管理層發言
Good day, and welcome to the Five Below Fourth Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Christiane Pelz, Vice President of Investor Relations and Treasury. Please go ahead, ma'am.
Thank you, Chuck. Good afternoon, everyone, and thanks for joining us today for Five Below's fourth quarter 2024 financial results conference call. On today's call are Winnie Park, CEO, and Ken Bull, Chief Operating Officer, as well as Kristy Chipman, 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 US 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. Good afternoon. It's been a busy three months since I joined Five Below as CEO, and I want to thank our amazing teams at WowTown, the ship centers, and stores for sharing their insights and passion for the brand. The reset of the business that Tom and Ken led eight months ago is well underway and generating positive results. We will double down on this strategy as the business has so much potential for growth and many attractive opportunities to improve sales performance. With my experience as a merchant, marketer, and operator, combined with an ongoing focus on operational excellence and financial discipline, led by Ken and Kristy, I'm incredibly excited to continue to evolve our unique brand, our differentiated business model and our commitment to customer value. My journey with Five Below began a decade ago as a customer when I discovered Five Below with my daughter, who was nine.
We walked out of the store with bags of amazing items, phone cases, nail polish, plush, and craft kits, all for $20. Five Below met my daughter as a kid and has grown up with her into young adulthood. Today, I have a great appreciation of how we work behind the scenes to deliver that WOW customer experience. And I have even more conviction that Five Below has a very relevant, unique, and valuable place in today's retail landscape. Now more than ever, we have a real opportunity to sharpen our focus when it comes to our value proposition, offering fresh, trend-right products at great price value in stores that are accessible, bright, and fun. There's also more we can do to connect with our customers both in store and digitally through social media engagement and omnichannel capabilities. Our approach represents an evolution of an enduring retail experience that will meet customers where they are today in a digitally-connected world. Before I dive into how we plan to accomplish this, Ken is going to share a few highlights from our Q4 and full year performance.
Thank you, Winnie. I know I speak for the entire Five Below team when I say we are thrilled to have you on board. Your significant experience at the intersection of merchandising, marketing, and omnichannel, and deep understanding of value retail is already having an impact. Now, on to our results. For the full year, sales reached nearly $3.9 billion, with a comparable sales decrease of 2.7% and adjusted EPS of $5.04. We opened a record 228 new stores across 39 states in 2024, including the entry into our 44th state of Wyoming. We ended the year with 1,771 stores across the US. 2024 was a tale of two halves. The first half did not meet our expectations, and we reset the business midyear to focus on improving product, value, and store experience. The teams worked very hard to influence these areas and impact the second half of the year. Our customers, associates, and vendors benefited from these efforts, and I would like to thank all of our teams for their dedication and commitment to Five Below.
For the fourth quarter, in particular, we entered the holiday season with the goal of showcasing more key item value product. And where we leaned into newness with a focus on trend and amazing value, we won. We also improved operational execution in the second half of the year with better staffing, optimized labor and workflow, higher customer engagement, timely product flow, and higher in-stock rates. These strategies and our execution paid off as they helped drive sales and adjusted EPS that exceeded the high end of our guidance. While it is encouraging to see early positive results from our efforts, this performance did not fully reflect what our business is capable of delivering. We know we left sales on the table as we adjusted our orders in the second quarter in reaction to lower-than-expected demand in the first half and consequently chased product as sales improved in the third quarter.
The organization is united around the priorities we set forth to return Five Below to the performance we should be delivering. As you will hear from Winnie, we are very excited about the opportunity ahead of us. And on that note, I'll turn it back over to her.
Thank you so much, Ken. The evolution of the Five Below brand starts with sharpening our focus on the customer, our true North. So, who is our core customer? It's the kid, as well as a kid inside us all. Our vision is to be the destination for kids from elementary through high school and beyond, as well as for mom and dad. By focusing on the kid first, we have a unique opportunity to build a relationship with our customer from a young age and be their go-to resource as they grow and become parents themselves. We help our customers play, live, give, and celebrate. Our youngest customers come to us with their parents to play with iconic $5 basketballs, crafting, games, and toys. As those kids enter the preteen and teen years, they become more independent and start expressing themselves, and we help them live with beauty, apparel, room and tech products. As those teens grow into adulthood and become parents themselves, their shopping needs change to focus more on others or to give.
We are a great destination for easy pickup birthday gifts. We also help our customers celebrate milestones like graduation and micro and macro holidays from Valentine's to New Year's Eve and everything in between. Five Below is where trend intersects with amazing value to create WOW. We will consistently deliver newness to keep the assortments fresh and drive the treasure hunt experience our customers want. We will redouble our efforts to curate the best of the best products, fewer, bigger, and better key item focus. We will have six distinct curtain-up floor sets that drive more customer visits during the course of the year. In addition to delivering amazing trend-right product, our value proposition must be crystal clear. We are passionate about providing trend-right products at our core price points of $5 and below, as well as extreme value on key items above $5. This commitment not only sets us apart in retail but also resonates more than ever with customers looking for budget-friendly options in these uncertain times, which brings me to the topic of tariffs.
Our guidance reflects as best as we can currently estimate the recently announced tariffs and our mitigation strategies. We're leveraging our scale and strong relationships with our suppliers as well as taking a strategic approach to price adjustments. We also have a business model that allows us to flow new product at great value throughout the year. For example, in Q4, we chased exclusive beauty products. The customer has voted for it and we continue to build that assortment and understand how high is high. This example highlights our ability to identify trends and chase to maximize them with speed, which is a true competitive advantage. Also, the diversity of our product offering uniquely positions us to capitalize on trends in a flexible way that is agnostic to category. I'm a merchant at heart, and product is my passion. And I can tell you, we have so much opportunity at Five Below, especially as we curate our assortments through a customer lens.
We will be distorting and disrupting value throughout the store. We will be simplifying our pricing with a focus on $1 to $5 whole price points. In addition, we will be raising the bar on adding value to our highly-edited assortment of products above $5. Ultimately, this will serve to simplify the shopping experience for our customers and streamline our operations. Our priority is to keep prices low and our offering accessible to ensure we maintain the trust and loyalty of our customers and attract new customers to the brand. We also have a huge opportunity to increase brand awareness and ensure that our customers know who we are, the amazing products we offer, and the value we provide. Customers are increasingly starting their shopping journeys online. They're discovering what is hot and new on social media, and we need to meet our customers where they are. It's why I'm so excited to announce hiring our new Chief Marketing Officer, Jacob Hawkins, who will help us harvest many opportunities we have to deepen our relationship with existing customers and create new ones.
The focus on our customer and delivering amazing trend-right curated product at extreme value will increase the productivity of our existing stores. We also have a long runway of unit growth ahead of us, including very attractive opportunities to grow our fleet by densifying existing markets and expanding into new ones like the Pacific Northwest. So, in summary, we have a brand and a value proposition that is differentiated and very compelling in this current environment. We have significant opportunities to grow new customers, new stores, and drive additional visits with our existing customers. To do this, we are sharpening our focus on our core customer and being the ultimate Yes Store for kids and parents. We are tightening our assortment, keeping it fresh and relevant. We are returning to our core focus at whole $1 to $5 price points and raising the bar for above $5 product to screen value.
And we will build awareness of this through our marketing. As we do this, we will pull the strong financial and operating discipline that has always been core to our business. With the initiatives we're committed to, we will further distinguish ourselves with the WOW, newness, value, and store experience that are unique to Five Below. With that, I will turn it over to Kristy.
Thanks, Winnie, and good afternoon, everyone. I will begin my remarks with a review of our fourth quarter and fiscal 2024 results and then discuss guidance for the first quarter and full year of fiscal 2025. My comments will refer to results compared to last year on a 13-week basis for the quarter and a 52-week basis for the year, and on an adjusted GAAP basis, excluding the impact of non-recurring or non-cash items as outlined in our earnings press release. Please refer to our earnings press release for GAAP results and all reconciliations, including the impact of the extra week in fiscal year 2023. Total sales in the fourth quarter of 2024 increased 7.8% to $1.39 billion from $1.29 billion in the fourth quarter last year. Comparable sales decreased 3.0%, driven by decreases in comp transactions of 1.9% and a comp average ticket of 1.0%. The negative comparable sales reflect the impact of five fewer holiday shopping days between Thanksgiving and Christmas.
Total sales exceeded our guidance, driven by the performance of our non-comp and new stores, while comp stores were at the high end of our guidance. In the fourth quarter, we opened 22 net new stores compared to 63 net new stores in the fourth quarter last year. We ended the quarter with 1,771 stores, an increase of 227 net new stores or 14.7% over last year. Adjusted gross profit for the fourth quarter was $563.2 million, an increase of 6.2% over the fourth quarter of 2023. Adjusted gross margin decreased by approximately 60 basis points to 40.5%, driven primarily by fixed cost deleverage on the negative comp and timing of certain product costs. This was offset in part by lower shrink due to lapping of last year's reserve true up and a slightly improved shrink rate from stores that counted in January this year. I'll share more about our inventory results in a few moments. As a percentage of sales, adjusted SG&A for the fourth quarter of 2024 increased approximately 110 basis points to 22.3% versus last year's fourth quarter.
This was driven primarily by deleverage of fixed costs on the negative comp, higher store wages, and an investment in store hours, partially offset by lower incentive compensation. Net interest income was $4 million for the quarter. As a result, adjusted operating income was $253.3 million, and adjusted operating margin declined 170 basis points to 18.2%. Adjusted net income for the fourth quarter was $192.4 million versus net income of $193.8 million last year. This resulted in adjusted earnings per diluted share for the fourth quarter of $3.48 compared to last year's earnings per diluted share of $3.50. Now, on to the full year. Total sales for fiscal 2024 increased 10.4% to approximately $3.88 billion from $3.51 billion last year. Comparable sales decreased 2.7%, driven entirely by a decrease in comp transactions as comp average ticket was flat year-over-year. Adjusted gross margin decreased approximately 10 basis points to 35.6% versus last year as fixed cost deleverage on the negative comp was partially offset by lower freight costs in the first half of the year and the lapping of the shrink accrual from last year.
As a percentage of sales, adjusted SG&A for fiscal 2024 increased 140 basis points to 26.4% versus last year. This was driven primarily by fixed cost deleverage on the negative comp and investment in store hours and wages that were partially offset by lower incentive compensation. As a result, adjusted operating margin was 9.2% or 150 basis points lower than last year. Net interest income was $14.8 million for the year, and the effective tax rate was 25.1%. Adjusted net income for fiscal 2024 was $277.8 million with adjusted diluted earnings per share of $5.04 compared to last year's diluted earnings per share of $5.26. We ended the year in a strong position with approximately $529 million in cash, cash equivalents, and short-term investment securities and no debt. Inventory at the end of the year was $659.5 million as compared to $584.6 million at the end of fiscal 2023. Average inventory on a per store basis decreased approximately 2% versus last year, primarily due to the $20.5 million write-off of inventory that we discussed on our third-quarter call.
While our overall inventory position and health has improved, we are still chasing inventory in some categories. The depth of inventory in certain categories is not where we'd like it to be, and we expect that to be corrected in the second quarter of this year. As it relates to shrink, we conducted the physical inventory counts on over half of our stores in January, and we saw shrink rates improve in almost every cohort of stores. We believe these results were in part due to the labor investment that we made in the stores that allowed for greater front-end engagement with a focus on high-shrink areas. While we are cautiously optimistic with these results, we want to see a continued and sustained improvement before we consider adjusting our go-forward shrink accrual rate or embedding improvement in our guidance. With respect to CapEx, we spent approximately $324 million in gross CapEx in fiscal 2024, excluding tenant allowances.
This reflects 228 new store openings, 180 conversions, expansions of our distribution centers in Georgia and Arizona, and investment in systems and infrastructure. Before I share specific guidance, I want to discuss how we're responding to the tariffs that were recently imposed. We've navigated tariffs before. However, the breadth and magnitude of the recently announced tariffs are significant given that approximately 60% of our total cost of goods are imported from China, either directly or through our domestic vendors. This situation is dynamic. We are dealing with the tariffs that are in place today, and our mitigation initiatives are well underway. These initiatives include vendor collaboration, selective price adjustments, primarily within our $1 to $5 price points, diversification of sourcing, and increasing our focus on product newness. We have been thoughtful about our approach considering the impact of these initiatives on the brand, our customers, vendor partners, and shareholders.
As you will see from our guidance, we expect a margin headwind from tariffs, net of our mitigation efforts. Tariffs notwithstanding, we intend to reinforce our very compelling relative value position as we deliver on our customer promise of sourcing trend-right product at amazing value in a fun store experience. Now, onto our guidance, which to reiterate includes the net impact of known tariffs. For the full year 2025, sales are expected to be in the range of $4.21 billion to $4.33 billion, an increase of 10.1% at the midpoint. Comparable sales are expected to be between flat and positive 3%. Adjusted operating margin at the midpoint is expected to be approximately 7.3% or a decline of about 180 basis points year-over-year, with a little more than half of this deleverage due to the impact of tariffs net of our estimated mitigation. This year, we are absorbing the impact from tariffs as well as the normalization of incentive compensation, fixed cost deleverage at the midpoint of our guidance, and the investments in store labor.
These are partially offset by the annualization of cost management initiatives that we implemented in 2024. Adjusted diluted earnings per share is expected to be in the range of $4.10 and $4.72. We expect net interest income of approximately $15 million and a full-year effective tax rate of approximately 25%. Capital expenditures are expected to be between $210 million and $230 million, excluding the impact of tenant allowances, which reflects approximately 150 new store openings and investments in systems and infrastructure. Onto the guidance for the first quarter of 2025. For the first quarter 2025, we expect total sales in the range of $905 million to $925 million or growth of 12.7% at the midpoint versus last year's first quarter. We expect to open approximately 50 new stores in the first quarter and comparable sales are expected to be between flat and positive 2%. Adjusted operating margin at the midpoint is expected to be 4.0% versus 4.7% in the first quarter last year, with the decrease more than entirely driven by SG&A deleverage resulting from investments in store labor and depreciation.
This SG&A deleverage is being partially offset by a gross margin increase of 40 basis points due to lower reserves on aged inventory. Adjusted diluted earnings per share is expected to be in the range of $0.50 to $0.61 versus $0.60 last year. In summary, we feel good about the traction that is building from our reset last year and we're excited about the opportunities we have to drive sales and realize our true potential. And with that, I will turn it over to Chuck to start the Q&A session.
分析師問答
Thank you. We will now begin the question-and-answer session. The first question will come from Kate McShane with Goldman Sachs. Please go ahead.
Hi, good afternoon. Thanks for taking our question. We wondered if we could start with your opinion on the overall health of the consumer. What are you seeing from your core customer in terms of buying habits, especially between more consumable type products and discretionary? And what have you built into the guide to account for any changes in what the consumer is facing, whether it's inflation from tariffs, or any kind of pullback of SNAP benefits which could impact the lower-income consumer? Thank you.
Thank you for your question, Kate. We're actually pleased with the results we've seen so far in terms of the sales performance and the trend. And we are actually not seeing a meaningful difference in terms of the way that the customer is spending right now versus in the past.
Thanks, Kate. And from an overall and how we thought about guidance, it really contemplates a range of scenarios that really considers the challenging macro backdrop and all the initiatives that we have in place both to mitigate tariffs and otherwise. And so, it's really hard to pinpoint each component of that because we did run a significant number and range of scenarios in order to calculate our guidance.
The next question will come from Scot Ciccarelli with Truist Securities. Please go ahead.
Hi, Scot Ciccarelli. So, it sounds like you're expecting a 90-basis-point impact from tariffs, if I understood that correctly. What have you included in the projection? Meaning, like, is there only a margin impact? Are you assuming some sort of sales impact? Any more color around that would be helpful. Thank you.
Thank you, Scot. I’ll begin, and Ken or Winnie can add if they’d like. We expect a 100-basis-point impact from tariffs for the entire year, which is slightly more than half of the 190-basis-point decrease from this year that I mentioned. This impact spans all the areas you referenced. We talked about selective price adjustments and vendor negotiations as the two main factors. Additionally, there are ongoing diversification efforts in product sourcing that will contribute slightly to the overall mitigation as well.
Scot, I actually think that Five Below is, with some of the sudden changes, in a great position to address the issue of tariffs and mitigate them. Part of it is, as Kristy mentioned, our business model. We are all about chasing product and trends and newness and the flow of newness. And so, as we look at placing the back half of the year more opportunity for new product. The second piece is we've got a very broad range of vendors and a diverse group of vendors. And I've been in the discussions with them on this particular topic. Many of them have been with us for a while and are quite eager to partner with us because of the growth we've demonstrated with them and the growth we will continue to demonstrate. I will say the third thing is that we've been very, very careful and surgical about where we are looking at price adjustments both up and down. And again, what we want to do is simplify the price position so that the customer begins to see more of those whole price points; it becomes much easier to shop and much easier for our stores to operate. I would say the last piece of this again is just enticing the customers to see us for who we are and the great value we offer and the addition of marketing I think is going to be a really, really great additive impact in terms of how we approach this issue.
And then, Scot, I'll just add on the price adjustments relative to elasticity. We did and we have experience in that from the past, so we use that experience to gauge and make estimates around demand degradation. And there was a range of scenarios there depending on the type of item and the pricing that's been incorporated into the guidance.
I will add one more thing. In addition to the pricing adjustments and our broad vendor base, we opened a global sourcing office out of India about a year ago and we think that there's a lot of opportunity to diversify where we source product ourselves, and that work has been well underway.
Your next question will come from Michael Lasser with UBS. Please go ahead.
Good evening. Thank you so much for taking my question. How do you get the margin that you are losing this year due in part to the tariffs back over time, especially in light of what is the need to emphasize value and what sounds like rolling back some prices below the $5 price point where T-shirts are currently at $5.55, certain electronic accessories are at $5.95? And also, if these tariffs don't go through, we just simply assume we will get this margin back or this margin pressure will not happen? Thank you very much.
Thank you for the question, Michael. I want to clarify our approach to price adjustments. We have analyzed items priced at $5 and below and identified areas for both upward and downward adjustments. We are ensuring that we maintain significant value in those products, as they represent the majority of our offerings. For items priced at $5 and above, our focus remains on delivering substantial value and relevance. Therefore, our adjustments are primarily concentrated on the items priced at $5 and below.
On the leverage point, I would say that it is dynamic and things are changing. As we approach next year, if the tariffs remain the same and we get through the first quarter, we should start to improve and see leverage at that 3% comp, which is still our leverage point. We are looking for positive shrink; we are currently seeing an improvement in our shrink rate. If we observe this again during our count in August, it should have a beneficial impact that creates leverage in the second half of this year and into 2026. The work that Ken is doing regarding operations and efficiency should also start to take effect in 2026. While tariffs complicate the situation right now and we need to navigate the first quarter of next year if they continue, there is definitely an opportunity for us to see leverage as we move forward into 2026.
Thank you, Michael.
Your next question will come from John Heinbockel with Guggenheim. Please go ahead.
Two questions. Winnie, what is the status of developing or introducing new products? I know you’ve mentioned focusing on spring and summer, which should be a strong period for you compared to the past. Where do we stand on that? Secondly, what is your perspective on marketing spending? You're currently spending less than you did in 2019, but you prefer to hold back on increasing that until the product is ready. What is your plan regarding that? Thank you.
Thank you, John. We're really excited about the new assortments we're introducing for summer. We've focused on ensuring there’s value in our offerings, particularly with compelling products priced at $5 and below. Our emphasis on outdoor play comes at a great time, especially with schools out and families looking for activities. I believe the assortment looks robust. We also have the chance to keep exploring new ideas, and we've seen great feedback on some of the beauty exclusives we’ve launched. We’re expanding on those and are also considering what our next new items will be. I’m optimistic about our back-to-school preparations as well. We want to ensure we’re becoming a go-to destination for essential back-to-school items while also providing fun products that allow kids to express themselves, like backpack charms that complement our appealing $5 backpacks. This mindset is guiding our approach, and I feel confident about what’s ahead.
We also have more opportunities to acquire and explore great ideas for the latter half of the year. Regarding marketing spend, we aim to optimize our budget. It’s been some time since we've had a Chief Marketing Officer, and we’re eager to evaluate our spending and ensure it’s efficient and directed to the right channels. We've received positive responses from our collaborations with social media creators, and we believe there's further potential in this area. We’re looking closely at the entire customer journey, which begins on their phones and connects all the way to the store. We’re excited about all these developments. Thank you, John.
The next question will come from Chuck Grom with Gordon Haskett. Please go ahead.
Hey, good afternoon. Winnie, as CEO, I guess, what's your initial operational evaluation of Five Beyond? Historically, the team has said it's the least productive part of the store, and hasn't really been brought up too much today. So, just curious how we think about Five Beyond both as a section of the store and the Wow Wall? And then, just one quick question on shrink. Can you just remind us how much higher the accrual rate is today relative to 2019? Thanks.
Thanks, Chuck. I'll take question one and leave shrink to Kristy. Just talking about Five Beyond, my perspective on just looking at the total box for Five Below is that the concept was really borne out of this idea of flexibility that you have these broad kind of like worlds that you shop in. And so, I think that there's opportunity for us to continue to flex in and out of ideas and categories and products. And so that really is what we're focused on. We also, I think, did a very nice job in the back half of last year looking at the Beyond section as an opportunity to feature big WOW items like big Halloween ghouls and holiday decor. And so, we'll continue to evaluate kind of what is next to new in terms of how the format evolves, but what we are really focused on as a team from a merchandising perspective is, one, ensure that we've got great value and great relevance packed in at $5 and below. When we take the steps above $5, again, it's got to be great product. And the customer has to see it as not only relevant but trend-right and, again, something that they won't find with others. And Kristy, on shrink?
On shrink, since 2019, there has been about a 100-basis-point change in the accrual rate, and I know Ken is very focused on helping us get back to that level.
The next question will come from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead.
Thanks, and congrats on the sales momentum. I wanted to come back to tariffs and get maybe a little more granular in terms of what your expectation on gross margins are for the year. Typically, you're looking at 36%. It seems based on the Q1 guide that most of this impact is going to come maybe in Q3 or Q4. But I wanted to get a sense for what the timing of when you're expecting the kind of the 100-basis-point tariff impact and then just what we should be thinking about for the year from a gross margin perspective.
Sure. We aren't providing guidance for the rest of the quarter, as is our usual practice at this stage, but I will give you some insight into our current situation. We estimate that the full-year effect of tariffs on gross margin will be around 100 basis points. We expect to start noticing some tariff impacts beginning in the second quarter, but as you mentioned, the influence in the latter half of the year will be about double the overall annual impact, roughly 200 basis points for that period. In the first quarter, the impact is nearly nonexistent, with some effect in the second quarter. Therefore, the first quarter will have the smallest year-over-year deleverage, while the situation slightly worsens in the second quarter, with the majority of the tariff impact occurring in the latter half of the year.
Thanks, Jeremy.
The next question will come from Matthew Boss with JPMorgan. Please go ahead.
Great. Thanks. So, Winnie, on value versus product, could you speak to where we stand today, maybe across the different worlds? Where have you been able to make the most impact versus where do you see the most opportunity as the year progresses? And then, maybe it's one for Ken. But what do you see as the right pace of store growth annually, multiyear? And what metrics are you evaluating?
Thank you, Matthew. I've been in the role for three months now, and it has been a fast-paced experience as I've closely collaborated with the merchandising teams. I'm genuinely impressed with the talent we have here, and I believe we are effectively conveying value across our various sectors. Currently, our focus is to reaffirm our commitment to offering products at $5 and below, ensuring that our range is relevant, new, fresh, and engaging. I also emphasized our aim to streamline our ideas into fewer, larger, and more impactful concepts that we approach with confidence. Additionally, we have the flexibility to experiment and quickly pursue the ideas that show promise. We are taking a dual approach—using both artistic and scientific methods—when considering value, especially for products priced over $5. A key factor is analyzing how our competitors position their price points and determining how we can be highly competitive.
We're particularly excited about the fresh offerings in beauty, which boast exceptional quality at prices not commonly found in the market. Our technology products also present great value, such as offering Bluetooth speakers for as low as $5 or $7. It's been enlightening to discover the quality we provide at such prices, and we are committed to maintaining that quality. Furthermore, I want to emphasize our goal of returning to the essentials, focusing on being the go-to destination for kids. As they engage in play during elementary school, we want our toys, games, and crafting supplies to be perfectly tailored to them. We also strive to support their transition into preteen and teen years through our product offerings in beauty, tech, and decor. Additionally, we aim to enhance our celebration offerings, creating intentional announcements around new products, value, and holidays—both big and small.
These represent significant opportunities for us. Overall, we have a wealth of options available, and as we look toward the latter part of the year, we are enthusiastic about our prospects. I am very pleased with the current trends in our business.
And then, as you can hear, Matt, Winnie is very enthusiastic about the product opportunities, and I believe we have a significant real estate opportunity ahead of us. We still see potential for 3,500 stores, and as Kristy pointed out, we finished the year with 1,771. We're optimistic about that. We plan to take advantage of any dislocations that arise as we progress, and we've encountered a few already. Party City was one where we can acquire some stores that align with our financial and economic model, as well as our market penetration strategies and targets. We will continue to expand in our existing markets while also exploring new areas. The Pacific Northwest is one such opportunity, which is enhanced by the Party City locations we've acquired. Reflecting on the deals and the disciplines we've reinstated since last summer, we're focused on achieving the returns we used to see, such as four-wall EBITDA levels. Internally, we will ensure we maintain those standards. We believe there are solid opportunities as we move ahead. Regarding our unit growth percentage increase, I don't anticipate it falling below this year's levels. It's too early to make predictions for future years, but we see promising opportunities going forward. Thank you, Matt.
Your next question will come from Simeon Gutman with Morgan Stanley. Please go ahead.
Good afternoon. I would like to ask about the 2025 comp guidance. Can you provide insight into traffic trends? Also, Ken, you mentioned some effects related to tariffs and unit degradation. Is the impact of tariffs ultimately positive for sales or comp figures? Additionally, I heard that there were some missed sales opportunities in the fourth quarter. Since merchandising is essential to the company, my question for you, Winnie, concerns the labor and operational model. Is there a chance to adjust labor levels to increase throughput? Thank you.
You want to start and then I can let me start. From a 2025 comp cadence perspective, we provided our guidance for the first quarter, which is 0% to 2%. The second quarter will be our easiest quarter from a comp perspective based on a two-year stack. Moving into the second half of the year, while I'm not providing specific guidance, I think it's reasonable to expect that we could be closer to the full-year guide of 0% to 3%. Regarding tariffs, we have modeled a variety of scenarios and are currently working on the pricing adjustments we need to make. We've indicated that we are addressing vendor mitigation, so I can't comment on the specific components of the comp at this moment because we are still working through a lot of details. Our guidance incorporates multiple scenarios, so consider our guidance as a baseline. As tariffs are introduced and all the mitigation strategies are implemented, we will likely stay within that guidance range.
And Simeon, I think you asked me directly about the labor model, and we certainly saw some of the investments we took in Q4 track with basically shrink being down as well as really great throughput. As customers were greeted, we made sure that stores were replenished, et cetera. And so that's, again, some art and science that we'll continue to look at in terms of getting the right levels, and to your point, looking at the opportunity in terms of driving top-line with the labor model. Thank you.
And Simeon, just to add to that, the comment around leaving sales on the table in the fourth quarter was more around the chase of product. If you recall, we had to cancel a lot of product in the middle of the year based on where the demand was and then trying to chase back into that. I think the team did an incredible job. But that's where I think we left some opportunities on the table. To Winnie's point around labor, we felt really good about the labor levels that we had that we felt those were optimal, not only in helping with shrink but delivering a great customer experience. So, thanks, Simeon.
The next question will come from Paul Lejuez with Citi. Please go ahead.
Hi. This is Kelly on for Paul. Thanks for taking our question. Just got a follow-up on tariffs here. Within the gross margin guidance of down 100 basis points, how much of the absolute tariff impact are you expecting to offset through mitigation efforts this year? Is it 50% of the impact, 75%? Just any color there would be helpful. And then, what percentage price increase do you ultimately expect to take across the assortment this year? And then, secondly, on SG&A, the deleverage you're expecting, can you talk about the timing of incentive comp this year? And any quantification of how much of a headwind that is to margins? Thanks.
I will address the first two questions now and we can discuss the third one in a follow-up call to ensure everyone has the opportunity to ask their questions. In terms of tariff mitigation, I would estimate we are over 50% mitigated, and I prefer not to elaborate further on that. We are engaged in many discussions, and as you can understand, some of our conversations with vendors are confidential. Now, I seem to have lost track. There were three questions.
The percentage price increase across the assortment.
Again, we're not sharing that level of information at this point in time. Our guidance assumes a range of scenarios that we've contemplated, and we're still working through the SKU by SKU price changes that will occur as part of this. It's included in all of the guidance and the comp that I provided. So, you can use that for your modeling. Thank you.
Thank you, Kelly.
The next question will come from Karen Short with Melius Research. Please go ahead.
Hi, thanks very much. I had two. So, the first question is, what do you think the run rate should be for your operating margin like negating what you had to take a hit for 2025 specifically? And then, the second question I had was what is the actual, I guess, number of SKU impacts that you're contemplating as it relates to optimizing SKUs?
Yeah. So, I'll let Winnie take the second one. From an overall run rate perspective, we need to get through 2025 first. What I would say is for beyond 2025, 3% is still the leverage threshold. And driving sales is still the biggest opportunity to create leverage for the business, which is why I'm excited about all the things that the merchants are doing right now because it's all intended to narrow the assortment, drive top-line sales. There's really no major changes in margin being contemplated as we sit right now. As I mentioned, some of our leverage points are being able to drive shrink rate down and decrease that rate is going to be a big piece of it for us, and then sales is a huge opportunity. So, I think I'll leave it at that for 2025 and the follow-on leverage post '25, but...
And Karen, on the number of SKUs, really, we're looking at like deciles, 10% to 15%. So, it is a minority of SKUs that we're looking at in terms of the adjustments. Thank you, Karen.
Your next question will come from Joe Feldman with Telsey Advisory Group. Please go ahead.
Hi, thanks for taking my questions. I wanted to follow up on the pricing. It seems like we will be moving towards higher prices in the sub $1 to $5 range rather than lower. Could you clarify that? Also, as you make these price adjustments, will they apply to new products coming in, or will you be changing the prices of what is currently on the floor? Thank you.
Hi, Joe. It's Winnie. Regarding the pricing adjustments, we are actually reducing some prices, but primarily we are increasing them for items priced at $5 and below. As for our products, we are assessing incoming inventory, and we have more flexibility with future products since we will continue purchasing in the latter half of the year. Thank you, Joe.
The next question will come from Brad Thomas with KeyBanc Capital Markets. Please go ahead.
Hi. Good afternoon. I wanted to ask about the remodels. I was wondering if you could just comment about how they've been performing? And then, I don't think you commented on a plan for any of your models this year. Are you pausing that or any comments on the remodels going forward? Thanks.
Thank you, Brad. Last summer, we paused the remodels, and we are still in that phase. This year, we will probably only do a few selective ones. We are consistently seeing a significant lift in our comparable sales, evidenced by hundreds of basis points, and we expect this trend to continue into 2024. However, we have those remodels on hold, and our focus this year is on opening 150 new stores. Thank you, Brad.
Your next question will come from Krisztina Katai with Deutsche Bank. Please go ahead.
Hi, good afternoon, and thanks for taking the question. I wanted to follow up on the marketing discussion. In particular, Winnie, if you could talk about what qualities you were looking for in the new Chief Marketing Officer? And when you communicate the message, and I believe the word you used was crystal clear value to the core customer, so the kid, where do you think you are on the education process right now versus what is their current customer price perception? Thank you.
Thank you, Krisztina. To begin, we were focused on specific qualifications for the role. Having a background in marketing myself, I find it fascinating how diverse that field can be. For Five Below, it’s crucial to find someone who deeply understands our brand and the unique value we offer through extreme affordability. Additionally, we need someone experienced in retail and omnichannel strategies to enhance the customer experience from awareness—perhaps through social media—to in-store interactions, including how we convey our value through signage. We're looking for a versatile individual who can enhance our efficiency and connect our digital presence with the in-store experience. There is significant potential to educate customers about Five Below, especially since we haven’t had a Chief Marketing Officer for quite some time. Currently, many customers only recognize our brand when they enter our stores, so increasing awareness beforehand would be beneficial in driving more traffic to our locations.
Your next question will come from David Bellinger with Mizuho. Please go ahead.
Hey, Winnie, thanks for all the details. We'll keep it to one question with one part also on tariffs. But you talked selectively about raising prices upwards just now. I know you mentioned downwards too, but it seems like mostly upwards in passing these increases through. On the other side of the equation, you're going after a more value-oriented product and driving that message. How do you square those two pieces? They're somewhat contradictory. So, can you help us understand how you're thinking through balancing those two items throughout 2025? Thanks.
Thank you for the question, David. It's essential for us to assess the relative value of the items we introduce in our stores. I've been truly impressed with some of our products, particularly our lounge and cozy products, which have exceptional value that’s hard to match, priced at $5.55. It's crucial that every item priced at $5 and above delivers significant value. For products below $5, we are examining competitive offerings to ensure that key items stand out in terms of value. Additionally, we’re focused on new products, trends, and collaborative development with our vendor community, leveraging our global sourcing expertise beyond China, especially from our office in India. We see considerable opportunities ahead. Our dynamic approach to purchasing and offerings is a vital strategy for addressing the recent tariff changes. Thank you again, David, and thank you to everyone for joining us this evening.
I want to emphasize our commitment to delivering outstanding value to our customers. Maintaining our core price point of $5 and below is fundamental to our identity. Our dedication to affordability and value goes beyond strategy; it is a promise to our customers that Five Below offers joy and excitement without financial burden. We have made significant progress in our key focus areas from last year and will continue to enhance our product assortment while investing in staffing to improve the shopping experience. I’d like to express my gratitude to our teams for their dedication to these priorities. Together, we have a tremendous opportunity to showcase the unique offerings of Five Below. I hope to see everyone in our stores soon to explore our fantastic spring and Easter collection. Wishing you all a wonderful evening. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.