Christiane Pelz - IR Joel D. Anderson - President and CEO Kenneth R. Bull - CFO and Treasurer

Michael Lasser - UBS John Heinbockel - Guggenheim Securities Chuck Grom - Gordon Haskett Kelly Halsor - Buckingham Research Group Jeremy Hamblin - Dougherty & Company Sean Kras - Barclays Capital Alan Rifkin - BTIG Paul Trussell - Deutsche Bank Stephen Tanal - Goldman Sachs Alvin Concepcion - Citigroup Patrick McKeever - MKM Partners Daniel Binder - Jefferies & Company Andrew Ruben - Morgan Stanley Brad Thomas - KeyBanc Capital Markets Anthony Chukumba - Loop Capital Markets

Good day and welcome to the Five Below Second 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, [indiscernible]. Good afternoon everyone and thanks for joining us today for Five Below's second 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 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 Web-site at fivebelow.com. I will now turn the call over to Joel. Joel D. Anderson: Thank you, Christiane, and thanks everyone for joining us for our second quarter earnings call. Before we begin our prepared remarks, I would like to take a moment to discuss the devastating hurricane that hit Texas last weekend. Our thoughts and prayers remain with all those impacted by Hurricane Harvey, including those we hold dear, our associates and customers. We also want to send our thanks to all the emergency and disaster relief workers and volunteers that continue to save lives and provide safety to those in need. Given the super storm has not yet ended, the full extent of the damage will not be known for some time, though we certainly hope that the worst has passed and the rebuilding process can soon begin. We are heartened by the acts of kindness being shown across the region and in the coming weeks we will work to provide recovery assistance to our associates and our store communities. I will now review the highlights of the quarter before handing it over to Ken to discuss our financials and outlook, and then we will open up the call for questions. We are extremely pleased with our second quarter performance. Sales, comps and earnings, all outperformed and surpassed guidance. Sales increased 29% to $283 million and earnings per share grew 67% to $0.30, representing one of the highest growth quarters we have achieved since Five Below's IPO five years ago. Sales growth was driven by continued strong results from our new stores and a high transaction-driven comp of 9.3%. During the quarter, we opened 31 new stores in diverse markets across a range of 13 states. We continue to concentrate our openings in existing markets, in line with our densification strategy that we believe will drive brand awareness. Our growing scale also provides us with even better access to great shopping centers with solid traffic and well-known national co-tenants. Our California stores continued to perform well in the second quarter. Given the state's population density and trend-conscious consumers, we believe the opportunity for Five Below in California is significant and look forward to expanding our presence in Southern California over the next couple of years. In the first half of 2017, we opened 62 new stores, representing approximately 60% of our planned store openings in 2017, which is a similar cadence to 2016. As we previously mentioned, the entire 2017 class of stores will feature the refreshed Five Below store experience with even more visual appeal, brighter lighting and signage, better defined worlds, and several new interactive displays. We are committed to innovating and continuously improving the store experience to delight our customers, as we firmly believe this combined with our added assortment and great value is what differentiates Five Below and keeps our customers excited to come back. Moving on to comp, our 9.3% comp was our highest quarterly comp since the IPO and above our 8% high end guidance. We are very pleased with the solid broad-based performance of our core business, led by Room, Tech, Create, and Candy, and a strong contribution from trends, primarily spinners as well as slime and smiley related products. Five Below's years of experience managing trends from beginning to end is a key skill set of our merchandising organization. When the spinner trend first emerged in Q1, our teams quickly sourced product and then brought innovation and freshness to the category in Q2 through new novelty spinners with different features, shapes and colors. For example, we introduced a Bluetooth spinner and a pen with a spinner top. Trends are also great because they build brand awareness, introduce new customers to Five Below, drive incremental transactions, and increase sales. Five Below's increasing scale enables us to be even more nimble and rapidly capitalize on emerging trends. It also provides us with access to differentiated products we could not have sourced just a few years ago. We will continue to leverage our skills, scale, global sourcing universe, and our deep vendor relationships to reinvest in product, innovate and offer even more value, newness, and wow to our customers. Moving on to marketing, we continue to optimize our mix of traditional and digital media to increase brand awareness, traffic and loyalty. In Q2, we distributed print circulars during peak summer weeks and conducted a successful TV test in markets covering about 25% of our stores. This year the TV ad was focused on our in-store experience and featured a broader product mix. We are pleased with the results and now expect summer TV to remain part of our media mix going forward. With regards to other digital initiatives, we are testing various mobile and social media campaigns and becoming even more targeted in our outreach. Additionally, we believe our e-commerce channel provides an easy, mobile shopping tool for our digitally-savvy customers. E-com is still a very small piece of our business and store growth and in-store experience remain our primary focus. Overall, we are pleased with the progress we have made across our marketing initiatives and look forward to leveraging our learnings in Q4. With respect to systems and infrastructure, we continue our disciplined strategy of phased growth. As planned, in preparation for Q4, we have begun the process to building out additional space in our New Jersey distribution center. We are currently conducting a distribution network study to determine future configuration options to service our continued growth. Separately, on the systems side, we have begun the multi-year project of upgrading our POS systems. Turning to the Q3 product offering, our stores are set for Back to School, from trend-right wow products in Room, Style and Tech to cool fun backpacks, all at $5 and below. We believe our stores are stocked with what our customers just got to have. While several important weeks still lie ahead, we are pleased with the start of Q3. Before I turn it over to Ken, I want to acknowledge a key milestone that Five Below celebrated in Q2. In July, we commemorated the fifth anniversary of going public with a special celebration that included associates ringing the opening bell at NASDAQ. Since the IPO, we have nearly tripled our store count, more than tripled our revenue, and quadrupled our net income. What makes us even more remarkable is how consistent our growth and results have been. It definitely feels great to celebrate this milestone anniversary with one of our best quarters of sales, comp and earnings growth ever as a public company. In summary, we are extremely pleased with our performance thus far in 2017, yet we remain firmly focused on the remainder of the year. We believe we are well-positioned to deliver the all-important fourth quarter as well as on our goals for this year. We are excited to show our customers an unbelievable lineup of products that we believe will wow them. Our results continue to reinforce the universal appeal of Five Below and the strength, consistency and flexibility of our model, giving us confidence in both our 2,000-plus store potential and our ability to achieve 20% top line growth with 20%-plus bottom line growth through 2020. With that, I'll turn it over to Ken. Ken? Kenneth R. Bull: Thanks, Joel, and good afternoon everyone. I will begin my remarks with a review of our second quarter results and then discuss our outlook for the third quarter and full year. Our sales in the second quarter of 2017 were $283.3 million, up 28.7% from $220.1 million reported in the second quarter of 2016. We opened 31 stores during the quarter, compared to 33 opened in the second quarter of 2016. We ended the quarter with 584 stores, an increase of 93 stores or 19% versus 491 stores at the end of the second quarter of 2016. Comparable sales increased by 9.3% for the second quarter of 2017 as compared to a 3.1% comp increase in the second quarter of 2016. The comp increase for the second quarter of 2017 was driven almost solely by an increase in comp transaction. Solid broad-based performance in our core business combined with the strong spinner trend drove the comp in transaction results. It is very difficult to determine the exact impact spinners had on our results, but we do know that it introduced new customers to Five Below and drove transactions. Gross profit increased 34.3% to $98.5 million from the $73.4 million reported in the second quarter of 2016. Gross margin increased by approximately 145 basis points to 34.8%, due primarily to improved merchandise margins from higher-margin spinner sales and leveraging of store occupancy and distribution costs. As a percentage of sales, SG&A for the second quarter of 2017 decreased approximately 70 basis points to 25.5% from 26.2% in the second quarter of 2016, as we leveraged expenses on the higher sales results. Operating income increased 67.4% to $26.3 million, or 9.3% of sales, from $15.7 million or 7.1% of sales in the second quarter of 2016. Our effective tax rate for the second quarter of 2017 was 36.7% compared to 37.6% in the second quarter of 2016. Our tax rate was favorably impacted by the new accounting standard related to stock-based compensation. This change had less than $0.01 impact to EPS. Net income increased 70.7% to $16.8 million or $0.30 per diluted share from $9.8 million or $0.18 per diluted share last year. We ended the second quarter with $167.5 million in cash, cash equivalents and investments, and no debt. Inventory at the end of the second quarter was $184.5 million as compared to $154.8 million at the end of the second quarter of last year. Average per store inventory at the end of the second quarter 2017 was flat compared to the end of the second quarter last year. Before I turn to guidance, I would like to add to Joel's comments about Hurricane Harvey. As the tragedy continues to unfold and the rescue efforts begin to turn to recovery, we have limited knowledge of the on-ground situation and have not yet been able to assess the full extent of damage to our impacted stores. All of our 23 Houston Metro stores were closed in order to keep our store associates safe. As of today, four stores have reopened, and we currently believe only a handful or less may have sustained major damage. As you know, the situation is still very fluid. If there is a need to provide an update due to a lingering impact, we will do so. Now turning to guidance, for the third quarter ending October 28, 2017, net sales are expected to be between $241 million to $246 million. We plan to open approximately 35 new stores in Q3 this year as compared to 26 stores opened in the third quarter last year, and are assuming a Q3 comp sales increase of 3% to 5% versus the negative 0.2% comp in Q3 2016. Our Q3 comp guidance reflects the slowing spinner trend compared to the second quarter. We expect modest operating margin improvement from leveraging of SG&A fixed expenses on the sales outlook for the third quarter. Net income is expected to be in the range of $6.2 million to $7.4 million, an increase of 14% to 36% over Q3 2016, with diluted earnings per share for the third quarter of fiscal 2017 expected to be $0.11 to $0.13. This guidance does not include any impact from the new stock-based compensation accounting standard. 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 $1.236 billion to $1.248 billion, representing a growth of 24% to 25% versus last year and a $6 million increase from our previous high end guidance. Comp guidance for the full year is increased from a 3% to 4% range to a range of 3.5% to 4.5%. As a reminder, this 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 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 modestly versus last year's operating margin of 11.4%. We continue to expect a 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 $90.3 million to $92.6 million, or a growth of 26% to 29% versus 2016. Diluted EPS is now expected to be in the range of $1.62 to $1.66 versus our prior guidance range of $1.59 to $1.64. With respect to CapEx, we still plan to spend in total approximately $78 million in 2017, reflecting the opening of approximately 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? Joel D. Anderson: Thanks, Ken. We have had a terrific first half. Both our first and second quarters delivered outperformance with strong top and bottom line results, driven by increases in transactions, new customers and brand awareness, as well as continued new store strength. In closing, I want to thank the entire team at Five Below for working so hard to deliver these results. Specifically, our merchant teams continued to bring newness and amazing values across our eight worlds and the marketing team engaged our customers and generated excitement, our Home Office support teams focused on creating efficiencies and making sure our stores and store teams had what they needed to be successful, while our distribution centers ensured products our customers desired were in our stores for them to find. Lastly, but certainly not least, our energetic store operations teams delivered to our customers the one-of-a-kind in-store experience that is so very special and unique to Five Below. Without each team member working together, we could not have delivered the results we are so proud to share with you today. I just have to say, it truly is an amazing time to be part of the Five Below family. And to that end, I also want to thank all of you on this call for your continued investment and support of Five Below. As you can easily tell, we are proud of our first-half success and excited about the momentum heading into the second half of the year. Five Below is a unique brand which is on a mission to help make life better for our customers so they can let go and have fun. With that, I'd like to turn the call back over to the operator for questions. Operator?

[Operator Instructions] Our first question will come from Michael Lasser of UBS.

Ken, you mentioned that the difference in your comp guidance from the second quarter to the third quarter really reflects the slowing spinner trends. So should we take that to mean that spinners added about 500 basis points to your 2Q comp? Kenneth R. Bull: I think what we mentioned about Q2 was really two things, right. We've had a kind of broad-based performance in some of those departments we called out, Tech and Room and Candy, and then those results were augmented with results from trends, including the spinners and slime and also smiley. And then as you kind of roll forward to Q3, and as we do with our guidance all the time, we kind of look at what we are coming off of, we look forward in terms of anything that we need to consider and obviously take into consideration where we are today. And we noted obviously that the spinner trend had slowed somewhat but still moving into the third quarter, and we put all that information together, and that's how we came up with our 3% to 5% guidance for Q3. Joel D. Anderson: Michael, I'd just add, I know everyone is trying to triangulate on quarters, but we've been public company, this will be our fifth full year, and I think when you look at it on an annual basis, historically four out of the five years, including this year, if you look at our guidance midpoint range, we've been between 3% and 4%. And I think on the years where there's been strong trends, it's been closer to the 4%, and obviously with this year's guidance of 3.5% to 4.5% and the influence of spinners, you can see we are trending closer to that high end of that 3% to 4% range. So, the consistency of this brand, we still continue to think of it as – from a comp perspective in that 3% to 4% range, and on a year when there is not a trend, it might be a little bit lower. I think last year was a case of that. But we remain committed to approximately 3%, on a low end 2%, high end 4%, and I think we continue to think of this brand from an annual basis and certainly when the trends come along, they will influence a particular quarter, and then that will skew us to the higher end of that range, if that makes sense, Michael?

It does make sense, Joel. You mentioned in your prepared remarks that these trends do help you introduce new customers to the brand. So is there some way that you can help us understand the magnitude of how many new customers you think were introduced to the brand from the spinners and slime, maybe even quantify the number of new e-mails or new credit cards that have been introduced into the mix in maybe the last three or six months? Joel D. Anderson: We like all trends and I think what makes Five Below so unique with its eight worlds is that we are able to take advantage of so many different trends. I mean even in the time since we've been public, it's been the rubber bands and frozen and selfie sticks and adult coloring, and certainly bean boozled, and now spinners, what all those have in common is that they are not in common, and it's because of the eight worlds that give Five Below the flexibility and the expectation of our customers that they can be assured that they will find that trend in Five Below. And every time we have one of those trends, they introduce some new set of customers to Five Below. Frozen obviously skewed young girls; adult coloring was a wide range; spinners, boys, girls, grandparents, three-year olds, it was a very wide range. And so, clearly there was a lot of new customers. We know through a lot of surveys, we have seen a significant amount of first-time customers in Five Below due to the spinner trend and we think that will have a nice halo impact on our business going forward.

Our next question will come from John Heinbockel of Guggenheim Securities.

Joel, I'm curious, as we head toward holiday here, without giving too much away, what areas would you like to improve incrementally when you think about marketing, the expansion of your efforts, including the EPIC deals, merchandising, and then also kind of store operations and throughput with George on board, what would you say the one or two things you'd like to most improve incrementally from a year ago? Joel D. Anderson: Certainly George has already had a very strong positive impact on the business. He has been onboard now for a few months and we expect that to continue the influence on the store piece of it. I highlighted in my remarks how successful we were with the TV campaign in Q2. Certainly we'll take those learnings into Q4 with our TV campaign. We've got the trailing positive impact of new customers that resulted from the spinner. And Michael and the merchant team, as I said in my prepared remarks, we've got some exciting new things to share with everybody in Q3 and Q4. Obviously for confidential reasons I can't share what those are yet, but we've got a seasoned team, all of our divisional merchandise managers at least have a couple of years under their belt with us now, and the team just continues to get better, stronger, more nimble. And I think the spinners are just a great example. When we sat on the results for the call from Q4 last year, we weren't even talking about spinners. It was a trend that hadn't even emerged. And in less than 90 days, we identified the trend, sourced it, got it on the shelves, and even started to capture sales at the end of Q1 with obviously the peak in Q2. So I think it's that nimbleness, John, that continues to get better, coupled with us just coming together as a team and being more seasoned working together.

And then I guess just a quick follow-up, EPIC deals, in and of themselves is a small part of the holiday effort, right, that's not something you need to improve much incrementally? Joel D. Anderson: No, I think the bigger theme, whether it's EPIC deals or something else, the common theme that works for Five Below is wow and newness, and certainly I think spinners fell in both the categories; wow, they get that for $5; and it certainly was new, new trend, and we had it first. So, that's where we'll focus, John, is a lot more wow, lot more newness, keep bringing that value to life. And let's not forget the in-store experience, because that's what differentiates Five Below from others out there.

We'll take our next question from Charles Grom of Gordon Haskett.

Could you guys speak to the opportunity on your remodel front, how the initial tests are doing so far, and then when you think about 2018, the opportunity for a deeper rollout? Joel D. Anderson: Sure, Charles. So we have remodeled four stores now. They look identical to the new store format that all 100 new stores will get. Honestly, it still is a little too early to speculate on 2018. Our plan right now, just like we did with new stores, is to continue to run it through the holidays and we are watching monthly what the impact is on sales, customer transactions. But I would tell you that our initial reads are very positive. We like what we're seeing. And I think the way I would contemplate 2018 is that will be a transition year for us, it will be the year we kind of perfect the remodel program, and then we'd look for something more 2019 as a rollout phase.

Okay, great. And just my follow-up for Ken, if my math is right, if you guys do a 4% comp in the third quarter, your guidance implies about 1.5% in the fourth quarter. I guess I'm curious if that was consistent with your original view that you laid out for us in March and I guess how you are thinking about trying to stand out in that November-December timeframe? Kenneth R. Bull: Chuck, I think you are standing a little light on the fourth quarter implied number for the year, but we haven't changed really what the underlying implied comp guidance for Q4 really going all the way back to the initial guidance that we provided earlier in the year.

Okay, and just opportunity to stand out, what do you guys – how you are thinking about acting now? Joel D. Anderson: You're asking, what do we see as an opportunity to stand out in the back half?

Exactly. Joel D. Anderson: I think it's a lot of what I was just alluding to with John. The marketing program continues to get better. The wow and newness with value in an in-store differentiated fun shopping experience is what's so unique and different about Five Below and we are going to continue to do more of the same. We are really excited about the 3% to 5% in Q3 here. It just shows you the continued strength of the core business. The business was healthy in Q2 and it continues into Q3 here. So we enter the back half, Charles, with momentum and I think all those things lead to a really strong point of differentiation.

Our next question will come from Kelly Halsor of Buckingham Research Group.

Congrats on a great quarter. Joel D. Anderson: Thanks, Kelly. Appreciate it. It truly was. We feel great about it. Thank you.

So I'm just trying to understand kind of what's going on under the hood here kind of ex-fidget spinners. I know it's a little bit difficult given there's probably some attachment rate as it relates to the fidget spinner traffic, but if you assume that that trend kind of peaked and fell off quite rapidly, as we have understood it, I mean how did that core business, did that start to reaccelerate? Throughout the quarter I think you were up against some easier comparisons. And then as we look to the third quarter, how should we be thinking about that from kind of a monthly cadence? I believe that October last year was kind of an anomaly with weakness around the election. Joel D. Anderson: The election weakness was more of fourth quarter, with some in October. But I think, Kelly, I'd probably reiterate some of the stuff I was sharing with Michael Lasser in that we really look at this business on an annual basis, and that consistency of four out of the last five years and the very narrow band of 3% to 4% comp, and then what you see is the spikes when you look at the quarterly cadence within those years that were largely driven by trends. And this trend of spinners is no different than many other trends we have seen. They last a quarter or two. And let's not forget there is also the smiley trend, there is the slime trend. The smiley trend is one that's been kind of coming up here on about a year now and it's really had legs. So, every trend is a little bit different, and we continue to buy with discipline into those trends and we exit with analytics. And by analytics I mean we watch the weekly trends, we understand looking at past history what makes them successful, when they are going to fall off. And so, I think overall, we love those trends, spinners was great. As I was alluding to earlier, it brought in a lot of new customers to Five Below and we believe those will have a great halo impact on our core business both in Q3 here and then certainly into the holiday period.

Okay, so it's fair to assume that while spinners is slowing, it's still additive to the comp as well as slime and smiley here in the third quarter really is what's embedded in your guidance? Joel D. Anderson: Yes, that's all embedded in the guidance, and certainly the peaks are gone but it's a great new item, and now it's probably more a substitution item than additive to the comp, but we continue to see sales daily and weekly in spinners and it has the possibility to be an evergreen item, no different than frozen turned out to be in 2014.

Our next question will come from Jeremy Hamblin of Dougherty & Company.

I'll add my congratulations on the really impressive performance. It sounds like it was fairly broad-based in addition to the fad item. I wanted to ask a little bit about back half margins, and in particular maybe looking a little bit on the SG&A side. With the Company coming in so far ahead of initial guidance and plan, I would imagine your incentive compensation maybe kicking up a little bit. I think as I look at Q3 guidance and what's implied for Q4, I think the implied guide for Q4 suggests operating margin down just a touch year-over-year. Could you give me a sense of what kind of impact coming in so far ahead of your plan has maybe on overall SG&A for the year? Kenneth R. Bull: You described that pretty accurately because that's really what's been implied for us. We obviously gave guidance for Q3 where I mentioned that operating margins would be up modestly, and then also for the full year same modest increase in operating margins, which does imply a little bit of a delever there in Q4. And it is being driven primarily by some of the incentive-based compensation that gets recorded in Q4. From a full-year basis when you talk about SG&A, again a modest increase in overall operating margin, and it's probably a little bit in both, a little bit in SG&A and possibly a little bit in gross margin when we look at the full year.

So maybe just to pinpoint, Q4 implications, or maybe it's Q3 and Q4 from an SG&A standpoint, could you give me a sense of the potential drag, are we talking about maybe 20 basis points or 10 to 30, seems like that's the potential range that you're looking at? Kenneth R. Bull: Yes, I think the way you would look at it in Q4, if you are modeling out a delever in operating margin, probably the majority of that will be coming from SG&A, again driven by the increased incentive-based compensation.

Okay, great. High-class problems. Congratulations, guys. Look forward to touching base soon. Joel D. Anderson: Yes indeed. Thanks Jeremy. Appreciate the support.

Sean Kras of Barclays has our next question.

I believe there was an upgrade to your labor scheduling system that I think will be in place by the fourth quarter. I'm just wondering, I guess how this should impact the SG&A leverage point maybe some in the fourth quarter and then thinking forward into next year? Kenneth R. Bull: I think the bigger impact you'll see on that is more into next year. Any time you put a new system in place, it takes a little bit of time to dial it in and get all the stores up on it. But we expect to have it certainly fully implemented by the time we get into the fourth quarter. But I think any benefits we see from it would be, financial benefits would be seen next year. But let's not forget, there aren't only financial benefits, there are customer benefits, and those we'll start to feel in the fourth quarter, having our labor scheduled at the right time, more closely tied to when the customer is in the store. So, we should feel that impact this year. Joel D. Anderson: To help improve our service levels. Kenneth R. Bull: Absolutely.

Okay, thanks guys. And just to follow up, could you talk a little bit more about the TV test in the quarter? It seems like now this will remain part of the media mix, but do you think you can expand it to a greater percentage of the stores next year? Joel D. Anderson: So we were in about 25% of stores this year, relatively flat to last year. I think if you recall, when we came out of last year, we wanted another year of testing it, changed up some things this year, went back in the store, broadened up the assortment we showed, and we were really pleased with the results. So, I think I mentioned in my prepared remarks, we saw enough positive good news out of it that we expect to move that now out of kind of the test phase and more into possible rollout. Too early to say what the percentage would be a year from now, but it will certainly be higher than 25%. It ties in perfectly with our real estate strategy where we are densifying in markets so that it makes economic sense to turn on TV market by market, but [indiscernible] TV will be part of our go forward strategy like Q4 TV already is today.

We will hear next from Alan Rifkin of BTIG.

Congratulations on a nice quarter. Joel, with transactions and partly due to new customers driving a best comp in five years, I know it's only one quarter, a couple of quarters or so, do you have any color as to the stickiness of these new customers who first came in to purchase the spinners, whether they are [indiscernible] your store on future occasions? And then I have a follow-up. Thank you. Joel D. Anderson: Not only was it part of our comp, I mean it was largely the majority of it. I mean we were up, Ken, 9.1% transactions? Kenneth R. Bull: Transactions, right. Joel D. Anderson: On a 9.3% comp. So, almost all of the sales increase was traffic driven, with transactions being a proxy for that. And as far as the second part of your question there, Alan, it really is too early to understand the total stickiness. Certainly by our guide here of 3% to 5%, we certainly believe there is a halo effect of it and I think as we get into Q4, we'll certainly know more, but we'll be out in the marketplace here leading into the holiday to do another awareness study. Our awareness has been up and I think when we complete that awareness study, that will give us a better sense of the stickiness to it, but a little too early to kind of certainly quantify what the impact has been.

Okay, thank you, Joel. And just to follow up if I may, so with your best comp in I think five years, which obviously was well above your original expectations, and as we are heading to the critical time of the year, can you maybe talk to your vendors' ability to meet incremental demand, should it arise, if your purchase orders have to be increased, what's the average lead time in terms of getting some product and what's your feel for their ability to increase production on-the-fly to meet your greater need, if need be? Joel D. Anderson: I guess I'll look backwards in the rear-view mirror to answer that question, Alan, and I'll use the example of spinners. I think they are a great example of how strong our supply chain is and our vendor community and the ability to source it, being nimble, get it across the water and into our stores. That was an item we hadn't even identified at the beginning of the year, it obviously showed an incredible amount of demand, and we were there to meet that demand. And that applies – I used that example, as we go into the fourth quarter and we start to see items take off, we'll use that same sort of methodology to chase products that we need to have a great fourth quarter. But as we continue to scale, our ability to do that gets only stronger.

Okay, thank you. Best of luck in the second half. Joel D. Anderson: Thanks Alan. We are looking forward to it and excited about the momentum we have.

Our next question will come from Paul Trussell of Deutsche.

Just wanted to circle back to the conversation on margin and if you could maybe just discuss some of the puts and takes on the gross margin side in terms of your third quarter and fourth quarter guidance, and just kind of broadly speaking, as we think about the business going forward, is the outlook for merchandise margins still in the flattish range as you kind of reinvest for better products? And then as the follow-up, just any additional learnings another quarter in on the California store openings? Thanks a lot. Joel D. Anderson: Ken, you want to take the margin, then I'll talk about California? Kenneth R. Bull: So Paul, on the gross margins, you probably heard me mention on the call, for Q3 we expect modest leverage on an operating margin perspective. Really that's going to be driven by leverage in SG&A. So I don't see at least at this stage any meaningful leverage coming out of gross margin. I think we are actually up against some pretty meaningful freight benefits from the prior year, but that's kind of how we see Q3. Didn't really provide Q4 guidance, right, we go one quarter out and provide the full year. But as I had stated before, the implied guidance or the implied margin was probably going to be down a little bit, primarily because of some additional incentive-based compensation based on the additional sales and profitability that we have guided to. And as we kind of fast-forward to the full year, we would expect to see modest operating margin leverage, and that really coming out maybe a little bit in SG&A and a little bit in gross margin. Joel D. Anderson: As far as California goes, we opened three more stores in the quarter. We've since opened two more here in the third quarter, for a total of 14 now, and we have one more planned in the balance of the year. Really no change from my initial thoughts at the first quarter call. California is doing great for us. We are excited about our initial openings. Our strategy is to stay concentrated in Southern California for the foreseeable future and we believe California is going to be a great market for us. It will become our largest state and we're going to push ahead as originally planned and you can expect us to open a lot more stores in California in the coming years.

Ladies and gentlemen, we still have several analysts the Company would like to speak to, so please limit your questions to one. We'll take our next one from Stephen Tanal of Goldman Sachs.

So a lot of good color already, but I guess the one thing we didn't really touched on that we talked about a little bit last quarter was start of the movie season, and it seemed like one where there were a few hits that could have been helpful to the business. I think there were Guardians of the Galaxy, Despicable Me emojis, Spiderman, talked about all those. If you could kind of give some color around how those are doing and what your expectations are going into the back half, that would be helpful. Joel D. Anderson: I would say of all the ones you listed, Despicable Me was the strongest. But honestly, it's a relatively soft license year as we look at it compared to the prior year and what's really been stronger has been the trends, as I talked about, spinners, smiley and slime. And then of course you might saw, we did an exclusive heli ball with Guardians and Spiderman. But other than that, not [really] [ph] overwhelmingly strong or weak that I can add any color to it. It's just kind of a muted year a little bit, but much stronger in those other three categories I talked about.

Got it, understood, it's helpful. And then just one last thought for me, the higher margin in the spinners, could you give some color around that, because I think similar to Paul, we've been thinking about merch margins being somewhat flattish, and I guess on the occupancy side you got good leverage this quarter, but any context you could put around that would be really helpful [indiscernible] and then I'll yield? Thanks. Kenneth R. Bull: Stephen, we normally don't provide any kind of detailed margin results around items. But I can tell you, of the 145 basis points of expansion in gross margin that we saw in Q2, about half of that was related to merchandise margin and then the other half was in occupancy and DC leverage.

We will take our next question from Alvin Concepcion of Citi.

Great quarter. I'll keep it to one question. I was curious about some things you have been seeing from your surveys. Are you becoming more of a standalone destination because you've been bucking the trend your retail anchors have been showing, so if there is continued weakness at your anchors into the holiday, what gives you confidence that you could continue to buck that trend and become more of a standalone destination? Joel D. Anderson: Thanks, Alvin, for the one question there. We have done a lot of studies on that. We still believe location matters. What our surveys have told us is that about 50% of our transactions are self-induced and about 50% of our transactions are living off the surrounding traffic in the center. And as we continue to grow, become a national player, the desirability of having Five Below in an A center continues to grow and our strategy is in differentiating from that. We are not mall-based where a large percentage of the decline has happened, and we are really concentrating on those A and B power strip centers. And as we continue to stand by bringing centers, I think that coupled with the half of our business that we drive really will continue to make us strong. And I would highlight though, let's not forget, what's winning in retail today is retailers that have value and in-store experience, and I believe we have both, and I think that coupled with being in vibrant centers is really continuing to allow us to buck the trend, so to speak. Thanks, Alvin.

We'll take our next question from Patrick McKeever of MKM Partners.

Ken, you mentioned, I think you said 24 stores in Houston and only four have reopened, and so my question is – and then you said something about if necessary you would provide an update I guess on that market, but is there an impact from Houston embedded in the 3% to 5% comp guidance or EPS guidance for the third quarter? I mean it's a pretty – it's 4% or so of the chain, so it's a pretty decent number of stores that are being impacted. Kenneth R. Bull: Sure, Patrick. As we said before, we've got 23 stores in that Houston Metro area, and as we noted, the events are still very fluid, right, they are ongoing as we speak. So we really don't have the full extent of what the impact is or will be until we get a chance to really look at all the various locations. But we did mention that we had four of those stores that have already opened up. So, as we do with guidance all the time, we take the information we know at the time and we provide that, right. We look back on where we have come from, where we are today, and then maybe some anniversary of results going forward. But if things would change to the extent that we would have to revise our guidance in any way, we'd obviously put that out and update everyone on that. But at this stage of the game, we feel comfortable with the guidance that we have provided. Joel D. Anderson: And I'll just add, not only we feel comfortable, Patrick, we really believe there is only going to be a handful or less stores that are going to sustain major damage. So, the number is going to come down quite quickly. Four reopened today, we think several more are going to reopen tomorrow, and our thoughts and prayers are certainly down there with the people and that's the first priority of helping our store teams and communities put the [indiscernible] stack together. But when it's all done and said, we think there is only going to be a handful of stores that are going to sustain major damage, and all that is kind of embedded in our guidance, and as Ken said, if it worsens, we'd certainly let you all know. But we think we have appropriately covered it.

We'll take our next question from Dan Binder of Jefferies.

I was wondering if you could just talk about two things. One is product trend related to what appears to be an emerging trend in squishy toys and if that is something you think could turn into a major trend based on what you are seeing today? And then secondly, just from a cash flow perspective, you should generate pretty good free cash this year, your cash balances are rising, the debt is zero, so curious what your considerations are for that cash going forward? Joel D. Anderson: On the product side, we are certainly aware of that trend, but right now we've been really more focused on slime, smiley, spinners, and haven't seen any signs that that trend would eclipse those. But as far as cash flow, Ken, you want to comment on that? Kenneth R. Bull: Yes, I mean, Dan, from a capital allocation standpoint, you are right, we continue to throw off free cash flow and obviously with the paybacks we are getting on our new stores. So, we are aware of the options, we have discussed that internally, not in a position yet to be able to talk about that externally, but we are going to be looking at that shortly, and obviously if anything comes up along those lines, we'll make sure that we let everybody know.

We'll take our next question from Vincent Sinisi of Morgan Stanley.

This is Andrew Ruben on for Vinnie. You talked about some mobile tests as part of your digital strategy. Could you talk a little bit more about what you are doing there and maybe how mobile and e-commerce are starting to meet? Joel D. Anderson: Those tests largely in the mobile social arena are allowing us to get into markets where it doesn't make sense to do TV. It's much more economical, you can really be targeted and approach it on a store by store basis. So that's really been the focus to get to a more targeted basis from it, and that's really where the focus has been with the mobile social.

We'll take our next question from Brad Thomas of KeyBanc Capital Markets.

Let me add my congratulations as well. I'll squeeze one in on e-commerce. Maybe could you give us an update on how big that business is getting and how you are feeling about its outlook from a profitability standpoint longer term? Thank you. Joel D. Anderson: I was counting on mobile social there to get a second question on e-commerce. E-commerce is still an important part of our overall marketing strategy. But I would remind everybody, our core focus remains on the in-store experience and growing our store count. We continue to see e-commerce as the icing on the cake. It's convenience play. It's a great way for customers to have access to Five Below that aren't near Five Below. But it still remains a very small piece of our business. We are fortunate enough, Brad, that we can approach this offensively and not defensively, which means we can grow with pace and diligence. You will continue to not see us do big, large amounts of free shipping as an example, and we are though adding more products and I'm really pleased with the initial startup, but it remains a very small piece of our business from this perspective.

We'll take our final question today from Anthony Chukumba of Loop Capital Markets.

I just had a question, you mentioned license merchandise sales [indiscernible] moving, have been [indiscernible] [given what you thought] [ph], are you expecting any sequential improvement with the Star Wars movie coming out later this year? Joel D. Anderson: Clearly I mean we liked what we saw in Star Wars a couple of years ago and we will carry Star Wars merchandise in the fourth quarter, and I think my comments were more just about comparing it to prior year impact on license, and the customers change. Sometimes licenses are really hot and sometimes they are not, and the focus this year seems to be on trends like smiley and slime and spinners and less on the traditional licensed properties. But as far as Star Wars go, yes, we'll be carrying Star Wars product this fall, but I don't see it being a major piece of our business for the fall.

Okay, that's very helpful and congrats on a great quarter. Joel D. Anderson: I think that's it for us and I really appreciate and thank everyone for joining us today. It's been a great quarter. We are excited about the momentum going into the back half of the year and we look forward to seeing you all in the stores. Have a great evening everyone. Thank you.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.