity to handle this because there is, to Winnie's point, there are shifts that have taken place here where it was a pause for a while now we're kind of moving a lot faster. And we're making sure we've got the capacity there to handle all this activity.

The next question comes from Brian Nagel with Oppenheimer. .

Kristy, thanks for -- it's been nice working there. I appreciate it. So the question I have, and I apologize, I'm going to bounce back to, I think, where the Q&A started, but just the acceleration we saw what we've seen here in the business in Q4 to Q1 and now into Q2. And sorry about if [indiscernible] going to be repetitive.

But can you just maybe explain that? I mean is there -- what drove actually if you look at the numbers, it's almost like a flip to switch moment where the business has got stronger quickly and stayed that way. And this has all happened if you look at across retail at a time when retail spending seems to be generally more sluggish. So kudos, but is there anything more you can explain really what happened in the business?

I think that on a 2-year stack comp basis, we did have easier compares in the front half of the year. And there is definitely underlying strength in the business, and we're excited for it. But on a 2-year stack basis and on a last year basis, we actually had easier compares. And so that gets a little harder in the back half of this year, notably. I will say that I think the thing that has made the biggest difference for us is just us maniacally focusing on our strategy, which is product, value and experience.

So ensuring we've got the right and relevant trends, ensuring that we've got a clear point of view in terms of what we stand for with the product, ensuring that we've got value-packed product. And again, it's all about relative value. We did roll back prices on key items for our spring and summer sets, and with really great reactions from the customers. And then the last piece is just a much better store experience, where we were able to clean up debt inventory, the newness really is able to show through. And we've got the right level of hours to move the product from the back to the front and greater coordination between our teams in terms of flowing product from D.C. all the way through to the stores. So it's a bit of retail blocking and tackling, but we're we're in better fighting position, and we're doing much better and exercise a lot of muscles across the last few quarters. And that will not stop. .

The next question comes from David Bellinger with Mizuho.

Another 1 on tariffs and reducing your reliance on China. So reduction for sourcing in the back half. What's the end goal there? Could you get to something materially below 50% over time? And which countries are you pivoting that volume to now? What what country is the most capacity for the back half.

So we are down 10%, and it really is 10 percentage points. And so the important piece there is, again, we were able to leverage our global sourcing office and hit the ground running. That had been established a year ago, and we are actively leveraging that resource. We're also looking at broadening and have added a lot of vendors across domestic as well as looking outside of China, in particular. So all of those things have helped us.

We also have a lot of flexibility built up in terms of how we drive business and chase trends. And in the back half of the year, the trends that are really working right now are less reliant on purely coming from a single source in a single country of origin. So all of those things are working in our favor, but it was [indiscernible] It is a daily cross-functional meeting and literally a hit list of things that we're going to do and target. And that's all come -- we're manifesting all of that now through the back half of this year.

The Next question comes from Paul Lejuez with Citi.

Two quick ones. I just wanted to understand what happened when China tariffs were at 145. You said that you put a pause. But what ended up happening with that product? Did you eventually take it once the rates were reduced or did you end up having to cancel a bunch. And then second, I'm just curious if you could give us any color about income cohort and any performance difference that you might have seen versus a lower versus upper income folks. .

Yes, absolutely. Thanks, Paul. When the tariffs hit 145%, which I think was around April 9, we basically just paused shipment of the product so we could let things settle and understand better what the environment would be. And since then, we've released that product. They were absolutely -- we weren't canceling product. We let it go, and it's flowing now.

So -- and we -- because we had good business in the first quarter of the year, we actually were actively pulling forward receipts, especially for our replenishment products. So I feel like we took the right actions to ensure that we didn't get hit with outsized tariffs in this quarter and in Q2. But that product is now flowing. And then in terms of income cohort, we actually saw growth evenly across all of our cohorts. And so it's been nice to see not only great growth across the majority of our product worlds, but also across our customer base, agnostic at socioeconomic level. .

The next question comes from Jeremy Hamblin with Craig Hallum Capital Group.

Congratulations on the exceptional results and best wishes Kristy. I wanted to come back to sourcing here and ask a little bit of a follow-up. It would appear like based on typical seasonality in your Q1 performance that kind of the underlying EPS for the business is about $6 a share. So a fairly significant tariff drag here even as you make that kind of 10 percentage point reduction in sourcing from China.

As you look ahead to 2026, how much further do you think that you can get that sourcing down if tariffs at an elevated level should persist? And then kind of as a related question, I wanted to understand whether or not you've seen any notable change as kind of the de minimis exemption has gone away, whether or not that's changed some of the competition?

So in terms of -- I'm going to actually start with your [indiscernible] which is de minimis. It's unclear whether or not de minimis has had any impact on our business. I will say that Five Below is an interesting business. It's pretty unique in terms of its focus on kids. And so I think just less impact overall from de minimis. And then in terms of going for 2026 with sourcing, really what we do is try and chase the best trends and get the most relevant assortment of products. And so a lot of what we've done, some part of it is intentional in terms of really looking at what's out there outside of China.

But the other piece of it is ensuring that we get more vendors into the mix. And we've been working on that actually since the back half of last year and ensuring that we've got really, really great product. And we're finding really great domestic sources, for instance, and we're exploiting that. We're definitely going after closeouts. So it's a combination of all things. And then I'll let Ken speak to the last question.

Yes. Jeremy, I think you mentioned kind of the tariff impact for this year and kind of rolling that forward. Yes, you're probably just under $1 based on the 150 basis points of that net tariff impact. And again, we're going to focus on 2025 for now. But given a lot of the benefits that's coming out of this work based on this tariff challenge, and as Winnie mentioned, kind of accelerating a lot of these activities that were strategies for us, but we've really pulled that forward.

We do feel, again, in a more normalized environment that we should be able to deliver operating margin expansion as we move forward.

The next question comes from Brad Thomas with KeyBanc Capital Markets.

Congrats on the results here. My question is around store openings and store actions. We know that you flow growth and paused remodels as you focused on stabilizing the business, presuming the consistency in comps continues. Is this still the right level of store growth to think about going forward? .

Thanks for your question, Brad. I think that we will accelerate store growth as we move forward. We -- this year, we're going to be entering markets where frankly, we have a lot of white space. We have stores in the Pacific Northwest. And so we've got a lot ahead of us in terms of potential and white space in the market. And with improvements in terms of our execution and our ability to deliver consistently both sales and profit, we will be looking at further expansion or more assertive expansion of our stores moving forward. .

Yes. And Brad, we're -- we mentioned a while ago, what we see as the opportunity in the United States of like the 3,000 stores. We still feel really good about that. And as you can see from these results, we're also seeing improvement in the productivity of these new stores. So that's a good thing to see and a little bit more consistency in terms of performance. So that gives us even more confidence as we move forward. Thanks, Brad. .

The next question comes from Anthony Chukumba with Loop Capital. .

I guess my question is just around the cadence of comps during the first quarter if there was any sort of noticeable difference between the different months and if you saw any sense of like acceleration in April post liberation day with folks may be trying to get in front of potential price increases? .

Anthony, we saw a really nice improvement in comps month and month out. I think we had a couple of interesting nuances to the quarter. Number one, February, we had bad weather throughout the country, which definitely impacted traffic. And then we have a shift in Easter timing we consider kind of March and April together in terms of a year-on-year comparison.

But again, coming out of the holiday, we have continued to see nice growth. And actually, our comp performance has been very good...

Yes, the exit rates coming out.

Coming out. So it's been continuing to accelerate week in, week out, and that's really great testament to everything that the teams have done

The next question comes from Michael Montani with Evercore.

I was just going to ask on the EBIT margin pressure, I think, $150 million of tariffs. So then should we take the other $50 million and kind of allocate it evenly between incentive comp, marketing spend and then store labor hours? Or is there any extra kind of clarity you can provide on that?

Yes, Michael, on the -- you're right, on a full year basis, as we mentioned, 150 basis points in op margin deleverage. Again, about 60% of that is going to be up in gross margin. Again, that's where the overwhelming majority of any tariff costs are going to be. And about 40% of that deleverage for the year is going to be sitting in SG&A.

And again, you've got the higher incentive comp for the year, the investment in labor hours and it's offset slightly by some fixed cost leverage on a full year basis that gives you a little bit of the geography of that full year.

And the last question will come from Joe Feldman with Telsey Advisory Group.

Congrats on a very good quarter. Again, I know you've been asked a lot about this. And I understand all the changes you've made in the stores, and I can see them we're in the stores, it does look like the assortment is better, tighter, everything you've described. But how did customers know like -- I mean, did marketing step up measurably.

I don't recall hearing you say anything too much about the marketing. But -- it's like -- it seems like customers would have had to have known that things got better to then start to come back more frequently and the traffic was great. So was there more stimulus? Or was it social? Or maybe you could just share some color there?

Thanks, Joe. I -- we didn't increase our level of spend. But what we did do was actually look at the channels and we did really invest in social media and greater content. And with that investment and redirecting the spend in that direction, we thought we were doing the right thing by the customer in terms of starting their journey where most customers start today, which is on social and in digital and connecting that journey through to what they saw in stores.

We were very specific about where we invested. We invested in trends that we were seeing that we thought were relevant, be it beauty, be it novelty candy, we did a lot in social around building your own Easter basket, and I'll just take that example of the Easter basket, what you saw in social connected to what you saw on the site in terms of literally built it, one, choose a vessel; two, what goes in it and you saw that all the way through to the store. So that end-to-end and looking at the storytelling and starting with social and stepping up our creator content.

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

Thank you so much for joining us. Thank you so much for joining us. We're so excited by the progress we've made across product, value and experience, and I want to thank all of our teams for their hard work and dedication to delivering our results. Five Below continues to be a destination for our customers for fun trend-right products at amazing value, and we're committed to continuing to provide the magic that is Five Below. In summary, we feel really good about where the business is today, and we're excited for the future. We wish everyone a great summer and hope to see you all in our stores. Thank you so much.

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