Christiane Pelz - Vice President, Investor Relations Joel Anderson - President and Chief Executive Officer Ken Bull - Chief Financial Officer and Treasurer

Michael Goldsmith - UBS John Heinbockel - Guggenheim Securities Dan Binder - Jefferies Jeremy Hamblin - Dougherty & Company Alvin Concepcion - Citi Alan Rifkin - BTIG Edward Kelly - Credit Suisse Vincent Sinisi - Morgan Stanley Charles Grom - Gordon Haskett Sean Kras - Barclays Stephen Tanal - Goldman Sachs Paul Trussell - Deutsche Bank

Good day and welcome to the Five Below First Quarter 2017 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, Andrew. Good afternoon, everyone and thanks for joining us today for Five Below’s first quarter 2017 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 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 website at fivebelow.com. I will now turn the call over to Joel.

Thank you, Christiane and thanks everyone for joining us for our first quarter earnings call. I will review the highlights of the quarter before handing it over to Ken to discuss our financials and our outlook and then we will open the call up for questions. We are very pleased with our first quarter performance. Our results continue to reinforce the universal appeal of Five Below and the strength and consistency of our model. We delivered both sales and earnings above our guidance range, with a sales increase of 21% to $233 million and EPS growth of 25% to $0.15. This sales growth was driven by better-than-expected comp performance and continued strong results from our new stores. During the quarter, we opened 31 new stores and entered the much anticipated new market of California, where we opened strong with a cluster of 9 stores on April 21 in the Greater Los Angeles area. This marks another successful noncontiguous market entry where we employed a cluster opening strategy to create buzz and optimize brand awareness. The customers from teens and tweens to adults and kids embrace Five Below and our unique and differentiated shopping experience with our got-to-have-it products, delivering extreme value at $5 and below. We were very pleased with our California openings. In fact, 7 of the initial 9 California stores made our top 25 all-time spring grand opening list. We find that pretty impressive, especially given that our new store classes over the last few years have been reaching new high watermarks for year one sales. We expect the California stores to deliver high productivity, quick payback and strong contribution margins and look forward to expanding our presence in that market in coming years. Outside of California, we also opened 22 new stores in the first quarter in existing markets. We experienced strong openings in different geographies and diverse markets. As we mentioned on the last call, we are strategically densifying our existing markets in order to gain more brand awareness. Year-to-date, we have now opened 48 stores and are on track for our 100 planned store openings in 2017. All the new 2017 stores will feature our refreshed Five Below store experience, which we began testing last year. We believe the refresh look has more visual appeal with brighter lighting and signage, better defined worlds and several new displays, which are much more interactive. We remain committed to innovating and continuously improving our store experience at Five Below. Our Q1 comp of 2.6 exceeded the high end of our guidance range. On our last call, we mentioned that we expect the Q1 to be our toughest quarter in 2017 as we are lapping a strong comp of 4.9% in Q1 of ‘16. Our outperformance is a testament to the strength and agility of our merchandising teams. We are doing an excellent job bringing newness to our assortment across all eight worlds and quickly capitalizing on emerging trends. With regards to merchandising, Tech and Room led our performance in Q1 and candy was also strong. Bluetooth continued to be popular, as were sequin pillows, mermaid blankets and emoji-related products. Our Easter selling season was a success. And the new spring set, which hit the stores after Easter, delivered continued freshness. The flying trend we discussed in our Q4 call and the emergence of a new spinner trend in April also contributed to our results. These are examples of how Five Below was able to quickly identify and capitalize on emerging trends. Using our scale and leverage, we moved fast to get slime on our shelves and source high-quality spinners, which we are offering at an amazing value of only $5. We are continuing to add to the spinner assortment as demand remains strong. Our Q1 results demonstrate how our eight worlds provide us the flexibility to introduce newness, respond to trends and shift purchasing to different products based on customer preferences. Better buying power gained from our increasing scale and strong vendor relationships, combined with our commitment to reinvest in product, gives us the ability to be innovative and offer even more value and wow to our customers. Our stores are currently set for summer and we are focused on making Five Below the destination for summer. Our customers are getting excited about school letting out and dreaming of sun, water and fun, and our stores are ready for them with boogie boards, beach chairs and towels, water toys and pool floats, all at incredible value prices of $5 and below. Moving on to marketing. We continue to optimize our mix with traditional and digital media to increase awareness and reach our customers how and where they want to connect with Five Below. In Q1, the cadence of our print circulars was similar to last year and we continue to shift our focus toward broader digital efforts. As we look to Q2, we plan to grow our mobile, social media campaigns and conduct another summer TV test. This test is planned to run in markets covering about 25% of our stores, which is relatively consistent to last year. Also, as we have said before, e-commerce is part of our broader digital initiative. E-commerce continues to grow and performed on plan in Q1. However, I want to remind you that e-commerce is still a very small part of our business and our focus remains on our stores and store growth. On the people front, we are extremely excited that George Hill has joined us as our EVP of Retail Operations. George is responsible for overseeing all aspects of retail operations, including store execution, construction and design, and in-store customer experience. We look forward to his contributions to Five Below. As we continue to grow, we remain committed to building the infrastructure necessary to support the much larger company we are on the path to becoming. In summary, we are very, very pleased with our first quarter performance. I am proud of all our teams for delivering these terrific results. And I am especially thankful to the many associates who work tirelessly to open California so successfully. We remain firmly focused on the remainder of the year and continuing to execute against our goals of opening new stores, delivering wow products, optimizing marketing, investing in our people and building out our systems and infrastructure. We believe we are uniquely positioned as a high-growth value retailer to capitalize on the opportunities that lie ahead for Five Below. With that, I will turn it over to Ken. Ken?

Thanks Joel and good afternoon everyone. I will begin my remarks with a review of our first quarter results and then discuss our outlook for the second quarter and the full year. Our sales in the first quarter 2017 were $232.9 million, up 20.8% from $192.7 million reported in the first quarter of 2016. We opened 31 stores during the quarter compared to 21 stores opened in the first quarter of 2016. We ended the quarter with 553 stores, an increase of 95 new stores or 21% versus the 458 stores at the end of the first quarter of 2016. Comparable sales increased by 2.6% for the first quarter of 2017 as compared to a 4.9% comp increase in the first quarter of 2016. The comp increase for the first quarter of 2017 was driven by an increase in comp transactions. Our comp transactions were positive before we began benefiting from the spinner trend late in the quarter. This spinner trend drove the comp out-performance versus the high end of our Q1 comp guidance of 2%. Gross profit increased 22.4% to $73.8 million from the $60.3 million reported in the first quarter of 2016. Gross margin increased by approximately 40 basis points to 31.7% due primarily to lower freight rates compared to the prior year. As a percentage of sales, SG&A for the first quarter 2017 increased approximately 50 basis points to 26.2% from 25.7% in the first quarter of 2016 due primarily to incentive compensation costs and costs related to our initial entry into California. Operating income increased 18.9% to $12.8 million or 5.5% of sales from $10.8 million or 5.6% of sales in the first quarter of 2016. Our effective tax rate for the first quarter of 2017 was 35.9% compared to 37.6% in the first quarter of 2016. Our tax rate was favorably impacted by the new accounting standard related to stock based compensation. This change had left $0.01 impact to EPS. Net income increased 24.2% to $8.4 million or $0.15 per diluted share from $6.8 million or $0.12 per diluted share last year. We ended the first quarter with $185.7 million in cash, cash equivalents and investments and no debt. Inventory at the end of the first quarter was $180 million as compared to $156.3 million at the end of the first quarter of last year. Average per store inventory at the end of the first quarter of 2017 decreased approximately 5% as compared to the end of the first quarter last year. This decrease was driven by lower penetration of direct imported goods. Now, I would like to turn to our guidance. For the second quarter ending July 29, 2017, net sales are expected to be between $273 million to $280 million. We plan to open approximately 27 new stores in Q2 this year as compared to 33 stores opened in the second quarter last year and are assuming a Q2 comp sales increase of 5% to 8% versus a 3.1% comp in Q2 2016. Our comp guidance assumes that the spinner trend continues through Q2. We expect leverage of approximately 100 basis points in operating margin for the second quarter driven by the higher expected comp. Net income is expected to be in the range of $13.4 million to $14.7 million, an increase of 36% to 49% over Q2 2016, with diluted earnings per share for the second quarter fiscal 2017 expected to be $0.24 to $0.27. As a reminder, this guidance does not include any impact from the new stock based compensation accounting standard I mentioned earlier. We will report the impact, if any, with our actual quarterly results. For the full year 2017, we are raising our guidance. Sales are now expected to be in the range of $1.227 billion to $1.242 billion representing a growth of 23% to 24% versus last year and the $12 million increase from our previous high end guidance. Comp guidance for the full year has increased from a low single-digit range to a range of 3% to 4%. We continue to expect to open approximately 100 stores in 2017 and end the year with a store count of 622, an increase of approximately 19% as compared to our 2016 ending store count of 522. For the full year, we expect operating margins to increase slightly versus 2016. We continue to expect the full year effective tax rate of approximately 37.5%. Our net income outlook has increased and is now expected to be in the range of $88.4 million to $91.1 million or a growth of 23% to 27% versus 2016. Diluted EPS is now expected to be in the range of $1.59 to $1.64 versus our prior guidance range of $1.55 to $1.61. With respect to CapEx, we still plan to spend in total approximately $78 million in 2017, reflecting the opening of 100 new stores with the remainder projected to be spent on our new home office, store relocations and remodels, distribution centers and corporate infrastructure. 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. We have had a terrific start to the year. Our first quarter delivered out-performance with strong top and bottom line results by increases in transactions, brand awareness and continued new store strength. I am very encouraged by the momentum across all of these metrics as reflected in our Q2 guidance. We believe we are well positioned to deliver on our goals for this year as well as our previously articulated strategy of 20% top line growth with 20% plus bottom line growth through 2020. Looking out even longer term, as we continue to expand our national footprint, our conviction in the 2,000 plus store potential for Five Below only grows. In closing, our merchant teams are delivering newness and amazing value across our eight worlds and quickly capitalizing on emerging trends. While the marketing team is generating excitement and engaging our customers to broader digital outreach, our home office support teams continue to impress with an efficient operations and we feel confident that our stores are ready to be the go to destination for all things summer. Said differently, this is a total team effort. And my personal thanks go out to all. With that, I would like to turn the call back over to the operator for questions. Operator?

Thank you. [Operator Instructions] And our first question comes from Michael Lasser from UBS. Please go ahead.

Good afternoon. It’s Michael Goldsmith on for Michael Lasser. Thanks a lot for taking my question. So based on how other trends have played out in the past, are you able to assess the longevity of spinners. And then secondly, what are you guys learning about these trends from a merchandising and marketing perspective that can be applied for the next time a new trend arises? Thank you.

Yes. Thanks Michael. What makes Five Below great is a couple of things. One, we have got a long history of successfully navigating many, many different trends. And I can go back to the [indiscernible] bans and tan or the rain balloon in ‘13, Frozen in ‘14. We had several trends in ‘15. And so as each one of these trends emerges, we just continue to get better at them. The eight worlds afford us the credibility from our customers that they come to expect Five Below to carry them. And our merchant teams get better at being quicker and more nimble at accessing the product from overseas or domestically as maybe the case. As it relates to spinners, Michael, it’s still very early in the process to begin to speculating to how long or short the trend is going to last. I think you might be able to tell that from the wider range in our guidance in Q2. But given that we have had success over many different trends over the number of years in different categories, I am confident in the Five Below merchandising team that we will chase as needed and ramp down when the customer demand changes. But overall, we have been really pleased with not only how successful trends been, but more importantly how fast the teams jumped on it and have made it readily available for our customers.

Thank you.

Our next question comes from John Heinbockel from Guggenheim Securities. Please go ahead.

So Joel, I guess a question as it relates to spinners that’s more theoretical, when you have something hot like that, so how do you then capitalize on your unique opportunity which is driving traffic into the store in terms of getting more maybe e-mail addresses, getting more brand awareness, doing something in terms of physical merchandising in the store to get more items into that basket, but also has a spinner. So, how do you do that? And are you doing that to kind of take advantage of this?

Yes. Thanks, John. The way we look at spinners is really more that I think all trends are great for long-term for Five Below and our brand awareness. I think each time a new trend emerges it exposes a different customer to Five Below. You go back to frozen, it largely skewed young girl. And with spinners, it’s really kind of skewed universally, boy and girl, young and old. But overall, I think you have to also keep in mind that whether there is a trend or not a trend, we need to stay focused on the core business. And even before the spinner trend emerged in Q1, we were tracking towards the high-end of our guidance range for Q1. In other words, the core business is strong. I called out Tech, Room, Candy, and now as we move into Q2, let’s not forget that Q2 is all about summer. So regardless of the spinner trend, while it drives traffic, the challenge for our merchants to stay focused on the core business, and in Q2, that largely relates to summer-related product.

And then just as a follow-up to that, so are you seeing when people buy these fetish [ph] products, is – I assume there are other items in the basket. And is the basket larger than normal or is that – they are coming in, buying that and leaving?

Actually, we see both. But certainly, we are seeing people buy other things when they are in the stores, not only buying spinners, but buying other product. And that’s a testament back to what I was kind of saying earlier, John, we have to stay focused on the core business. It’s been a long running strategy of Five Below to reinvest in the product. Since Michael has been onboard, the team has continued to improve the quality, the wowness, the newness. And as new customers or a first-timer in our stores because of spinners, they get exposed to that product, but we are seeing both. So I am buying just spinner transactions, but a lot of customers are buying other things. Thanks, John.

Our next question comes from Dan Binder from Jefferies. Please go ahead.

Thanks and congrats on a great quarter and successful California openings. My question was around license product. You have a lot of great movies coming out over the next few quarters that would probably lend itself well to license product. Just curious if you could give us a little bit of help in terms of understanding where you think those opportunities are, which movies, what type of product? And then I had a follow-up question on product cycles, which I will address.

Yes. Dan, it’s early in the movie season, Guardians of Galaxy was in May. We had some exclusive product for that that we are pleased with. Despicable Me launches very soon here. Emojis in July. Spiderman is coming up here in just a couple of weeks. So it’s a nice lineup for the summer. Let’s not forget, we have been talking about emoji-related product for many quarters now and we will continue to take advantage of those licenses as they emerge, but it seems to be setting up for a nice summer license business.

Great. And then my follow-up question was about some of these product cycles in general with spinners as an example. It seems like hit pretty quickly, you were out of stock, you got back in stock. I felt like it was probably on and off through the last couple of months. And I am just curious in terms of the vendor response and the type of procurement that you have in place to respond, I mean, you said it was pretty quick. I guess, first, do you expect anymore out of stocks on spinners? And secondly, can you talk a little bit about the slime trend and what’s happening now?

Yes, sure. Thanks, Dan. As far as out of stocks, you can never say it will be never, but I think we are in a much better situation now than we were even as little as 30 days ago. But I am sure from store to store there will be an outage from here and there. But overall, the supply chain has done a great job. We have brought spinners in really quick. We have got a real great partnership with our vendors. And that’s a key thing as we continue to grow. Remember, as soon as recently as we went public less than 5 years ago, we are just crossing the double-digit area for the amount of product that was sourced overseas, now it’s about a third of our business. So we have some great relationships overseas and that just really allows us to mobilize quickly and bring in product largely ahead of most retailers out there. So the team did a great job. And you can say the same thing about slime, that was your other part of it and we called out slime on our Q4 call and had a nice run with that in Q1 and we expect slime to continue here in Q2.

Great. Thank you.

Yes. Thank you, Dan.

Our next question comes from Jeremy Hamblin of Dougherty & Company. Go ahead.

Thanks and I will add my congratulations guys. I wanted to ask some questions about e-commerce. And it appears as though there maybe a halo effect from the spinner trend. It appears as though your traffic to the website has significantly ramped. So, the first part of my question is what kind of contribution are you seeing now from your e-commerce? And really probably one of the first times where we have seen consistent stock-outs in products with the spinners. And then the second part of my question is, is this big trend like spinners and maybe slime as well really opening you up to a newer geographic demographic, because they weren’t aware that Five Below had a website that they could buy products on and now something like spinners with a great value and a hard product to get in the last 6 weeks, they are able to go to your website. But can you add some color on that?

Yes. Our e-commerce strategy hasn’t changed since the day we launched it. Our stores and the growth of them remain number one. But I think we said from day 1, I think of e-commerce as part of our larger digital strategy, right. So we have been talking about mobile, social and TV and e-commerce is another pillar as part of our overall digital strategy. And what really e-commerce does like TV does is it helps us with awareness. We have positioned our e-commerce as convenience. You don’t see us doing free shipping. We charge for every order, but it does have that halo effect of awareness. Customers are doing research on our site. We are seeing a lot of people using that as a place to start, see what kind of spinners we had. And even if we are out of stock, you could still do the research on it. So, it’s just another tool in our digital strategy to really help us continue to reach the customers. And you asked about is the trend allowing us to reach a new demos, I think was what you are saying, Jeremy. And I think that’s a little bit on earlier question and whether it was Frozen a few years ago or adult coloring, Shopkins, each one of those trends has a core customer that it attracts and exposes us, that customer to Five Below. And certainly spinners is doing that as well. It’s boy and girl related. It’s young and old. And we have seen a nice flow of traffic into our stores and we expect that to have a long lasting halo effect on the brand.

Great. And one follow-up question, your cash and equivalents about $185 million, really it was up from the fourth quarter, which is really atypical for this company despite coming in with opening a little bit more stores than expected, is there kind of an inflection point as we get through the course of 2017 that you would consider doing something with all that cash that you are going to have at the end of the year in terms of opening new stores?

Sure. That’s where the main focus is going to be for us for the continued growth. I mean we have looked at capital allocation and obviously have discussed that internally. But as you know, we are continuing to invest in people and systems and infrastructure and that’s where that’s going to go. But it is something that we continue to look at on an ongoing basis. Nothing for 2017, I would say at this point. And again, we are happy to have the balance sheet that we do a really strong balance sheet going through the year and into the oncoming years. But from a capital allocation standpoint, again it’s something we are wary of and we look at, but nothing that’s going to happen in 2017.

Great. Thanks guys. Good luck.

Thanks Jeremy. I appreciate it. Thanks for the support.

Our next question comes from Alvin Concepcion from Citi. Please go ahead.

Great. Thanks. So congratulations on a great 1Q. Just a couple of quick questions for you, just curious, what kind of uplift to traffic or comps you see from spinners in the first quarter and second quarter to-date and it sounds like it was over 60 basis points in the first quarter, just wondering what you are seeing in the second quarter? And I have a follow-up after that.

Ken, do you want to just talk about transactions for a few minutes?

Yes. I think we called out Alvin, the comp increase in Q1 was driven by an increase in comp transactions and also noted that we saw that increase in comp transactions prior to any impact from the spinner sales, which occurred in the month of April and later in Q1, so we saw that throughout the quarter in terms of positive comp transactions.

And just wondering, with all the margin expansion and out-performance you saw or are expecting in the first half of the year, why would operating margin be only slightly higher for the full year?

Yes. I think you saw where we were coming off of in Q1 with operating margins being down by about 10 basis points. We had some of those initial California entry costs, because we opened those stores late in Q1. We also had some additional incentive compensation costs that were recorded given the out-performance that we are expecting for the full year. And then as we move through to the back end of the year, really haven’t changed our outlook around top line and bottom line. So I think when you work those through for the full year at the 3% to 4% total year comp guidance, that’s why I called out the slight operating margin improvement for the year, which is pretty consistent with what we have expected and what we have talked about in the past in and around that 3% comp that we do expect to see slight operating margin improvement.

Great. Thank you very much.

Thank you, Alvin.

Thanks Alvin.

Our next question comes from Alan Rifkin from BTIG. Please go ahead.

Thank you. Also let me add my congratulations as well. Joel, you mentioned that much of the upside, if not all in the first quarter performance was due to the kind of success of the spinners, when you look at your new higher full year guidance, is the entire incremental increase due to spinners or are you seeing other trends that give you even greater optimism than you had prior?

Yes. Let me just clarify on Q1. What I thought we said and if I didn’t, what we meant to say is the exceeding the high end of the range we originally gave you for Q1 was largely due to spinners. So had the spinner trend not emerged, we still would have been right there at the top end of our original guidance we gave you. So again, the core business is really strong and the spinner has really allowed for exceeding that original guidance we gave you. Obviously, the – and the guidance we gave you for Q2, 5-day comp and increasing sales, increasing earnings was largely driven to the emergence of the spinner trend that was not forecasted when we did the original budget. But the core business, I will just reiterate, remains strong and it’s continuing to do well. And then as far as the back half of the year, we have not included any continuation of the spinner trend in the current guidance we have given you.

Okay. Thank you. And then just a follow-up if I may, certainly, you had another successful debut in the non-contiguous market of California and it’s not the first time that you have been successful in growing to non-contiguous markets, as you look further out even beyond ‘17 or ‘18, does that give you great of optimism on maybe entering other non-contiguous markets at a faster rate relative to what you have done in the last few years with Texas and now California?

Sure. I am glad somebody asked me about California. It was a great…

I was there with you, Joel.

I know you were, Alan. You saw firsthand. And we were very excited, as I said in my prepared remarks, about the California opening. And we have actually Alan, honestly had several non-contiguous successful grand openings. We talk a lot about Texas. Florida was also that way. The entry into Chicago was that way and now clearly, California. To add some more to that as you are suggesting, those would be states like Washington and things like that, but I think right now, the opportunity in California is huge. And as we look at a 2,000-store chain in the U.S., really you have to be successful in California to have that kind of confidence, continue to grow. And this initial opening we have had, now up to 12 stores and a few more still coming later this year, really should help reinforce the 2,000-store chain opportunity. Ken and I have always been transparent with all of you on the phone. We have laid out a 5-year strategy for you. The 2,000-plus change lays out a strategy many, many years beyond 5 years. And so I think right now Alan, we are working – we will be more focused on continuing to open California. But certainly, we won’t have any hesitation once we are ready to have other non-contiguous leaps to open up other markets. But California is going to be a great market. It’s going to be a big one and we look forward to rolling that out over the years to come.

Thank you. And I will attest that the beaches at Monday morning were empty as your stores were packed.

Yes. It’s more fun in our stores than in the beach. So thanks Alan.

Okay. Take care.

Our next question comes from Scot Ciccarelli of RBC Capital Markets. Please go ahead.

Hey guys. Rob Iannarone [ph] on for Scott. So I actually also had some questions about California, I guess first, as you have been through the market now, I know it’s still very early, but is there anything you are seeing there that maybe is performing differently than you had originally expected, either better or worse?

I guess what I would tell you is what would be nice about California is the 24/7, 365 economy out there. It’s performing very similar to our Northeast markets without having to worry about weather. So I think it’s – you are not going to see the peaks and valleys that happen that are related to weather as much, but it is still very early on there Rob and I think we will just need more time before we have a definitive viewpoint on how California is going to be.

Great. Thanks Joel. And just one follow-up, is there – are there any hard numbers you can give us to quantify and I know you said that they made your top 25 spring openings, best spring openings of all-time, is there any way you can put numbers around that or…?

Yes. I think the better – going kind of back to your first question there, I think the shopping patterns in California is the density, the amount of traffic out there really allows us to really continue to densify our store base out there. So it will be a big market for us. In terms of quantifying, at this point, we are not prepared to share what exactly those numbers are. But I think by alluding being our top 25 stores, you can tell a chain of over 500 stores, you are talking about stores in the up to 5%.

Great. Thanks guys and good afternoon.

Thanks Rob.

Thanks Rob.

Our next question comes from Edward Kelly of Credit Suisse. Please go ahead.

Yes. Thanks and good afternoon. Just a quick follow-up on California, any update or thoughts on payback period, do you think we will be looking at something that’s similar to the chain average and the cost profile is different out there, how should we be thinking about that?

Yes. We think of it very similar to the rest of our chain. We expect similar payback periods. Our current model is less than a year and we don’t see that being any different in California. I don’t know Ken, you have anything to add?

Yes. I think Joel mentioned that again, we see that market with respect to economic similar to say New York Metro, Northern Jersey where again some higher costs there, but we also expect higher productivities. And ultimately, the economic results coming out of that market will be similar to what we have seen throughout the rest of the chain.

But no concern?

None yet.

A question for you, do you have color on new store productivity that you could share, I mean I think in Q3 and Q4 it seem like it was a little lighter, I guess than what it’s been over time, Q1 does seem to be a little bit lighter, but it’s unclear and the timing is always an issue here, just your thoughts on the trend there and what you are seeing?

Sure. We were – as Joel mentioned, we were really happy with the results of the new stores and we continue to achieve new store productivities of greater than 90%. In Q1, depending on how you calculate it, we are still north of 90% even with an adjustment coming for the California stores. Keep in mind, those nine stores opened late in the quarter and that was on top of productivity in last year’s Q1 of about 107%. And then based on guidance that I provided for Q2 and for the full year, that assumes productivities, again continuing in that 90% range. So we are really happy with what we are seeing coming out of these new store openings.

Great. Thank you.

Thank you, Ed.

Thank you, Ed.

Our next question comes from Vincent Sinisi from Morgan Stanley. Please go ahead sir.

Hi, good afternoon guys and congrats as well. I will stick on California here. Just it sounds of course, like all nine openings were very successful, just wondering, of the seven that you said kind of match your top 25 historical spring openings versus the other two, any key differences to note there, qualitatively whether it’s demographics, geography, anything like that worth noting?

No, not at all and I mean if I went down a few more points, ladder down the ladder, those two would show up there, so really not anything. I think the bigger thing to take away from it is more of this clustering strategy that we have now somewhat perfected. And you really get the halo effect when you open nine on the same weekend, leveraging advertising and really putting forth one message out there to the customer. And so I think that’s a bigger reason you saw so many stores right there at the top. But even if I added the other two, they wouldn’t be too far away from that, so really, nothing to take away from it Vini.

Okay, perfect. Thanks Joel. And then just a quick follow-up on the TV test for 2Q again this year, I know you guys have said that obviously 4Q is kind of the main TV season for you guys, but when you looked at kind of last year that maybe some things weren’t exactly as you expected, can you tell us kind of even more qualitatively any changes to this test in the 2Q and maybe if California maybe part of that as well within that kind of 25% stores? Thanks a lot.

Yes, you are welcome. Vini, California definitely will not be part of it from that perspective. And I think the better takeaway on Q2 test is it just shows you the discipline we kind of approach every initiative, whether its marketing related or spinner related chasing merchandise, we are going to apply discipline. We are going to look at the numbers. And we have said to you that we are in a rollout strategy for Q4 TV. And for Q2, while we have held the number of stores flat to last year is we are not ready to roll it out. And so we are still in this test and learn phase. And I – we still very much believe in it and it does work – we just got to get it to a number where we believe in the ROI. And I think once we get to that point, then we will shift to a kind of the rollout strategy for Q2 TV. But right now, we are still in the test and learn. I think we have focused on the things we thought we could improve. Clearly, densifying markets help to improve your ROI, that’s why you have seen us a shift in our real estate strategy. So everything kind of holds together as real estate works with operations and feeds into marketing and that will lead to a more successful TV test and we can then hopefully be in a position to start to talk about rolling it out further next year.

That’s helpful. Best of luck guys.

Yes. Thank you, Vini.

Our next question comes from Charles Grom from Gordon Haskett. Please go ahead.

Hi guys. Just my question really resides on the guidance and the 5-day percentage, I think probably one of the highest I have seen you guys ever guide to and you are typically very conservative and it sounds like the majority of that is not only what you have seen quarter-to-date, but the expectation for the spinner trend to continue. And I guess just to play devil’s advocate, what gives you the confidence that you are still going to get another 60 days of strength out of that trend and that will be fleeting with most school season starting to end?

Yes. Thanks Charles. I think what gives us the confidence is more of we have been through a number of these trends over the years, dating back to [indiscernible] bans being the one goes back all the way to 2010. And normally when these trends emerge, they are worth a quarter or two quarters. We have been talking about emoji now for many quarters longer than that. So every trend kind of has a peak and a valley value to it. And I think this one has especially a broad appeal. But let’s also go back to some comments I made earlier that the core business is doing really well. And we believe that the trends just are additive to the core business. And when you put both of those together, it gives us a lot of confidence in the remaining 60 days here in the quarter.

Okay. And then just to dovetail of that, it sounds like the spinners was up 60 bps [ph] for 1Q and we just use that 2% sort of the core business, is it safe to say that your expectations are for spinners to be anywhere between 300 basis points to I guess 600 basis points of a benefit, is that how you guys are kind of getting to that math?

I think you can look at the math a lot of different ways. I think the better way to look at it is that’s why you see a wider range. And so while it’s the highest you have ever seen this guide close to the widest range you have seen us guide. And so it really shows you a variety of outcomes that could happen. But I will just reiterate, the core business is very strong. And I think also another way to look at it is look at the 2-year stacks and it will start to give you a sense of how we are thinking about it. But let’s stay focused on the core business and I think the spinners just give us additive eyeballs of less than the customers coming to visit us, both digitally in e-commerce and then our stores.

Yes, no doubt about it. And just the more important part of your business, on the stores, it seems like you missed the productivity, the new store returns did much better than when you did the IPO 5 years ago, where are you guys thinking about longer term store growth at this point in time? And we have been talking about 2,000 for, I think since the IPO. Are you ready to update that number for us at this point in time, if we thought about going to Canada or any other countries at this point?

Yes. Charles, I think for us before we could even consider updating it, we needed to get California open. We need a little bit more than a 6, 8 weeks of California success before we be in a position to update it, change it, but that was clearly a foundation that need to get established out there. But I think a more appropriate time for us on that would be probably ‘18 or ‘19. And let’s keep in mind we are still only really in the second inning, third inning of a 2,000 store chain rollout, barely crossing the 500 mark here a little while ago, so more to come on it, but I think a more appropriate time for us on that would be ‘18 and ‘19.

Okay, great. Appreciate it. Thanks.

Yes. Thanks, Charles.

Our next question comes from Sean Kras from Barclays. Please go ahead.

Hey, guys. Thanks for taking my questions.

You bet, Sean.

So this is sort of a follow-up to prior question. But in the prepared remarks, Ken mentioned that he expects the spinner trend to continue in the second quarter and I think Joel you said that you are anticipating any benefit in the second half. So I am wondering if you are actually starting to see the spinner trends actually start to slow a bit now?

It’s less about whether we are seeing the slow and more about it’s still very new trend. And it would – it’s too early for us to forecast anything beyond the second quarter as we are really just in the last couple of weeks been actually able to get stock on a consistent basis. And it’s a trend and trends all have different lifecycles. We typically see them last a couple of quarters. But for right now, it’s not whether it’s slowing or growing, it’s just we need more time.

Okay. And then, Joel, can you maybe remind us then of your inventory planning process for items like spinners that could be somewhat of a short-term fad?

Yes, it is a short-term fad, but we have had a very long successful track record of managing the inventory. I think the way to look at it is it’s actually easier than some of the other things we do like Christmas, because there isn’t an end date, right. Like Christmas happens on December 25. Hanukkah happens on a certain date. And so you have that clip effect and trends are different that we can really watch it day by day, week by week. And as they are starting to slow down, we will begin to manage inventory. So, it’s easier than something we do on a year-in, year-out basis. And as we watch the trends just like why we are not giving guidance out beyond the second quarter, we just need some more time to watch it. But all that analysis is done and that’s what really guides our inventory. And you saw how fast we brought it in and we will play that same logic when we start to slow down.

It’s a fair point. Thanks.

Thanks, Sean.

Our next question comes from Stephen Tanal from Goldman Sachs. Please go ahead.

Hey, good afternoon guys. I had a couple of quick ones. Just to clarify kind of the core underlying trend here. Is the spinners math is the sort of 60 bps of upside versus top end of the guide and we kind of dollarized that and say same pace through 2Q, it’s kind of 160 bps or so to comp. which gets to the question of is the core business at this point x-spinner sort of 3 to 6, is that kind of the right range as you enter 2Q?

Yes. I am not sure that I want to really spell out core business versus spinners. It’s still very early to – I think John Heinbockel asked question earlier, are people putting other things in the basket. And so you have to also figure out how much was it at a trip driver, how much was it just an add-on because they are already in our store. So, there is a lot more analysis to go into it than to simply bifurcate spinners from the core business. The better way to look at it is I called out several worlds that are really performing well. All eight worlds drive our business and spinners is just something we layer in on top of that. So collectively, the core business is strong. The spinner business is strong, but it’s really hard to bifurcate exactly how you put the components of the comp together.

Got it. Just a quick one on at the 60 bps, does that contemplate just the spinner sales or you guys have thought about all that?

It contemplates kind of where our trend was when the spinner started it and how we thought we would finish the quarter. And again, there is other items in that 60 bps that aren’t spinners. So kind of back to the same question, it’s really hard to essentially bifurcate them. I think that I shared that fact with most of you just to understand, so all of you understand how strong the core business was that we would have been at the high end of our original guidance.

Understood. Then finally, just looking at SG&A, I know you tend to leverage around the 3 comp. Is there any at California in there as well? But with the 2.6 comp in this quarter kind of ex-Cali, do you think you would be closer to flat or do you think it’s still be de-leveraging a bit?

Yes. If you were to take out California, we’d be much closer to a flat in Q1.

Got it. Okay. And just very last one for you to clarify, the leverage of 100 bps and that you are getting EBIT margin to up about 100, right, in 2Q?

Operating margin, yes, would be up about 100 basis points and probably even between gross margin and SG&A.

Okay, great. Thanks a lot, guys. Good job in the quarter.

Thank you, Steve. Appreciate it.

And our final question comes from Paul Trussell from Deutsche Bank. Please go ahead.

I am just going to say congratulations on the great quarter because all my questions have been answered.

Paul that is the best question I’ve had all day. So thank you for that question and I appreciate the support.

Thanks, Paul.

Alright. I think that wraps up the call. We just wish you all a great summer. Please stop by our stores for all your summer needs. And you know what buy a spinner or two for us, so we would appreciate that too. Thanks everyone for joining us today on our Q1 2017 call. Have a great evening.

This concludes today’s call. Thank you for your participation. You may now disconnect.