Farah Soi - ICR, Inc., IR Tom Vellios - Co-Founder and CEO Joel Anderson - President Ken Bull - Chief Financial Officer

John Heinbockel - Guggenheim Charles Grom - Sterne Agee Dan Binder - Jefferies Michael Lasser - UBS Meredith Adler - Barclays Paul Trussell - Deutsche Bank Christian Buss - Credit Suisse Matt Nemer - Wells Fargo Securities Jeremy Hamblin - Dougherty & Company

Please standby, we are about to begin. Good day. And welcome to the Five Below Third Quarter Earnings Conference Call. Today’s conference is being recorded. And at this time, I’d like to turn the conference over to Ms. Farah Soi. Please go ahead, ma’am.

Thank you, Operator. Good afternoon, everyone. And thanks for joining us today for Five Below’s third quarter 2014 financial results conference call. On today’s call are Tom Vellios, Co-Founder and Chief Executive Officer; Joel Anderson, President; and Ken Bull, Chief Financial Officer. After management has made their formal remarks, we will open the call to questions. I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and Five Below’s SEC filings. The forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward-looking statements. Finally, we may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule, showing the GAAP versus non-GAAP financial measures is available in our press release issued today. 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 Tom.

Thank you, Farah, and thanks everyone for joining us today. As I am sure you have seen we issued two announcements today, the first, announcing the appointment of Joel Anderson as CEO effective February 1, 2015, and the second, our third quarter earnings release. First, I would like to spend a few minutes addressing our announcements of the appointment of Joel Anderson as President and CEO effective February 1, 2015. Our succession plan and the smooth transition of leadership at Five Below has been something that David and I together with the Board had been working on for quite a while now. It was critically important for us to find the right person to lead Five Below and to help realize the full potential of the amazing growth opportunity that lies ahead of us. We saw that leader in Joel, when we recruited him and since he has been on Board, he has hit the ground running, immersing himself in all aspects of our business to particular merchandising, marketing and stores. Additionally, his commitment to people and culture mirrors that of mine and David’s, which was a key operating philosophy that we needed to find in the next leader. I know I speak for David, Ken and the entire Five Below team, as well as our Board, when I say, we believe Joel is the right person to lead the company. It is also the right time for this transition. We have a solid and growing presence in our existing markets and our brand is being received with great enthusiasm in newer markets, as a value proposition resonates with existing and new customers alike. We have more than doubled the store base in the last four years alone and significantly expanded the reach of our brand over the last decade. We work tirelessly to build a solid infrastructure, systems and talent to ensure the foundation of this great business is strong, one that will serve us well for years to come. All of this combined with a disciplined approach to running the business has driven the profitable and consistent growth we’ve delivered. And as I sit here today, I'm confident that in Joel, Ken, Eric and all of dedicated associates with their passion that we have the right team and leadership in place to move us forward. We built a solid foundation, which we will continue to strengthen to position Five Below for long-term growth and the tremendous opportunities ahead. I will work closely with Joel to ensure a smooth and orderly transition and will remain active in my new role as Executive Chairman. My partner and Co-Founder, David Schlessinger will retain his seat in the Board of Directors. And we continue to support Joel and the entire Five Below team. And now to our third quarter results. We are very pleased to have delivered another quarter of solid performance. Sales for the third quarter increased 25% to $138 million and our comps increased by 1.5% which was our 34th consecutive quarter of positive comps and which was up against a rubber band trend that helped drive a 9% comp in the third quarter last year. Earnings per share for the quarter was $0.06, which was at the high end of our guidance range. We opened 12 stores in the third quarter for a total of 61 stores year-to-date. Our third quarter openings included our fire store in Brooklyn, New York, as well as the first store in San Antonio, Texas. We continue to see strong performance out of our 2014 class of stores consistent with the strength that we've seen in the last three years. As customers in both new and existing markets alike embrace our value proposition and our merchandise offering. As we always do, we will discuss our 2015 plans on our year-end call but I can tell you that the store pipeline for next year looks good. And we believe that 2015 should be another solid class of Five Below. With one additional opening in the fourth quarter, we've now completed our store opening plan for fiscal 2014. We will end the year with 366 stores, an increase of 62 stores over fiscal ‘13. From a merchandising perspective, we saw strength across a broad range of categories which Joel will speak to shortly. With respect to gross margin declines driven by freight and occupancy that we previously discussed and partially offset by SG&A leverage, adjusted operating income increased 21% on top of a strong 35% increase last year, resulting in EPS of $0.06 for the third quarter. On the distribution front, construction on our new East Coast Center located in Southern New Jersey is under way and facilities currently scheduled to open in the second half of 2015. This new DC is in close proximity to and will replace our current facility in New Castle, Delaware. Our Associates will be offered the opportunity to transfer to the new facility. And it is expected that most associates will continue in this new distribution center, which should benefit the transition process. Ken will discuss financials in a moment. But our current estimates for the expected drag of this new DC on our fiscal 2015 gross margins is approximately 30 basis points or about half of what we saw from our Olive branch, Mississippi DC which opened in 2013. We worked hard all year building our capabilities, adding necessary talent, bringing on seasoned leadership and breaking ground on a new East Coast distribution center to support the growth that lies ahead. All of this to ensure that Five Below is well-positioned to execute and deliver on promise of newness and value to our customers and consistent profitable growth for our shareholders. Ken will discuss our guidance in more detail but before he does, I would like to make a comment on Black Friday weekend. While sales trends were in line with expectations, Thanksgiving Day and Black Friday traffic for the weekend was soft and sales were below our expectations. While the weekend overall is relevant for Five Below, keep in mind our most important holiday weeks lie ahead and as we typically do, we have factored our quarter-to-date performance along with our expectations for the remainder of Q4 into our outlook. Additionally, you have heard how the retailers speak to shipping disruptions caused by the labor and labor issues at the West Coast ports. And we spoke on to this at our second quarter call. We incurred higher freight costs in the form of higher container surcharges and had higher inventory levels in Q4, as we made the decision early in Q3 to shift receipts from November into October. But this result in the women's stock and very well-positioned for the holiday season. I want to acknowledge all the work that Joel and the entire Five Below team have done to ensure that we are in great shape for the holiday season. I will now hand it over to Joel to provide additional comments on our third quarter results. Joe?

Thanks, Tom. Let me first say that I’m honored to be given the opportunity to lead this amazing company. Last quarter, I shared with you the things that drew me to Five Below. First, it was the customer passion for the brand and all that stands for. Secondly, the authentic associate commitment. Third, the merchandising capabilities as well as the amazing growth that lies ahead. Over the last few months, I have worked closely with Tom, David and the team and have the highest regard for the talented group of people at Five Below, the organization as a whole and a highly differentiated customer value proposition. This is a unique concept with a tremendous runway for growth and numerous opportunities ahead. So, I view this as being a dream job. I also feel very fortunate to be able to benefit from Tom’s continued involvement in the business as Executive Chairman. We able to use Tom as a resource, as well as David Schlessinger, both founders of our company is a luxury that not all incoming CEOs have. I want to take a moment to give you a sense for how I'm thinking about Five Below and what my priorities will be as CEO. Five Below is known for its speed to market and the ability to be nimble, while operating in a disciplined manner that drives consistent, and predictable performance. I believe in those principles. And they will continue to guide everything we do at Five Below. Since joining the company, I've seen first-hand that Five Below is truly a differentiated customer-driven organization built on a foundation of disciplined efficiency and one poised for continued growth. The formula for this business is proven and the foundation is strong. Now on to our priorities. One, we will continue to execute on the strong growth opportunity in new and existing markets for our stores. Two, we will focus on building upon the store experience for our customers and making it even better. This has made us a shopping destination of choice for pre-teen, teens and beyond, looking for trend-right, high-quality products, all at $5 and below. Three, we’ll also look to strengthen our systems to support the continued growth and enable the scaling of the business. Four, the talent within Five Below is exceptional. And we want to make sure we are constantly providing our great associates opportunities for growth within our company. To that end, we will be implementing programs to help train and further develop talent internally, providing a clear path for our associates, which will be critical to our future. Five, we will explore new marketing platforms and channels, as well as our e-commerce options to build our brand and extent consumer awareness of Five Below. An example of this testing is a TV spot some of you may have seen in last couple weeks in a few of our smaller markets. And finally, number six, and most importantly, we are a merchandising-driven company. We will continue to invest in our merchandising capabilities and talent to ensure we are delivering the newness and wow factor that our customers have come to expect from us. And we will approach all of these priorities with the same rigor that we have always shown, which has been a critical ingredient to our success today, discipline across expense management, inventory control, capital allocation and every area of the organization. I am energized and excited about the opportunity that we have to build on the accomplishments of Tom and David, our founders. I am looking forward to working with Ken, Eric and the entire team to create a national footprint. There is something truly special in the retail industry. Now let me turn back to the third quarter. It was a solid Q3, particularly considering the tough comparison we are up against from Q3 from last year. All the work our merchandising and product development teams have been doing manifested itself in a great assortment of exciting product this quarter, which you will continue to see through the holiday. In Q3, we had a solid back-to-school lineup that was well-received by our customers. Performance in the quarter was driven by strength in several categories including toys and games, sports and candy, as well as the solid performance from our beauty category. In addition, our frozen assortment, which spans multiple categories also performed well. In Q3, once again, the teams were doing what we do best delivering relevant, trend-right product at extraordinary value to our customers. We do not set trends. We are very fast-follower and the investments we have consistently made in improving our talent and capabilities continue to make us better. One illustration of this is our ability to be able to react quickly and leverage our sourcing capabilities an amazing base of 800-plus vendor partners. This allows us to quickly capitalize and bring trends to market, like we get with the iPhone 6 cases and accessories. Within a week and half of its release date, we have this product in our stores and we are working on getting even better and more nimble to capture opportunities with faster response times that result in increased freshness and relevance for our customers. And finally, as we look ahead to the key holiday selling weeks, I am sure you will agree that the stores and merchandising offering look great. We are well-prepared for the big weeks that lie ahead. Now Ken will discuss our financial results in more detail and review our guidance. Ken?

Thanks, Joel. And good afternoon, everyone. I’ll begin my remarks with the review of our third quarter results and then discuss our outlook for the remainder of the year. Our sales in the third quarter of 2014 were $138 million, up 24.6% from the $110.7 million reported in the third quarter of 2013. We ended the quarter with 365 stores, an increase of 61 new stores or 20%, versus the 304 stores at the end of the third quarter of 2013. Comparable store sales increased by 1.5% on top of a 9% comp in the third quarter of last year. The comp increase was driven primarily by ticket, which was a function of a comparison against last year’s third quarter, which benefited from lower ticket rubber band sales. Gross profit increased 21.6% to $41.6 million from the $34.2 million reported in the third quarter of 2013. Gross margin decreased by approximately 70 basis points to 30.2%, driven by higher freight cost related to the West Coast port labor issues that we discussed on our call last quarter. The financial impact of these higher freight costs were in line with our expectations at approximately $0.01 EPS impact. In addition, we saw occupancy deleverage on the 1.5% comp. These items were partially offset by lower pre-opening rent versus the prior year, as we opened 12 new stores in Q3 this year, as compared to 28 net new stores in Q3 last year. Before I discuss SG&A, operating income, net income and EPS, I want to point out that the results for the third quarter 2013 reflect the founders' transaction, which had no impact on our third quarter of 2014. When I refer to adjusted SG&A, adjusted operating income and adjusted net income, this excludes the impact of the founders' transaction for the third quarter of 2013. And when I refer to adjusted EPS, it is EPS based on adjusted net income using an adjusted diluted weighted average shares calculation for the third quarter of 2013. Please see the GAAP to non-GAAP reconciliation table in our press release for further detail. As a percentage of sales, SG&A for the third quarter of 2014 decreased to 26.2% from 28.2% in the third quarter of 2013, due primarily to costs incurred in the prior year period related to the founders' transaction. Adjusted SG&A for the third quarter 2014 decreased to 26.2% from 26.8% in the third quarter of 2013, driven by lower pre-opening costs. Our GAAP operating income increased 81% to $5.5 million or 4% of sales from $3 million or 2.7% of sales last year. Adjusted operating company for the third quarter of 2014 increased 21% from last year's adjusted operating income of $4.5 million. Our effective tax rate for the third quarter 2014 was 39.5%, compared to 37.9% in the third quarter of 2013. The increase versus the prior year was due to discrete items. On a GAAP basis, net income increased to $3.3 million or $0.06 per diluted share, from $1.7 million or $0.03 per diluted share last year. Adjusted net income increased 28% to $3.3 million or $0.06 per diluted share, from $2.6 million or $0.05 per diluted share last year. We ended the third quarter of 2014 with $5.3 million in cash and cash equivalents, availability of $20 million under our revolving credit facility and no debt. Inventory at the end of third quarter was $167.2 million, as compared to $115.5 million at the third quarter of last year. Ending inventory on a per store basis was up 20.6% year-over-year. As we said on our last call and as Tom noted earlier, the increase in per store inventory was due almost entirely to our decision to shift direct import shipments from Q4 into Q3 in anticipation of potential port issues. For the end of Q4, we expect inventory on a per store basis to return to normal levels, as we sell-through our holiday merchandise. Now I would like to turn to our guidance. For the fourth quarter ending January 31, 2015, net sales are expected to be between $262 million to $266 million, assuming a 4% comparable store sales increase. With an additional store opened in the fourth quarter, we have completed our 62 plan 2014 openings and our attention is now focused on the all-important holiday season. GAAP earnings per share are expected to be $0.59 to $0.62. As Tom mentioned, our fourth quarter outlook reflects our performance quarter to-date, as well as the comparison against the weather challenge Q4 last year and does not assume any additional deterioration in the West Coast port situation. We feel good about our inventory position for the holiday season, having accelerated deliveries and rerouted others as needed to help mitigate the impact of the port situation. Though we expect improved merchandise margin in Q4, given the comparison against the weather impacted fourth quarter of last year, we have incurred higher freight costs as a result of the port issues, which will impact Q4. As a result, our fourth quarter guidance assumes only modest gross margin expansion. For the full year 2014, sales are expected to be in the range of $678 million to $682 million, with the comparable store sales increase of approximately 4%. This compares to net sales of $535.4 million for fiscal 2013, representing a growth rate of 27%. With an additional store opened in the fourth quarter, we have opened 62 stores in 2014 and expect to end year with a store count of 366, as compared to our 2013 ending store count of 304. We continue to expect relatively flat growth in operating margins for the full year and a full year effective tax rate of 38%. GAAP net income is expected to be in the range of $47.2 million to $48.5 million, with GAAP diluted earnings per share of $0.86 to $0.89. Adjusted net income is expected to be in the range of $47.7 million to $49 million, or approximately a 29% to 33% increase over 2013, with adjusted earnings per share expected to be $0.87 to $0.90. With respect to CapEx, we plan to spend approximately $36 million in 2014. And as I mentioned last quarter, our capital expenditures reflect the opening of 62 new stores and investing in existing stores, corporate infrastructure, distribution centers and system upgrades. And as I said last quarter, we will incur initial spend for the new East Coast distribution facility that we expect to be operational towards the second half of 2015. We currently estimate that we will spend approximately $25 million on this project, of which approximately $4 million will be spent on initial outlays in 2014. As is customary, we will speak to 2015 on our Q4 call. But we currently estimate that the gross margin drag from this new facility will be about half of what we saw lot of out of Olive Branch or a drag of approximately 30 basis points. As a result of this new DC, we currently do not expect to see operating margin expansion in 2015. For all other details related to our third quarter and full year 2014 guidance, please refer to our earnings press release. And with that, I would like to turn the call back over to Tom to provide some closing comments before we open it up for questions. Tom?

Thanks, Ken. Across marketing, merchandising stores, and the entire organization Five Below is ready and in great position to deliver on our promise of newness, excitement and value to our customers this holiday season. During the last 12 years, we have built an incredibly unique retail business with a very loyal customer base and passionate associates. As proud as we are about where the business is today, we are even more optimistic about the future of Five Below. With only 366 stores today, there is a long runway for growth ahead of us. I look forward to working with Joel, Ken, Eric and the entire Five Below team and the Board as we embark on the amazing growth opportunity that lies ahead under Joel’s leadership while staying true to our mission of delivering newness and value to our customers and consistent and profitable growth to our shareholders. Thank you for continued support. And we would like to wish you and your families a happy and healthy holiday season. At this point, we would like to turn it over to the operator for questions.

[Operator Instructions] And our first question we’ll take from John Heinbockel with Guggenheim.

So Tom a couple of things on just on the short-term. Your commentary on Black Friday was, Black Friday was in line with expectations, but the weekend as a whole was light and including Black Friday, is that fair?

I think -- yes, I think, John, just to be clear, I think if you look at the combination of Thursday, Friday that was within our expectations. And it was sort of the back end of that weekend side of the Sunday that we saw the -- that we felt short.

But if you look at the four days as a whole, if you put those together that would have been light too or in line or what?

Well, I think, John, without getting into -- maybe I think the best way to sort of try and sum this up, I think, if you look at, here is what I feel about sort of where we are and how we view the impact of the close of the Thanksgiving Black Friday impact. We feel good coming out of Q3. I think you heard that across in the content and Joel spoke specifically to the performance across many of our categories. I’m confident that from an assortment and products standpoint of view, we’re well positioned for Q4. As you know, most of our business is still ahead, but clearly, I think, when we saw that the latter -- particularly, the latter part of the weekend did fall short to our expectations. And what we’ve done is we’ve basically taken that performance. We look at our quarter to date and I think what we did is now let’s remind ourselves. I think original guidance was mid-single-digit that we put out there which is lower to 4%. I think it is the responsible thing to do, when you see something in your business that you do and what we've always consistently done, not an indicator of how we feel about customer. I will tell you when our customers in our stores and they are spending money, as evident by the average spent from our customers. And if something were to change, as we look ahead into December, we are well-positioned for it. But we felt, it was the responsible thing to do and adjust our guidance down based on what we’ve saw. Again knowing that the majority of the business for us, is still ahead of us.

Okay. And then just as a follow-up to that, just remind us, I believe you got hammered in particular by weather the first two weekends of December, right. So this one coming up one after is that correct? And then just more strategically, with you moving onto Chairman, what do you intend to spent time on that you weren’t before as CEO?

Sure. I think, you are correct on the weather. Ken, jump in. I think you’ve done enough.

Yeah, John, from a weather perspective, it was really -- the majority of the December was really where are -- where we saw the impact last year.

And it starts with the weekend coming up, John, you are correct.

Okay.

And I think the other which I think is a great question. Look, we have a great business. We have a great opportunity. The timing was right. When you find the great leader, David and I have always been at the mind set. And when you find the right leader to transition your business that’s when the timing is right. With regard to what I’m going to do, my job is actually real simple. We have a job to do. We have a great opportunity. We are thrilled to have Joel as the new CEO of the business starting February the 1st. And my focus has to be on how do I find a way to make sure in my role as Executive Chairman together with the Board to support Joel and to help guide strategy and direction of the business across every aspects of the business. As we continue to almost the evolve this business from past than what has been to present and what it needs to be in the future. These are exciting times for Five Below.

Okay. Thank you.

John, I’ll just add. This is Joel.

Yeah.

Since I joined Five Below, I had the opportunity working very closely with Tom. As I said in my remarks, it’s a luxury to have somebody like Tom stand on as Executive Chairman as I will move into the CEO role. And I'll tell you this is a merchandising driven company. And having somebody like Tom, who is one of best merchants I’ve ever met, at my side to help think about our long-term strategy, new opportunities where we can go. In many ways, we’ll be freed up to focus even more on that as I take on the day-to-day responsibilities of running the company. So I think it really works nicely to have Tom on board as we move ahead and move forward. And I look forward to that long-term relationship.

Thank you.

All right. And next we’ll take Charles Grom from Sterne Agee.

Hey, guys. Good evening. Just on the fourth quarter gross profit margin guide for only modest expansion. And how much is the West Coast issue going to weight down? Because, obviously, grocers were down over 120 basis points last quarter. So is it that bigger to hit in the fourth quarter?

Yeah. We’ll probably see a similar impact in Q4 that we did in Q3, Chuck, related to that.

Okay. And that’s basically you said but the 75 basis point decline, was that -- that was entirely dozed into West Coast issue?

In Q3, you’re referring to?

Yes.

Well, we had to deleverage -- there were some deleverage on our occupancy expense also that was in there for Q3.

Okay. How the merchandise margins look into the third quarter?

Relatively flat, again where we’ve kind of seen it in the past that’s where we landed again in Q3.

Okay. And then when you look to 2015 you identified the 30 bps hit from the new DC down in South New Jersey? What do you think the offsets could be to that and what’s your total gross margin expectation for next year?

Well, again, 2015 we will get into that more detail on our Q4 call, we talked about it. And I just, I wanted to call out kind of the knowns at this stage and obviously, the distribution center and the new DC in New Jersey, the impact that’s going to have on gross margin and the drag there, I just want to get that out and that again, you should not expect overall operating margin expansion in 2015 at this point. But really not ready to talk about anything else in particular around 2015.

Okay. And then just a follow up on, John’s, question on the near-term, when you try to dissect the softness at the end of last weekend and I don’t know to near-term focus, but obviously, everybody will be? What do you guys -- what have you concluded, was it regional, was it product category, or was it just simply foot traffic, I mean, can you shed a little bit of light?

I would definitely say that it was definitely not product, actually customer has responded very well to our product in the stores. It was not regional. It’s also fair to say and it's -- which and when you look at the customer spend from the customer it's obvious that it was traffic.

Okay. All right, guys. Good luck.

Thank you.

Thanks, Chuck.

Next we will take Dan Binder from Jefferies.

Thank you. Can you just give us an update on the global sourcing initiatives and where that is going to mix out at the end of the year? And as a follow on to that, as you do incur higher costs related to the larger buying group, more distribution, is there any reason why you wouldn’t consider taking some of those sourcing gains and just passing it through to cover those higher costs?

You take that.

I want to take the first part. I think as far as sourcing and again, our PD team has two functions and it’s important, it’s what I think makes us different -- differentiates us maybe from other retailers. Our PD team is both sourcing but development, we just as comfortable working overseas as we are trying to create an opportunity and a business development effort around a domestic opportunities that may exist, just to sort of clarify that. But from a sources standpoint of view, we continue to see increase penetration from overseas. Ken, I think we estimate there will be lot of this year you think of that coming on.

About 25%.

So we will get about 25% for this year.

Yeah.

And we always tend to be opportunistic and we go overseas for the right item, not necessarily to get a better course on an item. With regard to ways by which we would look at the expense and as it relates to margin. Ken, do you want to?

Yeah. I think, Dan, we said before, just from an overall merchandise margin prospectively, we wouldn't expect to see material increases there even as we increase our import penetration given that we are going to be going after kind of the newness and allow product for the customers and that tends to drive traffic and comp, and we get that leverage off those increase sales. But, obviously, we would look it at a product development group and expense item we would get a return on that investment, but from an overall merchandise margin perspective, I think, you should still expect that to be flat in the future.

Okay. Thank you.

Next we will take Michael Lasser with UBS.

Good evening. Thanks a lot for taking my question. It relates to the positioning of the business in a world where overall retail traffic seems to be just under pressure? So given that Five Below’s comp is very much been traffic driven in the past? Do you think that, you can sustain the type of comp growth that you are seeing, historically, if consumers are just going to be out in about in the stores less and if not, what can you do to influence that?

I think that’s, maybe, I think, Michael, let’s break that and serve into two pieces. We have seen very consistent performance as you know across our business and you strip out last Q4, which we still believe, was primarily driven and was a result of weather. We think that we have delivering consistent performance across the stores, across all regions, on consistent basis in both older vintage of stores, as well as the newer ones. But I think we obviously can’t be blind to the fact as well that making sure that we are careful and watching what is going on in the marketplace and how the consumer is behaving. And while we have no immediate plans today to look and say shoot. And I think we spoke about this in the past whether our Five Below should have an online presence, a point or not. I think those are conversations and the discussions that I think and strategic consideration that have to be baked into our thinking as we think ahead for the business. But I think we have sort of wait and see and again we really good. Again we have come out of Q3 that we did well. I think we mentioned the way we were coming out of the Friday -- Thursday, Friday out of Thanksgiving. We made our decision where we think it is the right decision and a smart decision coming out of the weekend and we’ll wait and see what happens. But we do note for sure is that our customer continues to be passionate and loves what we have to offer in our stores, a product offering that we have. And I think that -- one way or the other that will continue to drive success and growth for this business. Too early to tell whether we've seen an actual shift and I don’t believe from what we've seen so far, we don't believe that to be the case.

Okay. And then my other question is on your promotional posture. I think there has been some fear talk that you’re a little more aggressive this Halloween and now you're guiding for flat gross margin in the fourth quarter, flat operating margin next year with slightly softer comp and I think what most, we’re in the fourth quarter. So do you feel like you have to be a little bit promotional in order to drive the business as well?

First of all, gross margin is flat. I think I’d like just to be clear but let’s maybe address the Halloween. I don’t know -- Joel, do you want to be…

I can say to you our plan marketing spend isn’t any greater this fourth quarter than it was last fourth quarter. So while we’ll continue to do different promotions and make sure we keep the product relevant, we haven’t seen any shift in the -- and an increase in our promotional spend.

And taking that, maybe Halloween, it’s just a tad -- let’s be -- just to be sort of like transparent. Halloween is a very small part of our business. And I think we are very happy with the supper that we had in Halloween but it’s not unusual for us with some seasonal categories particularly as we get to the end of the season to make certain decisions based on what we view to be our strategy looking ahead which will then in a way affect maybe I’ll pack away. And as you all know and as you may recall, we will from time-to-time pack away seasonal goods that we believe we would carry the following season. So sometimes some of our decisions that maybe you see in the stores reflect maybe a change or consideration that we may have in front of us to -- and be thinking about. But I would not in any way say that our strategy or cadence around promotional activity has changed in anyway. And again Halloween, we came out of the quarter, solid back-to-school. We were very happy with sell-throughs of Halloween but I will tell you Halloween is a very small business for the company.

That’s helpful. Let me just add one last question. How do you try to factor in very easy comparison that you are going to experience in the 10-days leading after Christmas because of the weather last year into your comp. I think there is a perception that you’ve seen these wide variations in your comp and maybe when your results actually come out, they are not as volatile as what you’d expect. So maybe you can give us a little more detail there? Thank you so much.

Sure. I think it’s very hard to predict December for anybody in retail. We’ve came out of last year and our analysis in every way that we’ve looked at it, we believed that weather had an impact in our performance last year in the month of December. And we’re going to start to see this over the next couple of weeks. That being said, I think you can also know us long enough to know how we operate as a company. And I believe that you have to make smart decisions and intelligent decisions around what you see and yeah, when we came out of the weekend, what we basically did is took a guidance that was mid-single digit and we basically adjusted to four. We’ll see how December plays out. Again we feel very good about the way we are. We are ready to service our customers both of our [receipts] [ph]. We have no issues whatsoever. We are delivering to our stores as we need to. We have no issues with receipt flow coming out of the port issues that maybe some other folks might be facing. And we’ll see how December plays out. It’s a great question. Am I trying to avoid it? I’d take a better question to almost postpone until we get through Christmas and get into January.

Okay.

And, Michael just wanted to add, just to clarify there. The freight surcharges that we will experience in Q4 that will be a drag on our gross margins. So we won’t expect to see the expansion in gross margin that we would have despite those costs, but the product margins again would be consistent for Q4.

Okay. Thank you very much.

Thank you, Michael.

Thank you, Michael.

Next, we will take Meredith Adler with Barclays.

Hey guys. I don’t know if you feel comfortable talking about when you think about the total holiday sales. How much of it comes towards the end and I don’t know whether it spills? That’s probably the last weekend before Christmas. I think if -- because you’ve been saying that there is more to come, can you quantify that?

We are not giving you an actual number, Meredith. The majority of our business, holiday business is ahead of us. There is no question about it. That’s why I’ve taken my comment. I said, while the first weekend is a relevant weekend, the fixed sales weeks are definitely ahead of us. Into Christmas and there is two weeks leading up to Christmas.

Okay. And you don’t promote for Black Friday, right?

We’ve consistently have a certain level that we’ve done year. But we are not really a promotional business. What we do is we put forth some of our key items but we free chain stores for the holidays and that’s pretty much it.

Okay. And then I have a question. I know you commented that you’ve made no decisions about e-commerce, but I maybe would address the question to Joel or even to you, Tom about Joel’s background. And was any part of the decision to bring Joel on, driven by the fact that he has tremendous experience with e-commerce or is that just a side benefit?

I think we should build sense of that. Let me just make a point. What we’ve said consistently, I think we feel that we have a tremendous opportunity in stores given the model, the performance of the model, the build out costs, the return on invested capital, the payback of less than a year. And I think we’ve chosen to put up energy into that side of the business to date. But I think we’ve also maintained that we also felt to continue to believe that there is a strong opportunity for an online effort in the business. We brought Joel on board, I think primarily and mostly for the leader that Joel has a diverse experienced, 20-plus year leader, a diverse background. If you look at this background at Big-box, specialty retail, mostly recently being the CEO of Walmart.com. So all of that definitely played into our decision, but I think you should hear from Joel as well because he certainly has a point of view on that front as well.

Yeah, Meredith, I just had -- with the transition to CEO, I want to make sure I not only assess the e-commerce efforts in any, but assess all the company priorities beyond what was just previously responsible as President. And as I shared my opening remarks, we are going to approach all this with the same discipline and rigor that Five Below always has. And so I believe in e-commerce. I think it’s an opportunity for this company but we don’t need e-commerce to help us make our next five years. And it’s an opportunity to enhance this company but we are going to make sure that we don’t lose once step of the progress that’s been made under Tom and Dave’s leadership in the last 12 years.

Great. Thank you very much and good luck.

Thank you.

[Operator Instructions] Next, we will move to Paul Trussell with Deutsche Bank.

Good afternoon. I wanted to just touch base on the expenses quickly, given what we’ve discussed a lot of changes going on in gross margin. Is there anything that we should be thinking about that would prevent or alter, what has been historically an ability to leverage at 4% comps or as we saw in the third quarter even at times below that?

Yeah. Paul, I think we’ve spoken about before at that 4% comp level. We tend to see some slight leverage in the SG&A area, that is if there isn’t any type of big investment. Just keeping in mind that next year, again I think I called out the new distribution center that we will have DC expenses that are included in cost of goods sold, we will have things like depreciation are related to the distribution center that’s included in SG&A. But I think that’s a fair statement to see slight leverage on a 4% comp as we move forward.

Okay. And then I know that you guys don’t want to give a lot of color about 2015. But in highlighting then that there is still leverage opportunities in SG&A, one that kind of 4% run rate. Is the drag from gross margins just completely offsetting that, or just how should we think about the 2015 view?

Yeah. Again, I think it’s still a little bit too early. And I wanted to emphasize the DC and new DC just to be able to get that out there. But from an operating margin perspective, I just wouldn’t expect margin expansion at this stage of the game for '15. But again, we will get some more detail when we come back on the Q4 call.

Thank you. Good luck.

Thanks.

Thanks.

Next we have Christian Buss with Credit Suisse.

Now that you guys decided on the new distribution center, just wonder if you could talk a little bit about your store density thoughts in those existing markets in the Northeast, and would love to get some color about what you think the opportunity is there?

You know I think without getting into a specific number, and I think you heard us in the past that we believe that the opportunity long-term is on a national basis. Clearly what we think Christian particularly I think across all of our markets, but especially as we’ve gone more into the east coast, including we just open our first store in Brooklyn, New York. The boroughs just a few years ago we thought completely different about them. There was a time we really didn’t even think we could actually be in the boroughs. So as we see both the ability to continue to densify as we’re adding more stores. And Ken has mentioned in the past that it’s been great about it, while we’re going to see a bit of cannibalization early on. But at the time we cycle the store around, everything is back to normal. So you can expect a definitely more density in that part of the market. I think you can expect that that facility will also serve on the east as we go further south. That would be a good assumption to make. And I think you can expect that some of the stores from that part of the country tend to be higher volume stores as well. So when you put all that together, it made a lot of sense and we actually spent a lot of time before we made the decision. It makes a lot of sense to really expand that facility to what would ultimately would be a million square foot facility to handle we believe the needs of the east coast. I don’t know if I answer the question without giving you an actual number.

You know what I wanted the actual number that at least from your guys.

You know what I think, let’s look at that. Let us do a follow up on that and see in fairness to you. Let us get back and see if there is a range that maybe we can give you since I don’t have some of the numbers in front of us, a direction of what we see in the area over the next few years.

That would be very helpful.

Fair enough. Sure. Absolutely.

Next from Wells Fargo Securities we have Matt Nemer.

Good afternoon.

Hey, Matt.

Joel, congrats on your new role. I wanted to get your view of -- your early view of what areas in the business you think require investment, setting aside new stores and then questions around e-commerce really kind of more focused on systems and processes and people?

Thanks, Matt. I think I outlined six priorities for you on my previous remarks. And all those priorities are really around making sure we continue on the path of aggressive store growth, improving the store experience and then developing our people here. So that we’ve got the ability to scale. As far as the specific initiatives and what we are going to focus on both short-term and long-term, we will really share all that with you as we get into the fourth quarter and get into the details of that. I can tell you that we are working on our planning system. And we’re also working on a new ERP system. So those are specific areas that are high priorities and then beyond that we’ll get into more detail as we share our fourth quarter earnings with you.

Okay. And then just a quick follow-up. If you look at the 2015 new store class, I’m sure that you guys are pretty furlong on that. Could you just comment on whether the balance of new and existing markets is fairly similar to what we saw in 2013 and 2014 or could it skew one way or the other? Thanks.

It’s a good question. I think its going to be fairly similar. We’ll probably announce maybe our market or too as well. And we look forward, truly look forward to having that conversation as we get to the end of the year but you can expect it to be fairly similar. And we love the existing market, as you kind of understand. I want to be real clear about that. I think it’s -- on so many fronts it make sense for us to continue to densify existing markets.

All right. And next from Dougherty & Company, we have Jeremy Hamblin.

Hi. Good evening, guys and thanks for taking my question. Just a longer term question, some of the volatility in the company and the stock seems to be that there is such a heavy reliance on fourth quarter to drive the results of the business. As you look out a few years and the company continues to expand into new geographies and you continue to expand the categories and the merchandized assortment that you have in your stores. Do you think that at some point Q4 starts to be a smaller portion of sales in earnings power?

Yeah. Anyway you look at it, I think you are totally correct. Q4 is where we make most of our money. As we continue to expand and I think we have been and need to constantly be on our gain to make sure that we’re ready for the holidays and ultimately service our customer and however, our customer wants to be served during that key period of the time. The other question -- other part of your question that I think is a very valid one. As we expand -- with the market that we’ve been into but as important the markets that we will be going into, no question about, we constantly are looking at and believe we have opportunity to grow other parts of our business outside the G4, a great example of that is Q2. Amongst all the quarters, I think there is growth. But Q2 certainly and I think the strength that we have, the loyalty that we have with our customer and the response that we have from our customer around Q2, I think is an opportunity for us, particularly on the whole outdoor business they continue to build it over time, particularly as we get in some of these markets where that business may actually have a much longer season.

And just as a quick follow-up to that, in terms of the fourth quarter and the incredibly promotional environment that we are seeing out there and that seems to be just kind of the normal course of business these days with so many retailers opening up on Thanksgiving and driving promotions earlier and earlier and deeper and deeper, is it just harder to generate traffic than it was even if three, four years ago?

I think the hours they share is obviously one aspect of what is going on, particularly in the holiday business. And I think we will have no chose probably, but to follow most of the retailers’ leads, if that’s when the customer chooses to shop. With regards to the promotional activity, what we’ve seen consistently and what I feel great about as I look at where we are as a company. When there is traffic regardless of what is going on around us, from a promotional activity standpoint of view, we continue to do really well. When traffic is in line with our expectations in our round of centers that we're in and with the co-tenants that we’re in, we do really well. And we believe what drives that repeats business from a customer is our ability to continue to wow our customer. Remember, we’re still a primary destination for teens and pre-teens that caters to both boy and girl, value segments, everything under one price point in a great store environment and that has served us well. We continue to see it either around the promotional activity and forgive me, but in a long winded sort of way, when there is traffic and when there is people, we do well regardless of the promotional activity around us, without needing to be promotional ourselves.

All right. And that does conclude today’s question-and-answer session. Gentlemen, I will turn it back to you for any additional or closing remarks. A - Tom Vellios: Okay. Thank you all. Really appreciate for your support and as I said earlier, have a happy and healthy holiday. And we look forward to our next call.

Once again, ladies and gentlemen, that does conclude today’s call. We thanks for your participation. You may now disconnect.