Farah Soi - IR, ICR, Inc. Joel Anderson - President and Chief Executive Officer Ken Bull - Chief Financial Officer and Treasurer

Dan Binder - Jefferies Steve Forbes - Guggenheim Securities Michael Lasser - UBS Edward Kelly - Credit Suisse Kelly Halsor - Buckingham Research Group Vincent Sinisi - Morgan Stanley Scot Ciccarelli - RBC Capital Markets Jeremy Hamblin - Dougherty & Company Alan Rifkin - BTIG Tiffany Kanaga - Deutsche Bank Patrick McKeever - MKM Partners

Good day and welcome to the Five Below Second Quarter Earnings Conference Call. Today's call 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. Good afternoon everyone and thanks for joining us today for Five Below's second quarter 2016 financial results conference call. On today's call are Joel Anderson, President and Chief Executive Officer; and Ken Bull, Chief Financial Officer and Treasurer. After management has made their formal remarks, we will open the call to questions. I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and Five Below's SEC filings. The forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward-looking statements. If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our website at fivebelow.com. I will now turn the call over to Joel.

Thank you, Farah, and thanks everyone for joining us for our second quarter earnings call. Overall, we are pleased with our second quarter performance. We delivered sales and earnings above our guidance ranges, continued strong performance from our new stores was accompanied by a 3.1% comp growth demonstrating how Five Below continues to resonate with both new and existing customers. This 21% sales increase was accompanied by operating margin expansion resulting in a 38% increase in earnings per share. Before I review our second quarter results in a little more detail, I want to update you on a few exciting developments that highlight and demonstrate the progress we continue to make. against our strategic initiatives here at Five Below that will support our long-term 2020 until 2020 plan. First, store growth is a single most exciting growth opportunity for Five Below and next week we are thrilled to celebrate the opening of our 500th store. This is an amazing milestone for us. In less than four years, we have more than doubled our store count across the country. Second, with regards to our digital strategy, just two weeks ago, we launched our e-commerce platform ahead of plan and on budget. We're excited to expand our digital presence and the reach of the Five Below brand. Our teams did an incredible job building and launching our first ever e-commerce site in record time allowing us to get the site launched ahead of our internal timeline. It is important to remember that this was a soft launch and we do not believe that e-comm penetration will be meaningful in our business as it is in many others across retail. Third, on the infrastructure front, I'm happy to announce that after a multiyear search we have found a new home for our corporate headquarters, which is still in our hometown of Center City, Philadelphia. As we continue to grow our business and add talent across all functional areas particularly the merchandising organization, we have outgrown our current space. We will be moving in 2018 to a larger space that can better accommodate our needs as well as our expected home office head growth for many years to come. This new space not only allows us to grow for the next 10 plus years, it also affords us an opportunity to have things like a mock lab store on-site for our merchants. This is something we do not have today. It will make us even more nimble. Finally, we’re continuing to invest in talent as we further solidify the foundation of Five Below to support the long runway of growth ahead. In the last several months, we've added two senior vice presidents. The first is Eya Yerkes; Eya has recently joined Five Below as the SVP of Planning and Allocation, overseeing merchandise planning, inventory allocation and replenishment. She reports to Eric Specter, our Chief Administrative Officer. Eya brings over 20 years of experience leading planning and allocation teams at several large retailers including Sports Authority, DICK'S and Toys "R" Us. Secondly, we hired Kuljeet Singh as our newly appointed SVP of Business Optimization and Innovation. Kuljeet comes to us with strong operational experience at larger retailers like Home Depot, Target and IKEA. And he also reports to Eric Specter. With our significant growth and multiple initiatives, we are very focused on putting in place processes to effectively and efficiently scale our supply chain. So it's great to have Kuljeet onboard to lead some of those efforts. He will also oversee business process reengineering and innovation. We are also very excited to announce Christiane Pelz has joined our team and she is here with me today. Christiane officially joins us just this week as our new VP of Investor Relations reporting to Ken Bull. Some of you may know her previous from her previous roles at Safeway and Shutterfly and we look forward to introducing her to you all in the coming weeks. So as you can see, we've been busy this past quarter putting in place the building blocks that will help us deliver our 2020 until 2020 plan. Now more on our second quarter results. As I said earlier, net sales increased 21% in Q2 with an EPS increase of 38% both exceeding our outlook for the quarter. Once again new store performance was very strong and Q2 marked our 41st consecutive quarter of positive comp sales growth. And as a reminder, about 85% of our top line growth is being delivered by our non-comp stores. We see strong and consistent performance from each class of stores across geographies with varying market sizes, which continues to illustrate the broad universal appeal of Five below. We are on track to open the 85 planned new stores for 2016 and in during Q2, we opened 33 new stores and entered three new markets including our entry into Wisconsin, Oklahoma and Rio Grande Valley in Texas. All of these markets are off to a very strong start. Another opening of note is our new store in Warren, Michigan. This is a test store for us where we are experimenting with new visual design, store layout changes and enhancing our merchandise offering. We will incorporate the learnings from this test store and reflect them in future openings. This testing and learning is something we will continue to do across merchandising, marketing and even within the store as we strive to elevate the already great customer experience with the Five Below brand. Along with our new stores, the heart of our business continues to be the exciting product and the amazing values we deliver customers day in and day out. As we mentioned on our last call, one of our goals heading into Q2 was to have Five Below be the destination for all things summer. We were pleased with our ability to be on trend with our seasonal merchandise in all categories. Those assortment included floats shaped like popsicles, ice cream cones and watermelons as well as flamingo shaped lights. These are just great examples of how we continue to create elements of fun and wow with even basic items like floats and lights. Also continuing with the trend we saw in the first quarter, Room remained a strong world for us. This is one of the categories our merchant teams reinvigorated. Now as the product flows into stores the newness in Room is resonating with the customers. Now, let me touch on the work we did with regards to marketing in the second quarter. This quarter we had a planned shift in the timing of our newspaper circulars, as we move late circular season spending up to the important July 4, holiday time period. As we learned and shared with you last year, there are key periods when the circulars resonate with customer. The July 4 holiday is one of those times, which drove our decision to move up marketing efforts early in the quarter and we’re very pleased with the associated results. Along with the print efforts, we tested expanded mobile advertising in select markets throughout the quarter. Specifically, we tested fun summer videos via mobile, social, media platforms to reach our customers where they hang out the most. In Q2, we also continued the TV test we did last year. We’re analyzing the results before we determine our go-forward plans for TV in the second quarter. Unlike Q4, where our TV tests are concluded and our plans are largely established. And finally, as I said in my opening comments, we’re excited to have thought plans for e-commerce site just two weeks ago. The site is designed for mobile shopping, showcasing a curetted best of Five Below assortment. By soft launch, I mean, we open with limited feature sets and only a few hundred SKUs initially. The customer reaction is positive and we look forward to ramping the capabilities and SKU offering in the weeks and they months to come. So in summary, we are pleased with our second quarter performance and we remain on track to deliver against our goals for the year. As we look ahead to the all important fourth quarter I believe we are well-positioned across all aspect of our business whether it be merchandising marketing, distribution or store operations. Our teams have been working together all years in our holiday assortment to deliver wow and newness and value to our customers. And with that I will turn it over to Ken.

Thanks, Joel, and good afternoon, everyone. I will begin my remarks with a review of our second quarter fiscal 2016 results and then discuss our outlook for the third quarter and the full-year. Our sales in the second quarter of 2016 were $220.1 million, up 20.8% from $182.2 million in the second quarter of 2015. We ended the quarter with 491 stores, an increase of 74 new stores or 17.7% versus the 417 stores at the end of the second quarter of 2015. As Joel mentioned, our new stores continue to deliver very strong performance. Comparable store sales increased 3.1% for the second quarter of 2016, as compared to a 3% comp increase in the second quarter of 2015. This comp increase was driven by an increase in average ticket, offset in part by a slight decline in transaction. Gross profit increased 22.6% to $73.4 million from the $59.8 million reported in the second quarter of 2015. Gross margin increased by 50 basis points to 33.3%, driven primarily by the leveraging of distribution cost. As a percentage of sales, SG&A for the second quarter of 2016 decreased to 26.2% from 26.5% in the second quarter of 2015, with the improvement driven by leveraging on various fixed cost components. Our operating income increased 36% to $15.7 million, or 7.1% of sales, from $11.6 million, or 6.3% of sales last year. Our effective tax rate for the second quarter of 2016 was 37.6%, compared to 37.1% in the second quarter of 2015. Net income increased 39.5% to $9.8 million, or $0.18 per diluted share from $7.1 million, or $0.13 per diluted share last year. We ended the quarter with $96 million in cash, cash equivalents, and short-term investments, and no debt. Inventory at the end of the second quarter was $154.8 million, as compared to $123.8 million at the end of the second quarter of last year. Inventory on a per store basis was up approximately 6% year-over-year, driven primarily by higher import penetration versus last year. As a reminder, we take ownership of these direct imported goods earlier as we record in transit inventory on our balance sheet as soon as the goods leave the overseas port. Now, I would like to turn to our guidance. For the third quarter ending October 29, 2016, net sales are expected to be between $199 million to $202 million. We plan to open approximately 25 new stores in Q3 this year, as compared to 17 net new stores opened in the third quarter last year, and we are assuming a Q3 comparable sales increase of 1% to 2%. Diluted earnings per share for the third quarter of fiscal 2016 are expected to be $0.09 to $0.10. For the full-year 2016, we are raising our previously provided sales and earnings outlook. Sales are expected to be in the range of $1,000 million to $1,009 million with a comparable sales increase of approximately 3%. This compares to net sales of $832 million for fiscal 2015, representing a growth rate of 20% to 21%. In 2016, we plan to open 85 new stores and expect to end the year with a store count of 522, as compared to our 2015 ending store count of 437. For the full-year, we continue to expect operating margins to be up slightly versus 2015, driven by improvement in gross margin and offset by modest deleverage in SG&A. As reminder, our guidance takes into consideration benefits from our 2015 investments, as well as costs associated with our launch of e-commerce and our 2017 entry into California. We continue to expect a full-year effective tax rate of approximately 37.5% and net income is expected to be in the range of $70.4 million to $72.7 million, representing a growth rate of approximately 22% to 26% over 2015, with diluted earnings per share in the range of $1.28 to $1.32. With respect to CapEx, we plan to spend in total approximately $40 million in 2016, reflecting the opening of 85 new stores, investing in distribution centers, and corporate infrastructure, including systems. 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 Joel to provide some closing comments before we open it up for questions. Joel?

Yes, thanks, Ken. In closing, we’ve made great strides against many of our strategic initiatives already this year. Our second quarter results demonstrated the consistency of Five Below’s financial performance. Our new stores continue to excel. We delivered comp performance in line with our expectations and sales and earnings exceeded our guidance ranges. As we look ahead to the second-half, our teams are head down and focused on delivering against our goals for the year. I want to thank all of our associates for their continued hard work and we look forward to updating you on our progress on our next call. With that, I would like to turn the call over to the operator for questions. Operator, if you would open up for questions. Thank you.

Thank you. [Operator Instructions] At this time, we’ll take a question from Dan Binder with Jefferies.

Great. Thank you for the time. I was wondering if you could just talk a little bit about the ticket and transaction data if you are seeing the ticket increase in units per transaction or AUR, and what do you think contributed to the – [indiscernible] transaction?

Ken, you want to…

Yes, Dan, we normally don't provide the detail within the average ticket. With regard to the overall transaction, because I think you heard Joel say, from an overall perspective in Q2, we’re really happy with the comp performance there. And as he also said, the large majority of the sales increases are coming from the new stores, and comps representing small percentage of growth. And we saw great performance from a top line perspective and all the way down to a bottom line perspective. So from a transaction standpoint I think we did call out, in the initial call we did back - our Q1 call, which was just after the Memorial Day Holiday that we did get off to cool weather there in May that drove some of that transaction challenge.

And then just as a separate – as a separate question, can you give us a little bit more color on inventory content it looked like stores were pretty clean on summer. I was just wondering if you could talk to that on a full store base and then how back-to-school is shaping up?

Yes, Dan it’s Joe. Yes no issues on inventory; we came out of summer very clean, transitioned nicely into back-to-school and as you know the majority of our stores are late going back-to-school stores we got a few markets go back. But the bulk of our back-to-school season is still in front of us here. But we’re set great and it’s a great start with back-to-school and no inventory issues overall really anywhere.

Great. Thanks.

You bet.

Move along to John Heinbockel with Guggenheim Securities.

Hey, guys it’s Steve Forbes on for John today.

Hello Steve.

As it relates to store layout changes with new test store in Michigan, can you provide some more details around what you’re testing, I mean is it a larger or smaller format in general, or is it adjustment as it relates to space allocation and the location of the worlds within the current prototypical box?

Yes, the overall box is relatively in line with our current box, maybe 10% bigger, but nothing significant. It’s - we’ve really, I think done a great job of tweaking the concept, it’s been a really strong concept for us. It’s now 10 years old and we’ve really brightened it up, some new fixtures are in there, new graphics, tightened up some of the worlds to define the worlds and really create a better opportunity for us - a lot of the customer to really get in and shop our world and create a lot of stickiness. And we’re excited about some of the initial findings on it, we’ll continue to take the learnings get to Holiday and anything that’s successful in that and look to see in our 2017 stores.

And then I have a follow-up, as we think about 2017 I mean the anticipated expansion out west can you just update us on your current thinking as it relates to supplying those stores. And I guess how are you thinking about price zones on a national scale if that make sense given your fixed pricing strategy?

Yes, at this point in time Steve we’re not really thinking about any different pricing strategy for those stores out there. The initial wave will be in the 10-ish number, which is consistent the way we've done it in the past when we made the leap to Texas, we opened 10, 12 stores our first day in Dallas, same way we did when we moved to Chicago made the leap to the Midwest there and we’re going to use that same strategy as these stores will be clustered largely and only in Southern California from that perspective. And we’ll rely on a three PL over time to support us in California.

Thank you.

You bet Steve. Thank you.

Next question is from Michael Lasser with UBS.

Good evening, thanks a lot for taking my question. Ken you earlier mentioned that traffic started off slow in May due to the uncooperative weather. So should we take that to suggest that the traffic trend improved over the course of the quarter?

Yes, Mike, I don't like to really get into month-by-month and I think we’re going to have puts and takes in any quarter as it relates to weather. Second quarter is probably the most fickle and volatile to weather patterns, but I think as everyone knows the mid-Atlantic had a really a slow start to summer continuing into kind of mid-June. But overall we are confident that it was largely weather-related and no overall concerns with our transactions from that perspective.

I guess the question is going to focused in part, because you guiding to softer comps for 3Q, so should we interpret that to mean that that the current quarter start off a bit softer?

Actually, no, I wasn’t looking it that way, in fact I think if you go back to our original guidance for the year, we are looking at the year at about approximately 3, you know you got half the year done, I give you the guidance for Q3, you can kind of back into where that puts Q4 and it all lands at about approximate 3, so, this is really where we saw when we laid out the original plans for the year where we sell Q3 to be, it is our strongest compare quarter for the year and what is really great about this concept is, if you look at the last five quarters of so and look at it from a two year stack perspective, we are in a pretty tight range of little more than 6 and little less than 7 and you would look at that for Q3 and we are right in that same range to take the mid-point of that guidance and you are at a 6:3, so Michael this is where we were at the beginning of the year and it is where we are still at right now. So, nothing more to look into it and simply that’s how the year laid out.

Okay. And I guess these questions are just aimed at trying to understand how long you can sustain this type of same store sales growth, understanding that, most of the algorithm right now is driven by new stores, but I think it is important to understand what the long-term productivity potential of all the boxes are, and part of that is going to depend on the merchandizing line-up, it seems like you had a good run with licensed merchandize, Shopkins, Star Wars, Frozen, how is the pipeline looking there, do you still have room to benefit from those license merchandising activity?

I think you call out the big contributing factor that strong Q3, I think the difference this year is we we've got Michael and his team clearly on board now going into the second holiday this is my third holiday, Eric Specter’s third holiday, leadership team is not going into this holiday blind, I think what Michael’s done with the merchandise is better than ever. And far as we can see and lookout into the future and we laid out for you at 2020 to 2020 plan, this is a 3% trending annual comp business. And you might see some quarters of 4 and 4.5 you might see it’s important that 1 or 2, but it blends out at a 3 comp. And I don’t see anything to differentiate from that at all. You look at the history of this company, every time we’ve been up against strong trends. You come around to hold on a little soft, but you still is comp positive and that’s been true when we’ve 10 comp quarters and true when we’ve had five comp quarters then I think everyone of those trends is doing a great job of exposing somebody new to the brand. Sometimes it’s the teen girls and sometimes that teenage boys and sometimes it’s mom, right. And so I think each one of those trends exposes somebody new to the Five Below brand. So no overall concerns I think you guys got to look at this – this is a three, comp business and we got to stay focused on 85% of our growth coming from new stores.

Thank you so much.

Yes you bet. Thanks Michael.

Our next question is from Edward Kelly with Credit Suisse.

Yes, hi good afternoon guys. Just the kind of a follow-up there I guess, could you talk specifically about holiday, and how the merchandize set looks at this point and expectations going into the period given that I think historically it’s been not pretty big area of focus from the best standpoint?

Yes I’ll reiterate a little bit of what I was just saying to Michael, my third season, Eric’s third season, Michael Romanko’s third seasons, certainly Ken’s been around 10 of them, I think the leadership team is more prepared than last year specifically as it relates to the merchandise question. We’ve done line views, products bought much of it’s on the water we’ve really feel strong about the merchandise – the line-up that we’ve got for the holiday season. And we go into 2016 even better prepared than last year.

And I just want to ask you a question from a cost perspective, there's a number of initiatives here which would seem like they would impact you from a cost perspective, whether it is e-commerce, California, new corporate headquarters. How do we think about the impact of all of that from a cost perspective, as we move forward, particularly as we get into 2017?

Yes, sure. I think, we shared with you back a year ago, we’ve made a lot of investment in people, the new DC, and we de-levered there, the size of the company couldn’t absorb all that. I think, as you look forward, you're going to continue to hear me talk about people systems infrastructure investments that support our 2020 goal. But for the large part, as the company continues to grow in size, we should be able to continue to absorb those. There might be a timer to where it gets bigger and the timing is off. And I think we hit one of those, we’ll certainly share with you. But I don't think you should look into it other than we wouldn’t have laid out a 2020 goal for you, if we didn't see on the horizon a pretty good cadence of what we got to do, in which year we go to do it to deliver and support and grow this company with discipline and rigor. And that's the best way I outlined. And I don’t know, Ken, if you would have anything to add on that.

No, I think you hit on all the key points and edges. I know you’re talking a little bit further out. But keeping in mind that, we mentioned we launched e-com and the initial California cost, they were all baked into our guidance in 2016. And really the point with what Joel saying is that, all those costs and the investments that we made before, those were all things that we were aware of and are planning for, and have been factored into that 2020 through 2020. So we feel confident with that.

Great. Thank you.

Okay, you bet. Thanks, Ed.

Moving forward we will hear from Kelly Halsor with Buckingham Research Group.

Hi, guys, thanks for taking my question. I just had a question on your TV test in 2Q and then as it relates to 4Q, how – what penetration were you at this quarter versus last? And then when you look out to the holiday quarter, will you be expanding your TV marketing there?

Yes, thanks, Kelly. I answered that question and kind of bridges the last question net apps. And I think, anytime we take on a new initiative or do some, we’re going to really test it thoroughly, whether it TV, or e-commerce, and really approach it with discipline and rigor. And as it relates to the Q2, I think, we’re still in a disciplined test mode with that. So that we get the right balance of both the top line and the bottom line investment that’s been specifically, we were in eight markets last year, we are in eight markets this year, and market this year might have been a little bigger. But not that big of an increase from last year. As it relates to Q4 though, we pretty much feel like the two tests we’ve done from the last two years, the holiday, given us enough confidence that you should expect to see us expand TV into Q4 this year. We’re obviously not in a position to buy nationwide, given we’re only in 30 states. And even in the 30 we’re in, some of those are pretty sparse. But we’ve got a pretty good algorithm now, we’re figuring out how many stores do we need in each market that it makes sense to do TV market by market. And the marketing team has put that together, and while the exact number is not done yet, we should and you should expect to see a pretty significant growth in TV versus last year.

Okay, great. And then as it relates to 3Q, you’ve heard from a couple of your competitors just around the timing of Halloween. I mean, has that been thought about, I think it falls into the – the actual Halloween falls into the fourth quarter this year, I mean, does that contemplated at all in your 3Q guidance?

It was certainly contemplated, but I would tell you for us, it’s really not material. Halloween is not a big holiday for us. If anything, it’s probably a benefit as we pick up that last Saturday. But it's so small, Kelly, that it wouldn’t move the needle either way for us back to school is a bigger holiday for us and a bigger piece of Q3. I might just add just for everyone’s reference on the call, of all the quarters, Q3 is our smallest quarter. And honestly, what’s on our mind and what’s most important in Q3 is getting set of for Q4 and being prepared for Q4. But the Halloween shift is not material at all.

Okay. And then just lastly, Ken, for our models, what would be the – well, it was great to see very strong new store productivity in 2Q came in above where we were expecting. So what should we be thinking about for the implied new store productivity for the back-half of the year?

Yes, we – as we mentioned, we’ve been very pleased with new store performance to-date. And I think implied in our guidance, I’m sure, you’ll be able to do the math on that is ongoing similar type performance in the back-half of the year.

Okay, great. Thanks for that.

Thanks, Kelly.

And we’ll move to Vincent Sinisi with Morgan Stanley.

Hey, great, guys. Thanks very much for taking my question. I just wanted to ask kind of more theoretical, as you’re doing more and more of your kind of digital initiatives and mobile and social media, can you just give us a sense for, as you're trying to kind of get to know your customer base and potential customer base more, kind of, some of the learning so far where the kind of the bigger opportunities lie and what you’ve learned so far going forward to then put into play?

Yes, I mean, probably not too surprising. But I think, I probably won't get into details of all the learnings, I think somewhat competitive in nature. But I’d like to share one example with you, mobile is where it’s at. I mean, I think, even if you look at our new e-commerce site, we built that site to be mobile only and not to be desktop, be really focused on the mobile device. And that's where our traffic is coming. As it relates to TV, the digital, we talk mobile social, all our ads are really being focused to tie into mobile YouTube clips or anything like that. But I think mobile is clearly with the teen tween customer. That’s kind of their device and that's where they live. And I think the marketing team has done a great job of pivoting and shifting and playing that up. Having said that and I’ve shared in the past, we've learned a lot about circulars. And I was probably too aggressive candidly in my first period of time to cut out too much circular and I think we've learned that circulars still play a role. And they're especially good in protecting the base. And so, I think we are working to make sure we kind of remain a nice balance of that as we understand our base customer from that perspective, but those are just a couple of examples, some of the things we've learned.

Okay. All right. Thanks, John. Just a follow-up on the e-commerce launch. Looking on the site, just to make sure that we all kind of know what's going on. So I know you said kind of limited SKUs at the start. Any thoughts around kind of expansion there, what may be seen so far? And then also it looks like kind of minimum order of a $15, but then some incremental costs as we get over $35 and maybe on an item basis too. So maybe just some further color around how e-commerce at least today is working.

Danny, it's obvious you’ve been on the site and shopping and checking it out. I appreciate that.

Sure.

Having spent a few years in e-commerce, they never want to let perfection be the enemy of great. And what I mean by that is speed is more important than anything and the teams got focused on it this year and we – anything that was a hurdle that would delay, we pulled out of the feature set. And we launched with a few 100 items, you'll see us begin to ramp that up, we've had zero issues with the site. When I say feature set, you can't use a gift card today, but we will have that before holiday. We can't ship to California today, we will have that in conjunction with our launch next year. So those are just two examples of the features that aren’t there today that'll come and expect to see more products, but we’re testing with right elasticity and shipping and handling fees, what’s the right threshold at what level, minimum orders, et cetera. So [indiscernible] found a couple of those, but team has done a great job, it’s been a quick launch, it’s great to see no issues. And as Ken shared from day one, minimal impact on the bottom line for us.

Okay, very helpful. Thanks, Joe.

Yeah, you bet.

Now we move to Scot Ciccarelli with RBC Capital Markets.

Good afternoon, guys. Two questions. First, I think you mentioned you are looking for a slight increase in EBIT margin this year, but when you look at your guidance and obviously the strong first half performance at the margin line, are you anticipating flat or down EBIT margins in either 3Q or 4Q? And secondly, Ken, can you help us understand the drop in payables within the increase in inventory? Thanks.

Sure, thanks. Just your first part of your question around margin, yes, you're right. What I said in the – in my comments was, we do expect slight operating margin improvement on a full year basis driven by gross margin improvement, offset by the SG&A deleverage in some of those areas like e-commerce costs and the California costs. When you look at that from a go-forward standpoint, it really assumes relatively flat operating margin performance in the back half of the year to lead to that. And then what was the second part of your question?

Payables.

Yeah, the drop in payables. That was purely just timing there at the end of the quarter.

So should we expect the payables inventory ratio to kind of normalize where it’s historically been?

Yes. Yeah, it would normalize to what we've seen in prior quarters as we move forward.

Got you. And just – Ken, just I understand that the flat EBIT in 2H, is that just the timing of e-commerce and the timing of California cost, I guess my original impression was given all the investments that you made in 2015, there would actually be margin improvement kind of throughout the course of the year, but it sound like that's not necessarily the case?

Well, you're right. We are getting – when you dig a little bit deeper, we are getting returns on those investments that we’ve made in the past, but they are being offset by e-comm and California because they are really in the back half of the year. So, you are right. That is the key driver there to getting that operating margin at a flat level for the back half of the year.

All right. Thanks a lot guys.

Yeah, thank you.

Thanks, Scott.

Jeremy Hamblin with Dougherty & Company has the next question.

Good afternoon, guys. Congratulations on another strong quarter in a tough environment. I wanted to ask, Ken, about the – this slight shift that we are seeing in new store openings. And it looks – I think it looks like you're calling for six in Q4. As we look forward in the model and you're starting to – you use to do no opening Q4 and now as we’re opening more stores overall, we're seeing a little bit of a creek into Q4, I know you don't like to particularly open during that holiday timeframe. Is that something – as we look into 2017, 2018 beyond, is that something that we should account for in our models that we may see a few more openings in that fourth quarter?

Yeah, and you mentioned it, Jeremy. I mean, historically, we would rather not open up stores in Q4. And when we say Q4, we are really talking about first week, maybe two weeks in Q4, so it’s really kind of just after the end of Q3 and that's really what we're expecting for, for this year. For a go forward perspective, I would expect that to be consistent as we move forward. There's the potential for stores or for us to open up stores in that early part of Q4, but really for the most part probably in those first couple of weeks.

Okay, great. And then just a couple of follow-ups on those – the commentary around the corporate changes. In terms of the test store in Michigan, any difference that you can call out at this point in time, obviously, it's still being tested, but in terms of the size, the cost to develop a store and obviously the economics, I’m assuming, are at least as good as what you currently get? And then just one other quick one to squeeze in, what's the kind of the timing of the change in the new headquarters and the cost or the EPS impact to that? Thanks so much guys.

Yeah, let me take those and, Ken, you can add any color to that. But on the store in Michigan, I think at the end of the day when it’s all done and said, I don’t think you should adjust your model at all on that. And certainly, if we begin to see upside to that, we would share that with you. But I don't think we certainly didn’t go into expecting to see a downside in it. As I shared on the call earlier, 5% to 10% larger, but it’s considered relatively the same size from that perspective. And then what was the second part?

New headquarters.

New headquarters, we are still finalizing that lease and the exact timings and a lot of work to do on that. But as we get closer and certainly as we would give a outlook in 2017 and all that, we would have all the specifics for you, but I think the biggest reason I want to share with everybody on the call is this was part of our original plan, we’ve been looking for a couple years now and that as we would send out a press release in a couple weeks, we didn’t certainly want any of you to follow this for a long time surprise kind of wondering what this, but initially we don't see any significant impact.

Great. Thanks, guys. Best of luck for the rest of the year.

Thanks, Jeremy. We look forward to talk to you soon.

We will move along to Alan Rifkin with BTIG.

Thank you very much for taking my questions. So, first question relates to SG&A, so after leveraging by more than 30 basis points in the first half of the year, you're looking for SG&A on an annual basis to be up, which would obviously significant deleverage in the back half. Is that deleverage in the back half entirely due to California and e-commerce and having nothing to do with the legacy stores?

When you are looking at the back half, Alan, that is the key driver when you are in SG&A for the back half. So there really isn't anything else meaningful to call out that’s driving that. Again because all those costs are really embedded in the back. We didn't – obviously there's no increase in the first two quarters related to that. So that is the key driver of the delever.

Okay. And then my second question is, if you look at the TV advertising increased again Q2 together with the fact that that transaction were a little bit weak, when you look at how quickly the sell-through from TV advertising resonates in the store, is there a lack factor involved? In other words, why did you not see transactions be a little bit stronger in the wake of TV advertising increasing in Q2?

No, no, no, Alan, actually if you look at our overall marketing spending in Q2, it was – on a rate basis was flat to last year, in fact they might even be down basis points or so. So it was – there was overall really no increase in marketing spend year-over-year.

Okay, thank you.

We will move now to Paul Tressel with Deutsche Bank.

Hi, this is Tiffany Kanaga on for Paul. Thanks for taking our question. Looking over the balance of the year and even further ahead, in which world do you see the most opportunity for comp growth and where do you anticipate any risk of potentially weakness?

Tiffany, for – obviously, for comparative purposes I don't want to really get into the specifics there, but I think what I’d just remind you and everybody what continue to make Five Below so unique and special and lead to those 41 consecutive quarters of positive comps is the eight worlds. And Michael and the merchants are constantly shifting in the worlds, leaning in on worlds that are trending and shrinking down worlds that aren’t and I think that’s what has really allowed us to kind of pivot the concept wherever the customer is, or wherever the trends are. I think as quarter by quarter goes along, we certainly share with you what drove the quarter. On the quarter we just finished, we talked a lot about seasonal in Room and we will do that as we go through the quarter, but we've got a great line up for the holiday season and it will stay in those eight worlds, it might shift around as quarter to quarter.

And given the management announcements today, are there any remaining gaps we're still looking to build out your team?

Obviously, when you are growing at the size we are growing, it will constantly create opportunities for us. We announced Christiane joining us, it’s the first time we've had a in-house IR person. Years ago we brought on our first loss prevention group. And so, as we continue to grow out and become a large retailer, we will fill those up. There is no glaring gaps that concern us. It'll just be the necessary head count growth to stay ahead of and in line with our annual of 20% percent or so – sales growth that is.

We have one more question in the queue. We will hear from Patrick McKeever with MKM Partners.

Thanks.

Hi, Patrick.

Good, good. Thank you. Just a question on merchandise margins. Anything notable there as you grow the business and do more direct sourcing? I know the intention is to surpass on any product cost savings to the customer to keep the wow factor up, but I'm just wondering if there's been anything notable on the merchandise margin front?

[indiscernible] answer the question for me there. That's still the strategy. I think Michael seems done a great job in that area and as we do find margin opportunities we do plan to reinvest that back into that product and continue to bring newness and wow and you’ve seen that in some of the stuff that came out last year and I think you'll see something even more impressive as we get into the fourth quarter here.

And then on the – I was just going to ask about the election. I don’t know if your business is affected by the election or not, but as usual if you look back four years ago and eight years ago, and it was a much smaller company than, but is there any – do you have any thoughts there as to do you expect to see maybe a little increased volatility as we get closer to the election, does your customer – as your customer not so concerned about the election, is that factored into your 1% to 2% guidance at all?

Patrick, I was a poli-sci major in college and worked on the hill, I thought you were going to ask from my opinion on who is going to win. History would tell you there's always volatility at this time of the year, but history would also tell you regardless of who wins, the markets just want certainty, and that will all be defined and decided barring any hanging chads in Florida in the first week in November. And I think as it relates to Five Below and what matters for us, the fourth quarter is the most important and that all happens after the election, so I think any choppiness or worries that happen in the third quarter here will largely be immaterial for us specifically. And we will stay hunkered down and focused on the fourth quarter. TV starts after the election and I think all the uncertainty will be done by then, so largely for us knock on wood. Thankfully we don't really have to worry about it.

Okay. And then just a quick one. On the new overtime rules that go into effect on December 1, will that have an impact, do you expect that to have an impact in the fourth quarter, how are you thinking about that?

We only have one member management in our stores, our general manager. We're largely on average at the threshold there. Because it doesn't start until December, it’s very material for this year. I think we forecasted for next year probably has about $0.01 impact on the overall year. Still possibly some legislation that could happen on that changes, but I think worst case scenario we Kind of believe there's about $0.01 impact in 2017 but this year's not much at all given late it is coming.

Okay, okay. Great, thanks, very helpful.

Thanks, Patrick. Thank you.

Thanks, Patrick.

That will conclude the Q&A session. I’ll turn things back over to Joel Anderson for any additional or closing remarks.

Yeah, thank you operator and thank you everyone for joining us today. We look toward to updating you again with our third quarter results in early December and talking about the all important fourth quarter. Have a great day and thanks for the questions and support. Take care. Bye.

And again that does conclude today’s conference call. Thank you all for participating.