Joel Anderson - President and CEO Ken Bull - CFO and Treasurer Christiane Pelz - IR

Stephanie Chang - Credit Suisse Paul Trussell - Deutsche Bank Michael Goldsmith - UBS Jeremy Hamblin - Dougherty & Company Stephen Tanal - Goldman Sachs Dolph Warburton - Jefferies John Heinbockel - Guggenheim Securities Kelly Halsor - Buckingham Research Group Alan Rifkin - BTIG Sean Kras - Barclays Alvin Concepcion - Citi Brad Thomas - KeyBanc Capital Markets Vincent Sinisi - Morgan Stanley Patrick McKeever - MKM Partners Brian Nagel - Oppenheimer

Good day, and welcome to the Five Below Fourth Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Christiane Pelz, VP of Investor Relations. Please go ahead, ma’am.

Thank you, Melissa. Good afternoon, everyone, and thank you for joining us today for Five Below’s fourth quarter 2016 financial results conference call. On today’s call are Joel Anderson, President and Chief Executive Officer; 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 in 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 Web site at fivebelow.com. I will now turn the call over to Joel.

Thank you, Christiane. I will provide a review of our performance in the fourth quarter and full year 2016, go over the progress we are making against our strategic priorities and discuss key areas of focus for fiscal 2017. After that, Ken will discuss our financial results and outlook. At the beginning of the year, we outlined our five-year strategy of 20/20 through 2020, which calls for 20% sales growth and greater than 20% net income growth through 2020. We met or exceeded these goals in 2016 highlighted by one, another strong class of new stores which is estimated to be our strongest class; two, our 11th consecutive year of positive comp sales growth; three, disciplined expense management while continuing to invest in the business; and four, as we’ve achieved in the past all stores were profitable. Our focus on the Five Below customer and delivering the promised wow factor is unwavering. This means consistently delivering trend right products at unbelievable values. It has driven our strong operational and financial performance and we will stay true to this mission as we continue to expand our footprint and grow our brand. Having hit the 1 billion sales milestone in 2016 and with top line growth of 20% expected, each passing year we are better positioned to leverage our growing scale and reinvest in our buying power to further strengthen our customer value proposition and deliver even more wow. Now, turning to Q4 2016, we delivered sales growth of 19% to 388 million and earnings per share growth of 17% to $0.90 per share. Comp sales increased by 1% for the quarter as we anniversaried strong trends from last year. For the full year 2016, sales were $1 billion, up 20% over last year. Our store count increased by 19% to 522 locations and comp sales increased by 2%. We generated operating leverage expanding margins by 20 basis points while continuing to make investments in the business, resulting in a 23% increase in operating income to 114 million and a 24% increase in earnings per share to $1.30. It was two years ago on my first call as CEO at Five Below that I laid out our five key strategic priorities namely new stores, merchandizing, marketing, systems and infrastructure and people. We have made substantial progress against each of these priorities in the last two years where we focused on building on the success in 2017. One, starting with new stores. In 2016, we opened 85 net new stores. We entered four new states; Louisiana, Wisconsin, Oklahoma and Minnesota and the new markets of South Florida, Cincinnati and Rio Grande Valley. We also continued to densify our presence in existing markets such as our hometown of Philly where we opened an additional four stores. 2016 openings included a mix of smaller, semi-rural markets like Lafayette in Louisiana, suburban markets such as White Marsh in Maryland and urban markets like Brooklyn, New York. Our 2016 class is on track to be the strongest class ever and be the first class to reach the average $2 million market per year one sales. This strength remains broad based demonstrating the universal appeal of Five Below that is the foundation of our 2,000 plus store opportunity. Customers in every market respond enthusiastically to our unique stores and trend right merchandize that delivers the wow factor at incredible value. This is what has made each class of store successful and also what makes us even more excited about the future of Five Below. It is this strong consistent performance right out of the gate that results in a less than one year payback period on our new store investment. In 2017, we plan to open approximately 100 stores, the majority of which are strategically planned to open in existing markets to leverage brand awareness and further benefit from densification. We will enter California in 2017 with a cluster of nine stores in the Greater Los Angeles area at the end of April. Our people are in place, all our store managers are hired and our distribution center is ready to ship product. We expect the economic profile of these stores to mirror the rest of the chain with high productivity, quick payback and strong contribution margins. We are excited to enter the state of California and look forward to building our presence in Southern California with additional stores in 2017 followed by increased openings in 2018 and beyond. California is expected to be our largest growth opportunity over time. We are constantly looking for ways to innovate in our stores to keep them as fresh and exciting as our products and to improve the customer experience. Last year we began testing a refreshed Five Below concept with new features including a new look and feel for several of our worlds. We were pleased with the results. In a class of 17, we’ll incorporate these enhancements. Number two, on the merchandizing front. Our new wow products particularly in Tech and Room were a big hit with customers in Q4. As we look ahead, we will continue to grow product development, build out our sourcing capabilities and leverage our scale to bring more trend right high-quality merchandize at amazing prices to our customers. The team is focused on delivering our core value proposition by reinvesting in product both quality and price to deliver the wow that is our customer promise. We like the emerging trends we are seeing in Q1 as well as our initial set for Easter. Number three, in marketing, we continue to optimize our medium mix. Within Digital and Media, we are focused on getting closer to where our customers are whether it’s on their mobile phones, on social media or watching on-demand video like YouTube. Looking ahead, we will continue to utilize TV in both Q2 and Q4 as we increase our presence in key existing markets to further leverage brand awareness and benefit from densification. Another component of our expanding digital efforts is e-commerce, which we soft launched in August of 2016. We were very pleased with the performance of the site and what the team accomplished this first holiday season. I personally want to thank the team, led by David Makuen, for all of their hard work. To grow the business and offer even more convenience to our customers, we are continuously enhancing the assortment and the mobile customer experience and will soon also be able to ship nationwide. Our comprehensive marketing initiatives both print and digital are focused on increasing top of mind and brand awareness to drive traffic to our growing store base. In addition, our real estate densification strategy is designed to increase our brand awareness more rapidly. On the infrastructure and systems front, our leadership team has created efficiencies across our supply chain and has continued to improve our processes. We also continue to look for ways to improve the customer experience in-store. The multiyear phased-in system upgrades are progressing as planned. We completed the financial systems component of our ERP implementation this past year and now are on to merchandize item planning and human resource information systems. Finally, as I mentioned last quarter, we are also preparing to move into our new home office at the beginning of 2018 to better accommodate our growing business. Which brings us to our fifth strategic priority, people. As we have grown Five Below scale, we have also hired the necessary talent to drive our success further strengthening our teams across several functional areas; from merchandizing, to planning and allocation, to marketing, finance and human resources. We also added more training and development resources for the store associates. We will continue to opportunistically make the right hires at the right time and invest in the right systems to support the substantial growth that lies ahead. Now, I’d like to turn it over to Ken to give more color on our financial results and discuss the guidance for next year. Ken?

Thanks, Joel, and good afternoon, everyone. I will begin my remarks with the review of our fourth quarter and fiscal 2016 results and then discuss our outlook for the first quarter and full year fiscal 2017. Our sales in the fourth quarter of 2016 were $388.1 million, up 18.9% from $326.4 million reported in the fourth quarter of 2015. We ended the quarter with 522 stores, an increase of 85 net new stores or 19.5% versus the 437 stores at the end of the fourth quarter of 2015. As Joel said, we continue to be very pleased with the performance of our new stores with the class of 2016 estimated to deliver on average $2 million in year one sales performance which is the highest in our history. Our stores continue to generate a payback on our new store investment in less than one year. Comparable sales increased 1% for the fourth quarter of 2016 as compared to a 3.6% comp increase in the fourth quarter of 2015. The comp increase for the fourth quarter of 2016 was driven by an increase in average ticket. Gross profit increased 20.6% to a $159.4 million from $132.2 million reported in the fourth quarter of 2015. Gross margin increased by approximately 60 basis points to 41.1% driven by improved merchandized shrink results and leverage from our new distribution center that we added in the second quarter of 2015. As a percentage of sales, SG&A for the fourth quarter of 2016 increased to 20.8% from 19.9% in the fourth quarter of 2015 largely due to deleverage of expenses on the 1% comp. Our operating income increased 17.1% to $78.9 million or 20.3% of sales from $67.4 million or 20.6% of sales last year. Our effective tax rate for the fourth quarter of 2016 was 36.9% compared to 37.7% in the fourth quarter of 2015. The decrease in the effective tax rate for the fourth quarter of 2016 was due to certain discrete items. Net income increased 18.5% to $49.8 million or $0.90 per diluted share from $42 million or $0.77 per diluted share last year. For fiscal 2016, total net sales were $1 billion, an increase of 20.2% over $832 million in fiscal 2015. Comparable sales increased 2% compared to 3.4% in 2015 driven by an increase in average ticket. Gross profit for the full year increased 22.3% to $357 million from the $291.9 million reported in 2015. Gross margin increased by approximately 60 basis points to 35.7% driven primarily by lower freight rate and leverage of distribution costs. As a percentage of sales, SG&A for the year increased 40 basis points to 24.3% from 23.9% in 2015 partially due to the cost associated with our launch of e-commerce and our 2017 entry into California. Operating income of $114 million increased 22.6% in 2016. Operating margin of 11.4% increased approximately 20 basis points from last year’s operating margin of 11.2%. Our effective tax rate for the year 2016 was 37.1% compared to 37.7% in 2015. The decrease in the effective tax rate for the year was due to certain discrete items. Net income increased 24.5% to $71.8 million. Earnings per share was $1.30 for fiscal 2016, an increase of 23.8% versus earnings per share of $1.05 for fiscal 2015. We ended the year with approximately $164 million in cash, cash equivalents and short and long-term investment securities and no debt. This is an increase of approximately $65 million versus the end of fiscal 2015 reflecting our strong free cash flow generation. As a reminder, our new store investment is approximately $300,000 and pays back in less than one year on average, which contributes to our cash flow generation. Inventory at the end of the year was $154.4 million as compared to $148.4 million at the end of 2015. Ending inventory on a per store basis decreased approximately 13% year-over-year driven by the timing of Easter holiday receipts due to the later holiday in 2017 and the lower penetration of direct imported goods. As a reminder, we take ownership of 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 full year 2017, sales are expected to be in the range of $1.210 billion to $1.230 billion with the comparable sales increase in the low-single digits. This compares to net sales of $1 billion for 2016 representing a growth rate of 21% to 23%. In 2017, we plan to open approximately 100 new stores and expect to end the year with a store count of 622 as compared to our 2016 ending store count of 522. As a reminder, the 2017 fiscal year includes a 53rd week which is expected to add approximately $15 million in sales and approximately $0.02 in EPS. Full year comparable sales are based on a 52-week fiscal year. We expect to open approximately 60% of our new stores in the first half of 2017 in line with the percentage of new stores opened in the first half of 2016. The majority of new stores will be in existing markets and states with the one new state being California. For the full year, the midpoint of our guidance assumes relatively flat operating margins versus 2016. We expect a full year effective tax rate of approximately 37.5% and net income is expected to be in the range of $86 million to $89.5 million representing a growth rate of approximately 20% to 25% over 2016 with diluted earnings per share in the range of $1.55 to $1.61. With respect to CapEx, we plan to spend in total approximately $78 million in 2017 reflecting the opening of approximately 100 new stores and investing in systems and infrastructure including distribution in our new home office. These gross capital expenditures exclude the impact of tenant allowances. Tenant allowances related to our new headquarters are approximately $10 million. For the first quarter ending April 29, 2017, net sales are expected to be between $228 million to $232 million. We plan to open approximately 26 new stores in Q1 this year as compared to 21 stores opened in the first quarter last year, and are assuming a Q1 comp sales increase of flat to 2% versus the 4.9% comp increase in Q1 2016. The first quarter is expected to be our toughest comparison versus last year as the strong trends we have spoken about continued last year in Q1 2016. We expect some deleverage in operating margin in the first quarter due to the lower expected comp and the end of quarter timing of our California openings. Diluted earnings per share for the first quarter of fiscal 2017 are expected to be $0.12 to $0.14. This guidance does not include any impact from the new stock-compensation accounting standard 2016-09, which require excess income tax benefits for deficiencies to be recorded through the income statement as a tax impact instead of as additional paid in capital on the balance sheet. As the associated cost of vesting of equity grants as well as the exercise of stock options are dependent on the stock price throughout the quarter and year, we will report the impact if any with our quarterly results. For all other details related to our results on guidance, please refer to our earnings press release. 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?

Thanks, Ken. In closing, I want to say how excited I am for the future of Five Below. 2016 was a great year. We made progress on each of our strategic priorities and in 2017 we will continue to build on that progress. We are growing rapidly, opening approximately 100 new stores this year of which we’ve already completed nearly 20%. And we remain focused on delivering consistent performance on both the top and bottom line. We have a strong track record of delivering consistent sales and earnings growth and we remain on track to achieve our 20/20 through 2020 strategy. Our ability to deliver consistent high growth is a testament to the strength of our business model, our commitment to deliver wow and value to our customers and disciplined execution by our teams. Our stores are unique and our offering and price points are so compelling. Customers love Five Below as demonstrated by our recent record customer satisfaction score which was above our goal for the year and above averages of other retailers. Finally and most importantly, I want to thank all of our associates both here in the home office and out in the field for their ideas and hard work. We have a great team who has been and will continue to be key to our success. Operator, please open the call for questions.

Thank you. [Operator Instructions]. We’ll first go to Edward Kelly with Credit Suisse.

Hi, guys. This is actually Stephanie Chang on for Ed. Thanks for taking my question. With respect to merchandize, are there any specific products or categories that you’re excited about for the coming year? I noticed you mentioned tech and room I believe for standouts in Q4. Are there any categories that you are excited about for 2017? Thanks.

Tech and room were certainly drivers in Q4 and they continue to show great promise here in Q1, so we remain excited about those two key worlds for us. In addition to that, I don’t know if you saw our last ad, you would have saw that we featured slime and that is a trend that’s emerged here in the first quarter that we’re excited about as well as I would call out that we’re about to enter the important Easter season with a shift this year and I really like what I’m seeing for our Easter set. And then of course we’ll go into summer in Q2 which is really like a mini-Christmas for us and we feel really strong about our summer set that’s coming up here. Thanks, Stephanie.

We’ll next go to Paul Trussell with Deutsche Bank.

Hi. Good afternoon, guys. Two quick ones just to follow up on that last comment regarding excitement around certain categories. If you can just kind of delve at all into kind of what you’ve seen quarter-to-date and whether delayed tax refunds had any impact to your business to start off the year? And then second for Ken, really just interested in how you’re thinking about new store productivity this year just given the opening of doors in existing markets along with obviously this initial entry into California. Is there any change that we should be aware of in thought process around new store productivity or particular cadence of NSP? Thanks a lot.

Thanks, Paul. Usually I don’t like to get into the week-by-week, blow-by-blow inter quarters. Certainly several retailers have called out the tax shift and we saw that same shift happening. We planned for it and we think as the quarter finishes, that’s net neutral and have already seen the bounce back from that. Currently, we’re up against Easter from last year and really our Easter selling for 2017 kicks off here starting next week. Ken, comments on --

Yes. Paul, on the new store productivity, we feel really good about our new store program in 2017. And from a productivity standpoint if you do the math on the guidance that I’m providing for Q1 and the full year, those productivities are north of 90%, so at the high-end of our guidance. So I think it echo’s the confidence we have going into 2017 with the new stores. And then you had a question around the cadence of the stores, pretty similar in 2017 versus 2016. We expect to open about 60% of our stores in the first half of the year which is about what we did last year, and in the back half obviously 40%. So that should be pretty similar year-over-year.

Great summary, Ken. And I would echo what Ken said, Paul, still no change in new store productivity and are equally excited about this class that’s coming up here as we get the year kicked off.

We’ll next go to Michael Lasser with UBS.

Good afternoon. It’s Michael Goldsmith on for Michael Lasser today. Thanks a lot for taking my question. My question is on the new store openings. You mentioned you’re focusing on existing markets with the exception of the openings in California. Is there going to be any expected cannibalization that should impact the comp in any way that’s been different than past years? Thank you.

Thanks, Michael. No. We certainly look at cannibalization as we approve market-by-market and we don’t expect the cannibalization percent to be materially different in 2017 than it’s been in 2016. Remember, we see a 2,000-store opportunity out there. We only just crossed the 500 and really believe that there’s a lot of open space within our existing markets that we need to turn our attention to and begin to densify. But no expected change in cannibalization rates from prior years. Thanks, Michael.

We’ll next go to Jeremy Hamblin with Dougherty & Company.

Congratulations guys on another great year. Wanted to just get into e-commerce a little bit and you mentioned that you were very pleased with the initial results. Wanted to get a sense of first, how many SKUs that you’re offering online at this point versus what you might typically see in a store? And then secondly, if you can give us a sense of potential magnitude of impact this year for the full year versus what you saw from August through the end of last year just to give us a sense of how much you expect that business to grow this year? Thanks.

Thanks, Jeremy. As I said in my prepared remarks, we soft launched in August and our main focus of our launch of e-commerce is really to get our initial platform out there, have a successful holiday season, get an initial set of SKUs out there. And I can honestly say we checked the box of success on all those initiatives. It was a great first year online. We’re fortunately in a position that we can approach e-commerce from an offensive standpoint not a defensive standpoint, meaning we can build it out with the right amount of pace and diligence rather than having to go excessively fast to play catch-up. I’ve always said that I believe e-commerce is the icing on the cake. Our stores are still the cake and we’re very excited about our new store growth and hence 100 new stores this year and we’ll continue to be the main driver of our growth. As far as the year goes, we’ll continue to add new features, optimize our SKU count. We’re still at a very small percent of what you see in our stores. We currently don’t ship to California as an example. And with our launch into California we’ll expand our e-commerce reach into California. And yet at the same time we don’t expect it to have a material impact on our overall sales for 2017.

Thank you. We’ll next go to Stephen Tanal of Goldman Sachs.

Good afternoon, guys. Thanks for taking the question. Wanted to just touch on a little bit on the guidance for the comp. A lot of obviously sort of negative data points on retail traffic and you guys are generally bucking the trend. But I wonder if you could comment on traffic specifically and how that’s trending and how you think that will – how that will play out in 2017? And then just a follow-up on e-commerce, if you could just tell us what the sales were in the quarter, that would be great? Thanks.

I’ll take the second one and Ken will comment on traffic. Currently, we haven’t disclosed the sales on e-commerce and I would tell you they’re not material and are still small in the overall piece from a materiality standpoint.

I think Stephen you had a question around traffic, looking at traffic going forward although I’d just make a comment in terms of again what we saw in 2016 in the fourth quarter and then the full year I noted the comps that we achieved were driven by average ticket. We did see an improvement in comp transactions as we moved through the year being at a lower point in Q3 and we improved in Q4 where it was relatively flat and was similar for the full year. As we move forward into 2017, we don’t guide to any type of transactions or average ticket around that but we did make the comment around the guidance of our comps. You noticed us kind of stretching that guidance out a little bit as we’ve gotten larger we feel is the prudent thing to do in terms of the low-single digits. But at this stage, I can’t comment or estimate or forecast specifically transactions embedded with those guided comps.

Yes, I would just add. We really saw Q3 as the high watermark of the negative traffic and saw a nice rebound in Q4 and would expect that to continue to moderate as we finish the peak of the trends from '15 and '16.

Let’s go to Dan Binder with Jefferies.

Hi. This is Dolph Warburton on for Dan. Thanks for taking my questions. My questions revolve around the TV advertising program. I might have missed it, but do you guys have an estimate for how much TV ads might have added to comps in the quarter?

No, we didn’t. You didn’t miss that. We haven’t broken that out. What I would share with you is that we increased TV in 2016 from 2015 from about 25% of our stores to 40% of our stores. We continue to think TV is very important to the overall marketing mix and you should expect to see us continue to invest in TV in both Q2 where we’re still doing some testing but expand it in Q4 of 2017. But it’s an important mix of our overall marketing going forward for sure.

Thank you. We’ll take the next question from John Heinbockel with Guggenheim Securities.

So, Joel, on real estate, given what’s going on with retail, what’s happening to the quality of the sites you’re looking at and the cost, right? So is rent flattening out or maybe even going down? And then when you densify how close – and I know it varies by how urban the market is. But how close do you find you’re able to put stores? And then what’s kind of the max cannibalization you think is acceptable, right, to try to drive brand awareness?

Yes, a lot in there on real estate, John, so let me try and tackle all those. What was the first part of it? It was --

Quality and cost of real estate.

Yes, quality. I would tell you overall the quality continues to get better, John. We are a desired tenant and as much as retailers are struggling and there have been several closings, landlords want vibrant centers. And we bring both an A balance sheet and we also bring traffic. We bring vibrant young traffic. And so – whereas in the past landlords didn’t know us. Today they know us and I think we are one of the first they call when they’re thinking about a new center, thinking about redeveloping the center. So if anything, we had more access to better centers than we have in the past. So I feel very good about the quality. And then the cost standpoint, Ken you want to comment.

Sure, and you mentioned it, John, that would depend on the locations we’re in metro versus non-metro. But on an overall basis, we haven’t seen a material change in the overall rental rate from what we’ve seen in the recent past. So they’ve been relatively flat for us.

Yes. And then I think on cannibalization, John, you almost answered yourself. It really depends but the best I can do is just give you a proxy and the proxy would be Philadelphia. So here’s our home city where we’ve started nearly 15 years ago and yet this past year we opened four more stores, some of those honestly within two miles of existing stores. So as our awareness continues to build in top of mind strength of the brand, we haven’t reached a point yet of saturation even in our home market of Philadelphia from that perspective.

Thank you. We’ll next go to Kelly Halsor with Buckingham Research Group.

Hi. Thank you for taking my question. My first question is on gross margin. How should we expect that to trend given last year I think at least early on you’re benefiting from lower freight costs and maybe some lower gas prices? And then as we got into the fourth quarter, you didn’t really call that out on improved merchandize margins on shrink and then leverage on DC. Should that continue into '17? And then my second question is I just want to gauge again kind of your confidence around the 1Q guidance given the choppiness we’re seeing in the retail environment and timing of Easter this year versus last. I assume Easter is the most significant selling period in the quarter. Thank you.

Thanks, Kelly. On the gross margin you mentioned, we did call out in the fourth quarter the improvement we saw there again driven by merchandize shrink improvement which I really see that as more of a one-time. We made investments over the last 18 months in loss prevention and other systems that has really helped us in that area. So I don’t see that ongoing, more of a one-time improvement we saw there. And then the leverage that we saw in distribution specifically around our new DC in Pedricktown, again that was one where a significant improvement we saw versus the prior holiday season remembering that that was really their first holiday season in 2015. So again don’t expect to see a significant amount of leverage in go-forward from the distribution center. And just on an overall basis in 2017, we would expect as I mentioned to see relatively flat operating margins with at the midpoint of our range that we provided for guidance that we wouldn’t see anything significant either on the gross margin line or on the SG&A line.

And then on sales for Q1, I think I shared some of the headwinds in the early quarter that are kind of behind us. I would just remind you Kelly and everybody that 90% of our sales come from new stores. And I think what you should expect to see from us is a widening of our comp guidance both in the quarters and the year. And if you just take the midpoints of our Q1 guidance and our full year guidance, what it should signal to you is we have confidence in our comps improving as we cycle the steepest of the trends from prior years.

We’ll next go to Alan Rifkin with BTIG.

Thank you very much. It was mentioned that the deleverage on the operating margin line in Q1 I believe is going to be due in part to the nine stores opening up in LA. If you could just confirm that all of the operating margin deleverage would be attributed to that? And at what point do you believe you’ll break even with respect to store openings? By the time you get to '17 openings by the end of the year, do you think that gives you critical mass or it will be some point in 2018 that you’ll achieve it? Thank you.

Alan, I’ll reiterate for Q1 the delever in operating margin coming from really two things. One, the lower comp on last year’s very high comp in 2016 first quarter. And then it’s that also we’re seeing some deleverage around the California stores because of the timing of their opening, literally opening at the end of April, the end of the quarter. So it’s the combination of those two things that’s driving the delever in Q1. But in terms of our new store openings in California and all the other stores for the rest of the year that’s going to be very similar to what we’ve seen in the past. There’s no specific delever coming out of that at all. We expect to see productivity again greater than 90% throughout the year. And then performance from a contribution standpoint very similar to what we’ve seen as a class coming out of other classes historically. So no impact as we move forward through the year.

And I’ll just reiterate. California specifically, we expect those stores to still perform at the same level as the chain in terms of less than a one year payback. So there is no extended breakeven that’s any different than the rest of our chain. We’re very excited about California. We like the sites we’re in and the teams ready to go out there. But there’s no drag post once we get them open.

Thank you. We’ll next go to Sean Kras with Barclays.

Hi, guys. Thanks for taking my question. This is a bit of a follow up to an earlier question. But can you talk about the difference in comps between markets where TV advertising was new in the fourth quarter compared to markets where you were lapping TV advertising? And also can you give us some color on what aspects of the Michigan test stores you’re going to be incorporating into new stores this year?

Say that last part again, what aspects?

I just wanted aspects of the Michigan test store that you’re going to be incorporating into the new stores this year.

Yes, if you happen to have been in the Michigan test store, you should expect relatively everything you saw in that store to be incorporated into the 2017 class of stores. And then the second part of your question was --

TV.

TV, sorry. Sorry, it was two different topics there. Sean, as far as TV goes, our new store TV stores performed significantly in line with the way they did in 2015 which means high-single digit and we’re excited with TV. We think it’s an important way to grow brand awareness, grow top of mind, hence why you saw us grow from 25% to 40% and should expect us to continue to grow that next year as well in fourth quarter.

Thank you. We’ll next go to Alvin Concepcion with Citi.

Thanks for taking my question as well. Just a couple questions on the California rollout. It’s your largest growth opportunity over time, so I’m wondering how many units do you think you can get to ultimately? And if you could talk about your go-to-market strategy, any changes in your approach there versus other key markets that are important for us to think about?

Our go-to-market strategy in California you’re talking about?

That’s right.

We easily see California over time being north of a couple hundred stores. It will easily be our largest state. As far as our go-to-market strategy as it relates to 2017, we are going to solely concentrate on the Greater LA basin and then expand from there going into '18 and beyond probably with San Diego being the next place we’d focus. But we’re starting in Southern California. To remind everybody, this is the same strategy we’ve taken from when we went into Texas, went into Chicago, when we went into Florida. In Texas we started in Dallas then we moved to Houston, over to San Antonio, Austin area. In Florida, we started in Northern Florida then moved into Southern Florida. Chicago is an example, we leapt forward to Chicago and then build back into other states. So we’ve employed this strategy several times prior and this is the exact same strategy we’re going to take as we enter California. I’d add from a personal note, I’m born and raised in California. This is a state I know and love well and we’re really excited to get going in Southern California. So it’s going to be a great opening for us next month.

Thank you. We’ll go to Brad Thomas with KeyBanc Capital Markets.

Good afternoon. I wanted to ask about sourcing and how much some of your direct purchases and foreign purchases increased during 2016 and how that will evolve in 2017. And if you could maybe contextualize how much of a tailwind that’s been for you to reinvest in the product and the value in your stores. Thank you.

Yes, 2016 our imports were relatively flat to 2015 and we’d expect it to stay in that relative range going into '17. And I think with every product we consider both domestic as well as imports as to what makes the most sense. But in all cases, our goal is to deliver wow and newness to our customers with a focus on quality and exceptional price. So it’s really a balance between both our import and our domestic strategies.

Thank you. We have a question from Vincent Sinisi with Morgan Stanley.

Hi, guys. Thanks very much for taking my question. Just wanted to ask about the advertising strategy just kind of overall. And I guess kind of two parts, with certainly TV continuing to become a part of the mix. This year versus last year, does that – I don’t know if you have any comments on where that kind of 40% of stores could go this year. And then I guess kind of what works best with TV specifically. But when you think of all the different mediums, I guess the second part of the question is any changes to the marketing budget kind of as a percent of sales overall? Thanks very much.

We certainly haven’t spelled out specifically what percent that will go to in '17. But as you can tell from our real estate strategy and the desire to densify some of our existing markets, we’re obviously aligning all our strategies around the goal of getting to a level of store count in each perspective market that we can add TV to it. You have to have a certain amount of density. It certainly changes market-by-market of what that number is. But you can tell by the strategy we’re employing that TV is important to us and we want to get to a point where we can deploy that to more markets. So expect to go up and certainly as we nail down the numbers in respective quarters going forward, we’ll share that with you. As far as marketing, we continue to see marketing on a rate basis relatively flat year-over-year. It might be up just a little this year. On a dollars perspective, it grows significantly. So as our growth is in the 20% rate, the dollars grow substantially and would continue to get leverage as we add more stores into existing markets. But we like where we’re heading with marketing. We’re excited about our top of mind and brand awareness strategies and we’ll continue to deploy those going forward here.

Thank you. We’ll take a question from Patrick McKeever with MKM Partners.

Thank you. Just a question on wages and any potential wage pressures you might be seeing with a good number of retailers raising wages both at the store manager level and also for store associates. And then a second question is on just thinking about a potential border adjusted or adjustment or whatever it’s called tax. And what the impact might be on your business if that were to go through given the high percentage of imported merchandize and also the $5 price point ceiling?

Sure. A lot in there, Patrick. Certainly wages, there was some FLSA pressure last year that moderated. I think we called that out about a penny. There’s the minimum wage increases that are baked into our '17 forecast and we called those out at about a penny for this year. And we’ll continue to call those out as they go forward from that perspective. And then as far as the border adjustment tax, what I would allude to there is this is a retail-wide industry issue. We’re really monitoring the discussions and it’s too early to kind of speculate on the extent of what those tax impacts would be on us specifically. There’s been a lot of ideas out there; some actually help us and there’s been some talk about excluding low price points, some obviously would have an impact on us and I think we’ve got to wait honestly Patrick until there is some legislation out there that we can kind of benchmark against exactly. But a lot of movement on that. Rest assured not only us but the entire retail industry is watching this and quite honestly lobbying for retail on it. Ken, anything to add?

No. I think you hit it. Just with regards to the border tax, we would expect that that will be part of some broader tax reform. And to Joel’s point there, could be other benefits to be able to offset that. So that’s why it’s difficult to speculate at this time on what it would be standalone versus some of the other things that have been put out there in legislation around capital expenditure deductions, overall corporate income tax deductions, things like that. So we’re obviously staying on top of the situation and then we’ll react accordingly when we get some more clarity.

We’ll take a question from Brian Nagel with Oppenheimer.

Hi. Good afternoon. Thanks for taking my question.

Go ahead, Brian.

I wanted to ask just on the California opening. So there’s been a lot of discussion here you’ve discussed previously. And as you’ve said in the past, you’ve made big pushes into other markets. Are there unique challenges as you look and explore California and you begin to move in, are there other unique challenges that you’ll see in California that you do not see in some of these other markets?

Sure. Certainly there are and I think it’s part of the reason we announced our entry into California so long ago. Certainly there are differences in regulatory, there are differences in labor laws and we spent the last year preparing for that, making sure our product meets all the requirements. And I can tell you the teams done an outstanding job and we’re ready to go. As I said, all the teams are hired. The training is taking place. The product meets all the official regulatory invoices. But besides those two, we from a business standpoint as I alluded to in some of the earlier questions, we expect California to perform much like the rest of our chain does. We have an experience with markets like California. I alluded to Northern Jersey and Long Island as examples there where we’ve been very successful.

Thank you. We’ll take a follow-up question from Alan Rifkin with BTIG.

Thank you very much. For the 40% of your stores that were supported by TV, can you shed some color on the comp performance or the revenue performance or traffic or profitability of that group of stores compared to the stores that were not supported through TV advertising? Thanks. And then will let you go.

Thanks, Alan. It’s a part that we haven’t broke out in the fourth quarter. I did share that new stores have performed in the high-single digits in comp. And I think you can tell by the comments I made of expanding TV in 2017, we believe it’s an important mix for us in terms of not only helping brand awareness but also helping top of mind and keeping Five Below at the forefront of customers’ minds when they’re thinking about shopping. But we haven’t broken it out specifically from that perspective.

Thank you. That concludes today’s question-and-answer session. I’d like to turn the conference back to management for any additional closing remarks.

Thank you, operator. Thanks everybody for joining today. We look forward to speaking with you again on our second quarter call. We’re excited about 2017. Have a great evening. Thank you.

That concludes today’s conference and thank you for your participation.