Five Below (FIVE) Q1 2023 Earnings Call Transcript

Five Below (FIVE 1.55%)
Q1 2023 Earnings Call
Jun 01, 2023, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Five Below first quarter 2023 earnings conference call. All participants will be in listen-only mode. [Operator instructions] Please note this event is being recorded. I'd now like to turn the conference over to Christiane Pelz, VP of investor relations.

Please go ahead.

Christiane Pelz -- Vice President, Investor Relations

Thanks, Sarah, and good afternoon, everyone. Thanks for joining us today for Five Below's first quarter 2023 financial results conference call. On today's call are Joel Anderson, president and chief executive officer; and Ken Bull, chief operating officer, 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 made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements.

If you do not have a copy of today's press release, you may obtain one by visiting the investor relations page of our website at fivebelow.com. I will now turn the call over to Joel.

Joel Anderson -- President and Chief Executive Officer

Thank you, Christiane, and thanks, everyone, for joining us for our first quarter 2023 earnings call. We were pleased to achieve first quarter results in line with our guidance with sales growth of approximately 14% to 726 million and a transaction-driven 2.7 comp sales increase. It continued to be a challenging time for consumers with persistent inflation, lower tax refunds, and fewer government-sponsored benefits compared to the stimulus fueled periods of the pandemic. However, being an extreme value trend-right retailer, we continue to attract and retain more customers and grow our comparable transactions in both converted and nonconverted stores.

Our transaction increase of 3.9% was the highest since 2017, excluding the stimulus fuel period during the pandemic and is a strong indicator that Five Below is a destination customers rely on even in tougher economic times. We are a resilient retailer with a flexible model, and we continue to play offense, opening new stores and quickly reacting to customer needs to bring them the wow products that they want at amazing values, while also executing against our strategic pillars to achieve our triple-double growth. On product and trends, we saw a continued popularity of a broad variety of trends across our world since squish, Hello Kitty, anime, collectibles, and our version of consumables, including candy, snacks, and beverages in our candy world. And also beauty items and accessories in our style world.

The new Super Mario movie released in April was a hit, and we sold through tees, posters, and other items, and quickly procured more. It is nice to see licenses emerging again. For Easter, we had great baskets and candy at extreme value that resonated with our customers. The broad-based results of our worlds demonstrate the relevancy of our products.

All through the quarter, we made progress across our five key strategic pillars that underpin our long-term triple-double vision. As a reminder, we are looking at each of these five pillars through the lens of customer relevancy and are unleashing the power of data and analytics to drive results. The first pillar is store expansion. We are expanding our reach to put Five Below anywhere, as we said at our investor day.

We now expect to reach a milestone of over 200 new stores this year, while building our pipeline for next year and beyond. In the first quarter, we opened 27 new stores across 19 states. Two of these stores were in the top 25 Spring grand openings of all time. With our strong balance sheet, seasoned and nimble teams, and focused execution, we acquired several leases from other retailers in bankruptcy, positioning us to exceed our original 200 store openings goal for this year.

These negotiations took time and effort from our real estate, construction and design, legal, and finance team, on top of their already busy jobs, and we are very thankful for their commitment in achieving a great result. Moving to our second pillar, store potential. We are focused on growing our average unit volume to the addition of Five Beyond in the back of the store, as well as new products and services such as ear piercing and fun snarky helium balloons. We converted approximately 250 stores into the new prototype in the first quarter alone and are on track to convert over 400 stores to the new Five Beyond prototype this year to achieve our goal of Five Beyond everywhere.

These conversions continue to drive traffic and higher baskets, and we see a large opportunity to grow Five Beyond from the current single-digit penetration of sales today. Our third pillar is product and brand strategy. We've discussed that Five Below is a merchandise-driven organization and how our merchants are relentless about scouring the globe to pursue trends while newness and value. In the first quarter, we were very pleased to officially incorporate and open our first global sourcing office in India.

We are very excited to have a presence on the ground to work directly with our factories overseas and, together, develop and bring to market even more amazing products at disruptive and distorted value for our customers. This was a huge effort by so many people who supported our product development team in establishing this office. Thank you to those who went above and beyond to achieve this milestone. On brand strategy, our digital marketing investments continue to grow and reach more customers to build our brand awareness, drive customer traffic, and position Five Below as a go-to destination for fun.

We conducted a successful campaign in Q1 surrounding Easter while continuing to push evergreen offerings of the brand. In doing this, we have successfully used data analytics to understand audiences to segment and optimize our digital marketing investments. Complementing our paid digital marketing efforts, our social presence and customer fans are growing in terms of followers' engagement across social media platforms. In addition to influencers creating content and posting about us, celebrities like Walker Hayes and Bethenny Frankel shared the videos about their visits to Five Below on TikTok.

Their posts had high viewership and engagement. The fourth pillar is inventory optimization. The focus of this pillar is to further enable the scale required to achieve our triple-double strategy, while continuing to leverage inventory as an asset to drive sales and maximize profits. Using technology and data analytics, we are focused on improving inventory forecasting, ordering, replenishment, and flow with a goal of increasing turns and improving end-to-end visibility.

We have already implemented a new vendor management platform that increases transparency and enhances real-time communications, and we are beginning to work on both a new planning system and a replenishment forecasting tool. The fifth pillar is crew innovation, which focuses on the critical pipeline and talent that we need to achieve our triple-double. We will hire and train hundreds of thousands of crew members in the next several years in order to serve our customers, lead our teams, ship our product, and support our strong growth. As you can see, we have been busy this first quarter.

In summary, we are pleased with our financial results and operational accomplishments in the first quarter amid a challenging macro backdrop. With May actualized, we have a good perspective on Q2, in which we expect to see a continuation of transaction increases. As we look to the remainder of the year, we believe many of the headwinds of the pandemic era that impacted us will begin to emerge as tailwinds. We are accelerating our offensive playbook.

We are opening 200-plus new stores and completing over 400 conversions. We're executing a focused marketing campaign to bring to life the new Five Beyond store format, and we are capitalizing on an improving supply chain, including favorability and freight costs, and continuing to build our strong pipeline of new stores for 2024. With that, I will turn it over to Ken to review our financials and our outlook in more detail. Ken?

Ken Bull -- Chief Operating Officer, Chief Financial Officer, and Treasurer

Thanks, Joel, and good afternoon, everyone. I will begin my remarks with a review of our first quarter results and then provide guidance for the second quarter and the full year. Our sales for the first quarter of 2023 increased 13.5% to $726.2 million from $639.6 million reported in the first quarter of 2022. On a four-year basis since 2019, total sales for the first quarter this year increased by an approximate 19% compounded annual growth rate.

Comparable sales increased by 2.7%, with a comp transaction increase of 3.9%, partially offset by a comp ticket decline of 1.2%. We opened 27 new stores across 19 states in the first quarter compared to 35 new stores opened in the first quarter last year and continue to be very pleased with the productivity of our new locations. We ended the quarter with 1,367 stores, an increase of 142 stores or approximately 12%, versus 1,225 stores at the end of the first quarter of 2022. Gross profit for the first quarter of 2023 increased 13.6% to $234.8 million versus $206.8 million in the first quarter of 2022.

As expected, gross margin of 32.3% was flat versus the first quarter of 2022. As a percentage of sales, SG&A for the first quarter of 2023 increased approximately 80 basis points to 26.5% versus last year's first quarter, driven primarily by a planned increase in marketing expense, as well as higher costs in certain store-related expenses. As a result, operating profit finished at $42.4 million versus $42.3 million in the first quarter of 2022, while operating margin decreased approximately 80 basis points to 5.8%, as expected. Net interest income was $3.65 million as compared to a net other expense of $237,000 in the first quarter of 2022, as our investment income benefited from rising interest rates.

Our effective tax rate for the first quarter of 2023 was 18.6% compared to 22.3% in the first quarter of 2022. This decrease was due primarily to a higher benefit from share-based accounting this year versus last year. Net income for the first quarter of 2023 was $37.5 million versus net income of $32.7 million last year. Earnings per diluted share for the first quarter was $0.67 compared to last year's earnings per diluted share of $0.59 cents.

Diluted EPS included a share-based accounting benefit of approximately six cents this year compared to an approximate three-cent benefit in the first quarter of 2022. We ended the first quarter with $424 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 $534 million as compared to $504 million at the end of the first quarter last year. Average inventory on a per-store basis decreased approximately 5% versus the first quarter last year as we strategically ordered inventory earlier last year to ensure healthy in-stock positions.

We are pleased with the current level and quality of our inventory going into the summer season and expect to be well positioned for the second quarter. Now, I'd like to turn to our guidance. For the second quarter of 2023, net sales are expected to be in the range of $755 million to $765 million, an increase of 12.9% to 14.4%. At the midpoint of this guidance, total sales are expected to show an approximate 16% compounded annual growth rate for the four-year period since 2019.

We plan to open approximately 40 new stores in the second quarter this year as compared to 27 stores opened in the second quarter last year and are assuming a second quarter comp sales increase in the range of 2% to 3%. As a reminder, the slower cadence of opening one-third of our annual new stores in the first half of this year was due primarily to permitting- and landlord-related delays. We expect operating margin of 7.5% to 7.9% in the second quarter of 2023 or deleverage of approximately 70 basis points at the midpoint, as a shift in marketing spend and more normalized incentive compensation costs this year are only partially offset by lower freight expenses. Net interest income is expected to be approximately $4 million for the second quarter, and taxes are expected to be approximately 26%, which does not include any potential impact from share-based accounting.

Diluted earnings per share for the second quarter of fiscal 2023 are expected to be $0.80 to $0.85 versus $0.74 in diluted earnings per share in the second quarter of 2022. Now, onto the full year. We are tightening the range of our EPS guidance with the midpoint consistent with our previous guidance. And we still expect that at this midpoint, we would generate slight operating margin expansion.

Our total sales for the second half of the year are still expected to grow in the high teens on a four-year CAGR basis, similar to the first half, with a comparable sales increase in the second half of the year currently assumed in a low single-digit range. Fiscal 2023 includes a 53rd week, which is expected to add approximately $40 million in sales and approximately $0.08 in EPS. My remarks on full year guidance will refer to the 53-week year unless otherwise noted. For 2023, sales are expected to be in the range of $3.5 billion to $3.57 billion, an increase of 13.8% to 16.1%.

The comparable sales increase is expected to be in the range of 1% to 3%. We now plan to open over 200 new stores and to end the year with over 1,540 stores or unit growth of approximately 15%. For the full year, the slight leverage in operating margin at the midpoint of our guidance is driven by lower freight costs, offset in part by lapping lower incentive compensation and certain one-time cost management strategies we put in place last year. With our strong cash balance and healthy free cash flow generation, combined with higher year-over-year interest rates, we are still assuming a significant increase in net interest income this year.

We expect a full year effective tax rate for 2023 of approximately 25%, which currently assumes a higher effective tax rate for the second half of the year of approximately 26% and does not include any potential future impact from share-based accounting. Net income is expected to be in the range of $297 million to $319 million, representing a growth rate of approximately 13.5% to 22.1% over 2022. Diluted earnings per share are expected to be in the range of $5.31 to $5.71, implying year-over-year growth of 13.2% to 21.7%. On a 52-week comparative basis, growth for diluted earnings per share is implied to be 11.5% to 20%.

This guidance does not include any potential future impact from share repurchases. With respect to capex, we now plan to spend in total approximately $335 million in gross capex, excluding the impact of tenant allowances. This reflects the opening of over 200 new stores, including those recently acquired from bankrupt retailers, converting over 400 store locations, commencing expansions to our distribution centers in Georgia and Arizona, and investments in systems and infrastructure. In summary, we delivered first quarter results within the range of our outlooks and against a difficult macro backdrop.

As Joel mentioned, we also made important operational progress against key strategic objectives. This, once again, is a testament to the executional capabilities and focus of our teams, and I am extremely grateful for their efforts. For all other details related to our results and guidance, please refer to our earnings press release. And with that, I would like to turn the call back over to the operator for the question-and-answer session.

Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Simeon Gutman with Morgan Stanley. Please go ahead.

Simeon Gutman -- Morgan Stanley -- Analyst

Good afternoon. My one question, with no extra parts, is literally every company across the retail landscape that we follow, whether they're selling to lower income or higher income, cited strain on the consumer, basket pressure, some weakness. So, I'm curious, Joel, if you can give us some insight into your quarter, the cadence of it, seeing if, you know, we're over a hump in terms of your customer and how your customer is sort of handling it in terms of basket and visits, just as a way to sort of gauge if we can expect the steadiness going forward.

Joel Anderson -- President and Chief Executive Officer

Yeah, thanks, Simeon, and it's a great question. I don't know that I could say that our customer's over it, but I would say that the indication of such a strong transaction-led quarter for us probably indicates that, you know, like we've seen multiple times, when times are tough for our customer, they have to rebalance their balance sheet, figure out, you know, their spending patterns again, and Five Below becomes, you know, part of their new routines. And so, clearly, that showed up in transactions. Look, as far as the quarter goes, you know, we were really pleased with Easter.

And like many called, post-Easter was a softening. So, I think we're seeing trends get back to more normal pre-pandemic, where the customer buys closer to the events. We certainly saw that with Easter. We've seen it with Mother's Day.

That trend happened last year with things like Halloween. And there's no reason that that wouldn't continue to happen. We see the end-of-the-month cycle. You know, as the end of the month, the sales get softer, then they really pick up at the beginning of the month.

So, all that, we've got many, many years of following that, and we're really kind of getting back to trends that we saw closer to last year. You know, look, we're trend-right, we're extreme value. We believe that the last place customers cut out are their kids. And so, all that should bode well in tough times, as well as in really strong times.

So, you know, quarter was, you know, on the soft end of it. But we've definitely seen an improvement here. And I think that the peak of the headwinds are behind us. Thanks, Simeon.

Operator

Our next question comes from Scot Ciccarelli with Truist. Please go ahead.

Scot Ciccarelli -- Truist Securities -- Analyst

Hey guys, Scot Ciccarelli. So, I guess my question is, we've had declines in average ticket for several quarters now. Just given the growth in Five Beyond, I guess the question is, at what point would you expect average ticket to shift into positive territory given the current environment? Thanks.

Joel Anderson -- President and Chief Executive Officer

Thanks, Scot. You know, you've seen declines, but they've been pretty small. And I think it's important to remind everybody, you know, post-pandemic, we saw extreme increases in ticket. And so, while there's been some declines, they still are much higher than they were pre-pandemic and double-digit increases.

So, it has ticked down. I think that's a sign the customer is being very discerning in what they put in their basket. But at the same time, I think where the positivity for Five Beyond really is proving to play out is on trips. So, that shows up in transactions.

We're just one more reason to come visit Five Below. There's another reason. I don't know, Ken, anything else to add?

Ken Bull -- Chief Operating Officer, Chief Financial Officer, and Treasurer

No, I think you hit it on the Five Beyond, Scot. Early on, we've talked about this, and we're still seeing it. It's really driving an increase in transactions. I think it's somewhat of the newness of the store when the customer comes in and they see that.

That may change because we're still early in this, but at least out of the gate, we're seeing that increase on the transaction side versus ticket.

Joel Anderson -- President and Chief Executive Officer

Thanks, Scot.

Operator

Our next question comes from Matthew Boss with JPMorgan. Please go ahead.

Matt Boss -- JPMorgan Chase and Company -- Analyst

Great, thanks, and congrats on a nice quarter.

Joel Anderson -- President and Chief Executive Officer

Thanks, Matt.

Ken Bull -- Chief Operating Officer, Chief Financial Officer, and Treasurer

Thanks, Matt.

Matt Boss -- JPMorgan Chase and Company -- Analyst

So, Joel, could you expand on the broad-based performance that you're seeing across worlds and just the drivers behind the material improvement in transaction count? And then, Ken, with store productivity the best in two years, if you can just elaborate on the performance of some of the new builds and speak to the acceleration decisions that you made around new stores and conversion.

Joel Anderson -- President and Chief Executive Officer

Yeah, look, Matt, the performance was really, seven out of our eight worlds were extremely strong, all positive. Really, the only world that's running negative comps is tech, and I think that's pretty much across the marketplace. But really led by our version of consumables, I mean candy, snack, beverages, HBA, those were the leaders of the quarter. But the fact that seven out of our eight worlds were positive shows you that the customer really shopped our entire offering.

Ken Bull -- Chief Operating Officer, Chief Financial Officer, and Treasurer

It's full store. Yeah, and then, Matt, on the store productivity, you're right. We've seen in some recent quarters back to that kind of 90-plus store productivity performance, which we're happy to see. Joel actually called out this quarter a couple of stores again, hit records for Spring grand opening performance.

And if you look at our guidance, if you do the math around that, we do expect that to continue as we move forward to get back to that, you know, 90% productivity as we move through the year.

Joel Anderson -- President and Chief Executive Officer

All right. Thanks, Matt.

Operator

Our next question comes from David Bellinger with ROTH MKM. Please go ahead.

David Bellinger -- ROTH MKM -- Analyst

Hey, Joel. Thanks for taking the question. On the leases you recently acquired, it looks like you picked up maybe 18 of those from a home furnishings retailer no longer in operation. And those store sizes look to have a little more square footage than your typical box.

Looks like most of them are in excess of 10,000 square feet. So, is there any thought or testing around maybe a slightly larger store format, including not just a wider selection of product, but maybe some additional space for Five Beyond? Thanks.

Joel Anderson -- President and Chief Executive Officer

Yeah, thanks, David. You know, the majority were picked up from Tuesday morning. And, you know, whether it's 10,000, 11,000, it's an immaterial difference to us. We've got plenty of stores out there that have a little extra square footage.

But what I would tell you about the prototype is, you know, we continue to innovate with our prototype. I mean, the original Five Below prototype was only 4,000 to 5,000 square feet. Then, we created the 7,500 square foot, which was when I got here. And we've slowly grown it now close to 10.

And the way we've set up Five Beyond, David, is we can continue to grow Five Beyond. All we have to do is keep pushing that backwall back. And so, it's only limited by our merchants coming up with rituals and milestones that are growing up that they think we can build a classification out of. I think pets is a great example one that we've built over the last few years.

But as of this point in time, we are really more focused on these next couple of years of massive conversions to the current prototype that we shared with all of you down in Pembroke in Florida. But it's not to say, down the road, there is an opportunity to keep growing the prototype. Thanks. Appreciate it, David.

Operator

Our next question comes from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead.

Jack Cole -- Craig-Hallum Capital Group -- Analyst

Thanks. This is Jack Cole on for Jeremy. So, similar to the first question, we've also heard widely across retail pressure from shrinkage, but you guys saw your GMs flat year on year as you expected. So, just any comments on any impacts you guys saw from shrink in the quarter? And if so, could you quantify it just in terms of bps?

Joel Anderson -- President and Chief Executive Officer

Yeah, look, you know, shrink is definitely something that's impacted retail. We're no exclusion to it. You know, we trued that up last year, and it had an impact on our fourth quarter. We are accruing at the higher rates this year.

And, you know, doing things on our part to mitigate shrink, we changed our return policy as an example. I don't know, Ken, anything else on shrink?

Ken Bull -- Chief Operating Officer, Chief Financial Officer, and Treasurer

No. I think, Jack, as Joel mentioned, we're focusing on preventative measures around shrink. I mean, at this point, we're not experiencing anything materially different than what we saw at the end of last year when we did a lot of our physical inventories. And as Joel mentioned, that higher rate that we came out of last year with has been included in the guidance that we provided for this year.

Joel Anderson -- President and Chief Executive Officer

It's all baked into this year's guidance at a higher rate.

Ken Bull -- Chief Operating Officer, Chief Financial Officer, and Treasurer

Yeah.

Joel Anderson -- President and Chief Executive Officer

Thank you, Jack.

Operator

Our next question comes from Michael Lasser with UBS. Please go ahead.

Atul Maheswari -- UBS -- Analyst

Good evening, this is Atul Maheswari on from Michael Lasser. Thanks a lot for taking our question. We have a question on Five Beyond. Are you still getting a mid single-digit lift from the Five Beyond remodels? And is there any risk that the lift moderates from here, given the macro background?

Joel Anderson -- President and Chief Executive Officer

Thank you. That lift has been consistent. And we're seeing that continue in the stores that we first converted and in the stores that have just recently converted. So, we see that lift almost immediately, and it has continued throughout.

But, you know, we're extreme value, and the customer loves what they're seeing in Five Beyond. And that mid single digit continues to be the forecast as we expect. Thank you.

Operator

Next question comes from John Heinbockel with Guggenheim Securities. Please go ahead.

John Heinbockel -- Guggenheim Partners -- Analyst

Hey, Joel, two quick things. Number one, the acceleration of the Five Beyond conversions, can you accelerate it further, meaning do more than 400 this year and accelerate it next year? And then, secondly, your current thoughts on the tech world reset, how you feel about that and the ability because you called that out. Can that now move us back into positive territory in that category?

Joel Anderson -- President and Chief Executive Officer

Yeah, thanks, John. Great question. Technically, we could accelerate conversions. However, I would tell you, the people that do our conversions are also the same team that does our new stores.

And so, it was purposeful this year that we front-end loaded our conversions. As you can tell, our new stores are back-end loaded this year. And so, that team is really planning to wrap up conversions here by the end of Q2 to really focus on the back-half new stores. I mean, this is a record back-half opening for us.

It's going to be about one-third, two-thirds, front half to back half. And so, that's probably the primary reason we're not accelerating them. But we've got a -- we feel the 400 are getting done. We feel really strong about them.

And then, we'll pick those right back up starting in the beginning of the year. And as far as tech world goes, yeah, we've seen some improvement from that. We've got an even bigger reset coming early this fall. I think there's a lot of rumors out of some changes happening with the Apple release that will be positive for us.

And I think you'll really see the improvements as we get into the second half of Q3 and certainly the all-important fourth quarter. Thanks, John.

Operator

Our next question comes from Edward Kelly with Wells Fargo. Please go ahead.

Edward Kelly -- Wells Fargo Securities -- Analyst

Hi, guys. Good afternoon. I want to ask you about the comp cadence. The Q2 comparison seemed like it was going to be your easier comparison of the year-on-multi-year basis.

Based upon how you're guiding, I think it implies, you know, a little bit of acceleration in the back half. So, just thoughts around that. And then, as we think about holiday generally, Joel, in terms of like product standpoint, you know, things that you're excited about from a holiday perspective. And I know it's early, but sort of like what you're expecting, you know, for the season.

Joel Anderson -- President and Chief Executive Officer

Yeah, hey, Ed, you know, on the comp, you know, I think the acceleration, I think you've got to really look at it more on the on the four-year, you know, geo stacks. And If you look at the four-year total sales CAGR, the first half comp is very similar to the second half comp. And I think what we forecasted for Q2 is a very in line, you know, take the midpoint of that is dead on in line with where we came out of Q1. And then, the back half of the year, I'm not ready at this point to really talk about trends we're chasing, things that we're really excited about.

That's something that, at this point in time, you can appreciate, we want to keep that a little closer. But we're pretty excited about some things we're seeing for the back half. Thanks, Ed.

Operator

Our next question comes from Jason Haas with Bank of America. Please go ahead. 

Jason Haas -- Bank of America Merrill Lynch -- Analyst

Hey, good afternoon, and thanks for taking my question. Can you talk about how May is running to date versus the 2% to 3% comp count that you gave for 2Q? And then, can you just remind us what the compares look like as you move through 2Q? I think May was one of the softer months last year. So, did the compares get harder through the quarter?

Ken Bull -- Chief Operating Officer, Chief Financial Officer, and Treasurer

Sure. Thanks, Jason. Normally, we don't, you know, provide intra-quarter activity. But I can tell you that when we prepare our guidance for our current quarter, we consider where we are and then we look forward to see if there's anything -- any changes in the business or expectations or anomalies anniversaries from last year.

So, relatively in line with what we're guiding to in terms of that two to three. You mentioned the kind of changes in the business last year as we move through the quarter. It was relatively consistent. You know, possibly a slight deceleration last year based on some of the things that were going on around the customer and inflation.

But that's kind of what we're thinking now in terms of the guidance for Q2.

Joel Anderson -- President and Chief Executive Officer

But pretty much all three months in Q2 last year were relatively in line with each other. 

Ken Bull -- Chief Operating Officer, Chief Financial Officer, and Treasurer

Yeah, from a comp perspective.

Joel Anderson -- President and Chief Executive Officer

From a comp perspective.

Ken Bull -- Chief Operating Officer, Chief Financial Officer, and Treasurer

Yeah.

Joel Anderson -- President and Chief Executive Officer

Thank you, Jason.

Operator

Our next question comes from Brian Nagel with Oppenheimer. Please go ahead.

Brian Nagel -- Oppenheimer and Company -- Analyst

Good afternoon. Nice quarter. Thanks for taking my question.

Joel Anderson -- President and Chief Executive Officer

Thank you, Brian.

Brian Nagel -- Oppenheimer and Company -- Analyst

I'm just -- not to be nitpicky, but, you know, as you look at the guidance, we did take, I guess, the top end of the annual comp guidance down by a point. So, what's behind that? Is it something you're seeing now, some new expectation in the back half of the year, or something more mechanical?

Joel Anderson -- President and Chief Executive Officer

Yup. Ken?

Ken Bull -- Chief Operating Officer, Chief Financial Officer, and Treasurer

Yeah, Brian, you know, when you look at the full year comp guidance, our previous guidance was a 1% to 4% comp. And then, we moved to a 1% to 3%, so we brought the high end of that comp down. That really just reflects the expected performance if you look out of the first half of the year. And as I mentioned in my prepared remarks, the second-half comps imply a range low single digits.

And somewhat similar to what we had talked about on our first call earlier in the year, that low end for the second half would assume some type of deterioration in the, say, the macro consumer environment. And then, the high end would assume some slight acceleration on some of those tailwinds that Joel mentioned in his prepared remarks around increased conversions that we're doing, more effective marketing, and things like that.

Joel Anderson -- President and Chief Executive Officer

All right. Thank you, Brian.

Ken Bull -- Chief Operating Officer, Chief Financial Officer, and Treasurer

Thanks, Brian.

Operator

Our next question comes from Kate McShane with Goldman Sachs. Please go ahead. 

Kate McShane -- Goldman Sachs -- Analyst

Hi. Good afternoon. Thanks for taking our question. A lot of our questions have been answered already, but we wondered, to the extent that you can, is there any way to quantify maybe a trade-down or just what -- if you had any more higher-end consumer shopping Five Below in the first quarter?

Joel Anderson -- President and Chief Executive Officer

Yeah. Hey, thanks, Kate. And I thought since all the questions were answered, you were going to ask how I was doing or something. But I'll answer the trade-down question instead.

No, honestly, we haven't seen anything that is significant on that one. We continue to see our, you know, lower-end customer spending more with us. But we are seeing, you know, transaction increases across the board. But it's still -- like our core customer is still really dependent on us.

And I think, if anything, they're probably spending more of their discretionary dollars with us. But nothing significant yet on the trade-down side.

Operator

Your next question comes from Karen Short with Credit Suisse. Please go ahead.

Dan Silverstein -- Credit Suisse -- Analyst

Hi. Good afternoon. This is Dan Silverstein on Karen's team. Just two really quick ones.

First, on the strong transaction growth, are you able to assess how much of the contribution is from new customers versus existing customers shopping more frequently? I know you guys have done a lot of work on leveraging customer data, so any comments on your, you know, consumer behavior would be helpful. And then, really quickly, can you just qualitatively speak to what you're planning to in terms of margins for 3Q versus 4Q just to get some help with the timing of lapping freight? Thank you.

Joel Anderson -- President and Chief Executive Officer

Look, on the transaction side, and then, Ken, you can talk about margins, it's actually, Dan, both. You know, we're seeing it both in the form of new customers and of existing customers coming in more often. So, that's really nice to see, both an improvement in new customers, as well as our existing customers visiting us more often. Ken, do you want to take --

Ken Bull -- Chief Operating Officer, Chief Financial Officer, and Treasurer

And, Dan, yeah, on the operating margin leverage, I'll just kind of start with, in my preparatory marks, on the full year, so, just, you know, we expect slight operating margin leverage. We're guiding the second quarter to about a 70 basis-point deleverage. So, the back half of the year will be operating margin leverage that we're going to see. Q4 is going to be, from what we're looking at now, slightly more operating leverage than Q3.

And when you get into the numbers there, the third quarter gross margin leverage is probably going to be double that of the operating margin leverage for that quarter. And when you get into Q4, again, with the freight cost benefit and some of those other things going on, the deleverage around SG&A, we're probably going to see gross margin leverage in excess of 150 basis points in Q4 and SG&A deleverage probably just a little bit less than 150 basis points.

Joel Anderson -- President and Chief Executive Officer

All right. Thank you very much.

Operator

Our next question comes from Paul Lejuez with Citi. Please go ahead.

Kelly Crago -- Citi -- Analyst

Hi, guys. This is Kelly on for Paul. Thanks for taking our question. I just want to first ask on the licensing business.

Good to hear you're seeing that category improved. Just curious how big that business is for you today versus maybe peak or even pre-COVID levels and what is kind of coming down the pipeline that got you excited. Just to --

Joel Anderson -- President and Chief Executive Officer

Yeah -- no, go ahead.

Kelly Crago -- Citi -- Analyst

I can circle back. OK. Just to follow up on the back-half guidance, just curious if there's any differences 3Q to 4Q, or are we just sort of plugging in that, you know, 2%-ish comp in the fourth quarter as well? Thanks.

Joel Anderson -- President and Chief Executive Officer

Look, I think, Kelly, the comment on license, it's really been nonexistent for three years. You know, and some of that's because, you know, movies has been pretty much nonexistent since COVID. It's still very small. It was really nice to -- I think Super Mario surprised us, but it still wasn't -- it didn't have a material impact on the business.

But it does, you know, give us hope that some of the movies coming out this year are going to turn into licenses. It's just an example of another trend that's back. As they appear, we'll take advantage of them. Ken, on the back-half guidance?

Ken Bull -- Chief Operating Officer, Chief Financial Officer, and Treasurer

Yeah, and, Kelly, on the back half, you know, if you're looking at the modeling, from a comp perspective, the way we're seeing it now, really, in both Q3 and Q4, we're assuming low single-digit positive comp for both of those quarters. And then, from an operating margin perspective, again, we would expect to see leverage in both Q3 and Q4. And the way we're looking at it now, Q4 is -- looks like it's achieving slightly more leverage than Q3.

Joel Anderson -- President and Chief Executive Officer

Very good. Hey, thanks, Kelly.

Ken Bull -- Chief Operating Officer, Chief Financial Officer, and Treasurer

Thanks, Kelly. 

Operator

Our next question comes from Steve McManus with BNP Paribas. Please go ahead.

Steve McManus -- Exane BNP Paribas -- Analyst

Hey. Great, thanks for taking our question. So, on gross margins, I recognize that Five's version of consumables is unique. But is there any mixed shift impacts working through the P&L that's worth noting?

Joel Anderson -- President and Chief Executive Officer

I don't think anything material worth noting. You know, we've seen this shift now for over a year. And it, you know, continues to tick up. But it's not a material shift point here or point there.

And like we always do, we chase trends. And so, you see one area go up and another area go down. But it's not so significant that it's moving, you know, 1,000 basis points or something like that. Thanks, Steve.

Operator

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

Chuck Grom -- Gordon Haskett Research Advisors -- Analyst

Hey. Like Kate, most of my questions have been answered. So, I guess how are you doing, Joel, will be my first one. And the second would be, I guess, just bigger picture, you know, you guys have been talking about tokenization for a while.

I guess at what point do we take that to a loyalty program? And just maybe some observations on what you've learned so far. Thanks.

Joel Anderson -- President and Chief Executive Officer

All right, just trying to lighten the mood a little bit. Thanks, Chuck. No, look, tokenization's firmly implemented now. I think we are at the point of starting to explore loyalty.

Some of that probably just got put on hold because, for three years, it's just been COVID, and then supply chain, and then inflation. And the teams have just been so busy dealing with mixed shifts and product changes and all that. But the next logical step, Chuck, is really to, you know, now that we've got some of the base in place to start looking at putting in a loyalty program. You know, I think you've got to look at it as '25, not '24.

And, you know, we'll certainly keep you all updated as we start to put that in place. But the groundwork's been laid. And as we continue to see more normalization of our business and we're back to, you know, playing offense as I called out for several reasons, that's one that is on the pipeline. Thanks, Chuck.

Operator

Our next question comes from Krisztina Katai with Deutsche Bank. Please go ahead.

Krisztina Katai -- Deutsche Bank -- Analyst

Hi. Good afternoon. Both of you, thank you for taking the question. Just a quick follow-up to some of the strengths that you're seeing in traffic.

Are you doing anything differently against merchandise or either price point-wise? I know you said candy, snacks, and HBA performed particularly the best. But how do you view the opportunity to further capitalize on a potentially weaker consumer environment now that you're doing a lot more data analytical work? Thank you.

Joel Anderson -- President and Chief Executive Officer

Yeah, thanks, Krisztina. Look, the one thing that's been consistent since the beginning and is something we're really probably even more focused now is really delivering value and specifically in the $1 to $3 range. You walk in our stores now, there's a 16-foot wall that's all a buck. And I think that is really resonating with the customers.

And so, while we talk a lot about the growth opportunity and Five Beyond on these calls, the core behind Five Below is not only the $5 wow product. But right now, the customer is really resonating with the $1, $2, $3 product. And certainly, candy and snack, we have a larger majority in that price point. But, you know, take a look at the 16-foot wall we got in our stores now that's all priced at a dollar.

And that is value at its extreme, and it's really resonating well with the customer. Thanks, Krisztina.

Operator

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

Joel Anderson -- President and Chief Executive Officer

Thank you, everybody, for joining us today. Let me just close by reading what I said earlier in my closing prepared remarks. We truly are accelerating our offensive playbook. I reiterate, we are going to open 200-plus new stores this year.

We will complete over 400 conversions. We will capitalize on an improved supply chain. We already have a strong pipeline of new stores for 2024. And as you've heard today from both Ken and I, our growth prospects at Five Below are strong.

I hope you all have a great summer, and make sure you visit our stores for all your summer fun. Thanks very much, and have a great night.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Christiane Pelz -- Vice President, Investor Relations

Joel Anderson -- President and Chief Executive Officer

Ken Bull -- Chief Operating Officer, Chief Financial Officer, and Treasurer

Simeon Gutman -- Morgan Stanley -- Analyst

Scot Ciccarelli -- Truist Securities -- Analyst

Matt Boss -- JPMorgan Chase and Company -- Analyst

David Bellinger -- ROTH MKM -- Analyst

Jack Cole -- Craig-Hallum Capital Group -- Analyst

Atul Maheswari -- UBS -- Analyst

John Heinbockel -- Guggenheim Partners -- Analyst

Edward Kelly -- Wells Fargo Securities -- Analyst

Jason Haas -- Bank of America Merrill Lynch -- Analyst

Brian Nagel -- Oppenheimer and Company -- Analyst

Kate McShane -- Goldman Sachs -- Analyst

Dan Silverstein -- Credit Suisse -- Analyst

Kelly Crago -- Citi -- Analyst

Steve McManus -- Exane BNP Paribas -- Analyst

Chuck Grom -- Gordon Haskett Research Advisors -- Analyst

Krisztina Katai -- Deutsche Bank -- Analyst

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