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

Scot Ciccarelli - RBC Capital Markets John Heinbockel - Guggenheim Securities Jeremy Hamblin - Dougherty & Company Dan Binder - Jefferies Charles Grom - Gordon Haskett Alvin Concepcion - Citi Michael Lasser - UBS Paul Trussell - Deutsche Bank Edward Kelly - Wells Fargo Sean Kras - Barclays Alan Rifkin - BTIG Vincent Sinisi - Morgan Stanley Patrick McKeever - MKM Partners

Good day and welcome to the Five Below Third Quarter Fiscal 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Christiane Pelz, Vice President of Investor Relations. Please go ahead.

Thank you, Gary. Good afternoon, everyone, and thanks for joining us today for Five Below’s third 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 website at fivebelow.com. I will now turn the call over to Joel.

Thank you, Christiane, and thanks everyone for joining us for our third quarter earnings call. I will review the highlights of the quarter before handing it over to Ken to discuss our financials and outlook, and then, we will open the call for questions. I’d like to start by saying, I’m very excited to report that we delivered another phenomenal quarter. And I’d also like to thank our many long-term shareholders for your continued support of Five Below. Sales, comps and earnings in the third quarter, all outperformed and exceeded our expectations. Sales increased 29% to $257 million, driven by strong results from our new stores and a traffic-driven comp of 8.5%. As a reminder, remember, we use transactions as a proxy for traffic. Earnings per share grew 80% to $0.18, representing our highest earnings per share growth quarter in over four years. New stores typically account for over 80% of our annual growth, and growing the store base remains our highest priority. During the quarter, we opened a record 41 new stores in diverse markets across 24 states, including our 600th store in Augusta, Maine and the 15th Five Below in Southern California. Our new stores continued delivering strong performance across both new and existing markets in urban, suburban and semirural settings. Three new stores in fact, made our top 10 of all-time fall grand openings. And we ended the quarter with 625 stores, an increase of 21% versus Q3 last year. Additionally, in early November, we opened one more new store, which completed our new store program for the year. All of these new stores reflect the refreshed Five Below store experience to which our customers have responded favorably. The class of 2017 is generating very strong productivity with average first year unit volumes that we believe are on track to exceed to $2 million. That would make this our strongest class yet. From a real estate perspective, our growing brand awareness, consistent results and strong balance sheet increased our desirability of the tenant. We continue to see great new store opportunities in shopping centers with solid traffic and well-known national co-tenants. I’m happy to report that the majority of next year stores already have leases in progress and we are beginning working on locations for our 2019 class. Moving on to comps. Our 8.5 comp far exceeded guidance of 3% to 5%, brining our year-to-date comp through Q3 to almost 7%. Our Q3 performance was driven by a strong customer response to our WOW product, our incredible price points, our differentiated in-store experience, and our increasingly targeted marketing efforts. With respect to merchandising, our team delivered a fresh selection of high-quality, trend-right items at amazing value to our customers. The strong third quarter results reflect this commitment as evidenced by broad-based performance throughout our core business led by Room, Tech, Candy, Sports and Create. Trends like flying, smiley and mermaid contributed nicely to sales, while as expected the spinner craze continued to slow. As we have shared with you many times, trends are good for Five Below to help drive overall brand awareness and introduce new customers to Five Below who then return to shop throughout the store. We were also pleased with the performance of back-to-school and Halloween. Seasonal updates like these keep the Now world fresh and give our loyal customers yet another reason to shop Five Below. As we leverage our scale and vendor relationships, our overall assortment gets better and better, and our merchants reinvest in amazing products, they create even more WOW. On the marketing front, we believe our efforts are gaining momentum as we benefit from our store densification strategy and optimize the media mix to increase brand awareness, traffic and loyalty. In preparation for Q4, we continue to enhance our digital marketing efforts, with new social media campaigns and our fourth quarter TV ad, which we believe will be our best ever. This is our fourth quarter -- fourth year of holiday TV and we are airing the ad in markets reaching approximately 40% of our stores, a similar percentage to last year. Additionally, while ecommerce is still a very small piece of our business, we see it as an important contributor to Five Below’s growing brand awareness and it also provides the benefit of being an easy-to-use pre-shopping tool for our customers’ in-store purchases. These marketing initiatives are led by David Makuen who was recently promoted to EVP of Marketing and Strategy. In his six years at Five Below, David has been instrumental in growing our brand awareness across markets and has shown great leadership within the organization. He has successfully led the launch of our ecommerce site and assembled a topnotch marketing team to help support our growth. With respect to systems and infrastructure, we continue our disciplined strategy of phased growth. Based on the recently completed distribution network study that we discussed last quarter, we have made the decision to locate our next DC in the Southeast and we plan to open it in the first half of 2019. We now are in the site selection phase, and we’ll have more information for you on our next earnings call. As another part of our strategy of building for growth, we are preparing to move into our new home office in early 2018. The finishing touches are being made on the space, and we have already opened a Five Below store in the Maine level. We believe that having the store located in the same building, as our office is, will bring us even closer to our customers. Turning to Q4 and holiday. We are very excited to offer our customers an amazing lineup of products for gift-giving, all at an exceptional value. We kicked off the season with an incredible deal, a $5 drone, purchase with purchase offer, which as you can imagine, was extremely popular. Our featured Black Friday on real deal was Guitar Hero for only $5. And we had other amazing products like remote controlled cars, boats, helicopters, and assortment of spa bath bombs and our first wireless charger. The customer reaction to Five Below throughout the Black Friday weekend was extremely positive and we look forward to continuing to delight our customers throughout the next few weeks with even more WOW products. In summary, we are extremely pleased with our 2017 year-to-date performance and the strong start to Q4. Our Q3 results continue to reinforce the universal appeal of Five Below and the strength, consistency, and flexibility of our model, giving us continued confidence in our 2,000-plus store potential and our ability to achieve 20% top-line growth with 20% plus bottom-line growth through 2020. The biggest weeks of the year still lie ahead and we remain firmly focused on delivering the all-important fourth quarter. Given our outstanding results and continued momentum, we are increasing our guidance on both the top and bottom-line. And 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 third quarter results and then discuss our outlook for the fourth quarter and the full year. Our sales in the third quarter of 2017 were $257.2 million, up 28.9% from $199.5 million reported in the third quarter of 2016. We opened 41 stores during the quarter compared to 26 opened in the third quarter of 2016. We ended the quarter with 625 stores, an increase of 108 stores or 21% versus 517 stores at the end of the third quarter of 2016. Comparable sales increased by 8.5% for the third quarter of 2017 as compared to a two-tenths comp decrease in the third quarter of 2016. The comp increase for the third quarter of 2017 was driven by a 7.1% increase in comp transactions. Gross profit increased 30.7% to $83.6 million from $64 million reported in the third quarter of 2016. Gross margin increased by approximately 45 basis points to 32.5%, due primarily to leveraging of store occupancy costs. As a percentage of sales, SG&A for the third quarter of 2017 decreased approximately 100 basis points to 26.8% from 27.8% in the third quarter of 2016, as we leveraged expenses on the higher sales results. Operating income increased 71.6% to $14.8 million or 5.8% of sales from $8.6 million or 4.3% of sales in the third quarter of 2016. Our effective tax rate for the third quarter of 2017 was 34.8% compared to 37.4% in the third quarter of 2016. Our tax rate was favorably impacted by the new accounting standard related to stock-based compensation. This change was approximately a penny impact to EPS. Year-to-date the positive impact to EPS related to the new accounting standard has been about a penny and a half. Net income increased 81.4% to $9.9 million or $0.18 per diluted share from $5.4 million or $0.10 per diluted share last year. We ended the third quarter with $134.8 million in cash, cash equivalents and investments and no debt. Inventory at the end of the third quarter was $271.7 million as compared to $228.2 million at the end of the third quarter of last year. Average per store inventory at the end of the third quarter 2017 was 1.5% lower versus the third quarter last year. Now, I’d like to turn to our guidance. As a reminder, this 2017 fiscal year includes a 53rd week, which is expected to add approximately $16 million in sales and approximately $0.03 in EPS in the fourth quarter. Comparable sales for the full year and fourth quarter are based on 52-week fiscal year and a 13-week quarter. For the 14-week fourth quarter ending February 3, 2018, net sales are expected to be between $491 million to $503 million, an increase of 27% to 30% over Q4 2016, or growth of 22% to 25% on a 13-week basis. This sales assumption includes one new store that opened early in the quarter, offset by the planned closing of one older classic store at the end of the quarter. We are assuming a Q4 comp sales increase of 4% to 6% versus the 1% comp in Q4 2016. Net income is expected to be in the range of $60.8 million to $64.6 million, an increase of 22% to 30% over Q4 2016 or growth of 19% to 27% on a 13-week basis. Diluted earnings per share for the fourth quarter of fiscal 2017 are expected to be $1.09 to $1.16, an increase 21% to 29% over Q4 2016 or growth of 18% to 26% on a 13-week basis. 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 for sales, comps and earnings. Sales for the 53 weeks are now expected to be in the range of $1,264 million to $1,276 million, representing growth of 26% to 28% versus last year or growth of 25% to 26% on a 52-week basis. This new sales assumption is a $28 million increase from our previous high-end guidance. Comp guidance for the full year has increased from a 3.5% to 4.5% range to a range of 5.7% to 6.5%. We expect to open 103 net new stores in 2017 and end the year with the store count of 625, an increase of approximately 20% as compared to our 2016 ending store count of 522. We expect the full year effective tax rate of approximately 37%. Our net income outlook has increased and is now expected to be in the range of $95.9 million to $99.7 million or growth of 33% to 39% versus 2016. On a 52-week basis, net income is expected to increase 32% to 37%. Diluted EPS is now expected to be in the range of $1.72 to $1.79 or growth of 32% to 38% versus 2016 compared to our prior guidance range of $1.62 to $1.66. On a 52-week basis, EPS is expected to increase 30% to 35%. With respect to CapEx, we plan to spend in total approximately $75 million gross in 2017, reflecting the opening of 103 net new stores with the remainder projected to be spent on our new home office, distribution centers, corporate infrastructure, and store relocations and remodels. 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. So, for 2017, it is been a truly remarkable year for Five Below. We have delivered outperformance with strong top-line and bottom-line results in each of our first three quarters and are very pleased with the solid momentum we have seen quarter-to-date. Before closing, I’d like to take a moment to thank our associates who worked tirelessly through hurricanes Harvey and Hurricane Irma. We are thankful that we sustained only minor damage and were able to quickly reopen closed stores and help our affected associates and communities recover. Our thoughts and prayers continue to go out to everyone impacted by these events. I also would like to thank all of our loyal customers for shopping at Five Below as well as the entire Five Below team, who are working so hard to deliver these fantastic results. A special thanks goes to our merchant teams for bringing newness and amazing values across our eight worlds, our store operation teams for delivering the one of a kind in-store experience that is so special and unique to Five Below, the distribution center and allocation teams for ensuring our ‘just gotta have it’ products are in the stores on a timely basis, the real estate and construction teams who opened a record 41 stores in Q3, our many home office support teams for providing our stores with the help they need, and finally, the Five Below leadership team for inspiring us every day. I’m truly blessed to be surrounded by an energetic, passionate and also talented team. We believe that the unique combination of our value offering and fun differentiated store experience has driven our success as a leading high growth retailer. We are 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 to the operator for questions. Operator?

We will now begin the question-and-answer Session. [Operator Instructions] Our first question comes from Scot Ciccarelli with RBC Capital Markets. Please go ahead.

Hey, guys, Scot Ciccarelli.

Hey, Scot.

How are you? I guess, my question is, historically, fourth quarter has been a tougher quarter for you guys, just as more sales kind of shift online, you lose a lot of the walk by traffic et cetera, especially during the holiday season. How do you guys assess or estimate what the negative impact of that shift will be on your business? I mean, I think we all understand you have great top-line momentum right now. But, how do you assess what that negative impact of the channel shift is?

Scot, good question. I guess, first of all, you got to start with that was in our base last year and it’s in our guidance, and look forward for the overall fourth quarter. And I think at the end of the day, what makes Five Below so unique and different, if you go back to everything I said in my prepared remarks, it’s the value retailer with a unique in-store differentiated experience. And I think that’s the part, the treasure hunt aspect that makes Five Below so unique and different. And I would tell you from second quarter to the third quarter and now leading into the fourth quarter, we continue to get better with the merchandise offering, our marketing efforts, and what our store operators are doing to make the experience better than ever. And when you factor all that in, as you can tell by our results and our forecast for Q4, we think we’re going to have a great Q4.

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

So, two real quickly. First, you look at the step-up in the two-year comp right over the last six months, what I’m trying to get my arms around is when you think about certain brand’s tipping point, right, with brand awareness and consumer recognition, from what you are looking at, are we beginning to hit that and is the brand awareness metrics that you look at suggesting that? And then, secondly, not relatively, do we still need to get through the holiday season to make a decision on rolling out the remodeled stores next year or I guess have you seen enough to determine that that’s probably something you want to do?

Yes. Taking the second question first. Cleary, we need to get through the fourth quarter. As we shared with many analysts, too shared [ph] here with us, we remodeled four stores this year. We are pleased with the initial results we are seeing. But like our Five Below brand, the fourth quarter is important and we wouldn’t make any decisions on our remodel strategy until we get through the fourth quarter. So, that clearly -- we’ll have more update for you all on our next earnings call. As for brand awareness, it’s not only brand awareness, it’s scale, it’s execution. We clearly believe our brand awareness is getting better and it’s happening faster. We are planning to share some results with you all at the ICR conference coming up in January. But, we’re clearly hitting that tipping point we believe, yes, John.

The next question comes from Jeremy Hamblin with Dougherty & Company. Please go ahead.

Good afternoon, guys. Congrats on a stellar quarter.

Thank you, Jeremy. We appreciate that. Go ahead.

We appreciate it too. I wanted to get into just the operating model. For the last five years, you really have seen unbelievably consistent operating margins. This year, it looks like you are going to take a pretty significant step forward, get to 12% operating margins for the first time. I wanted to just explore what is driving. Is it that we’re at a tipping point here on those AUVs that’s allowing you to drive more SG&A leverage? Really, if I look at the model this year, it’s really your gross margins that are now crossing 36% for the full year of the first time. Can you just speak to what does the longer term picture look like here or is this simply a reflection of just very strong comps and not -- we shouldn’t necessarily be thinking about 12% plus operating margins going forward?

Good question, Jeremy. We said in the past, in terms of operating margin leverage that our tipping point is about at a 3% comp if you look at that on an annual basis. And as you mentioned here implied in our high-end guidance is the meaningful movement this year. I think, what you’re seeing is a couple of things. The ongoing high productivity is coming out of the new stores and also the comps, and the full year comps that we’re guiding to. The one thing that I will mention though from a gross margin perspective, again a little bit unique to this year, if you remember back in the second quarter, we did have the benefit of the spinner craze, which was a high margin item for us, we sold a lot of those, and that drove a lot of the margin improvement in the second quarter and obviously a big chunk of that for the full year. But again, we would expect to see, as we move forward that again we’re still, at least at this stage, the way we see a 3% comp in terms of the tipping point for overall operating margin leverage.

And I think, Jeremy, I’d just add, if you go back a couple of years ago, we rolled out the 20/20 through 2020. And so, well, it may come as a little bit surprise to your or somebody else on the call. This has really -- has long been part of our plan, 20% top-line with 20% plus bottom-line. So, we’ve always foreshadowed leverage on the bottom-line. And it’s a combination -- certainly, the comps have been strong, but as we continue to grow those new stores, the refresh look, the brand awareness, the execution of store level, and then you layer in the merchants getting better and better at driving trends and being trend right, it all comes together and what you end up with is a consistent gross and operating margin.

Great. I wanted to see sneak one follow-up on the last question. On store openings, we had a lot of reports of a little bit higher costs post hurricanes, since demand for materials, this higher demand for labor et cetera is a little bit tighter. What are you guys seeing in terms of development costs for next year? I realize that you still have great unit economics. But, is that at all a little bit of hurdle or changing any of the dynamics as we look forward to next year’s opening?

No. You shouldn’t expect any material change from us on that. We haven’t experienced anything what you are talking about there.

The next question comes from Dan Binder with Jefferies. Please go ahead.

I’ll add my congratulations, particularly on the strong flow-through and the upside for sales, so great quarter. My question was around the comp store sales. And you have to go back probably several years to see this kind of strength without a particular one or two item driver. I was just wondering, if you could speak to just how broad the strength was from the product mix versus how much of it was just driven handful of items.

Okay. Thanks, Dan. Particularly I appreciate the acknowledgement on the flow-through. It was a great quarter there. I guess, the best way to explain is, if I go back and just elaborate a little bit more on trends is which -- is what I think you're asking about. And we've always been a trend right retailer. That's what Five Below was built on. But, I think what's unique about Five Below and trends is that we've got the eight worlds. And those eight worlds provide us the flexibility that chase many types of trends. And in particular I think there is three types of trends that we experience. First of all, there is the trends we call a craze, and in that bucket, I would put things like Silly Bandz back several years ago and the spinners we experienced in Q2. They surge and then they go away rather quickly. There are short-term as opposed to maybe evergreen. So that's one type of trend. Second type of trend are license trends. You could add everything from Star Wars, which lasts for decades to something like Frozen that emerged in 2014; it's been with us now three or four years. And then finally, I would call a third category probably in the category, what I call relevancy. And that's really -- the difference between that third bucket and those first two is we control the third bucket. And if I have to pick an example what I mean by being relevant, think about blankets. We've had blankets since the brand was started in ‘02, and we've got them in 2017. The trend in blankets right now is about mermaid; and next year, it will be about something different. But, we will have blankets five years from now. So, that's about our merchants staying relevant to what the trend is. As we continue to get bigger, as Michael is now on his third season, as our DMs are seasoned, it creates consistency and that's why you've seen 11 years of consecutive comps. I think what's unique about the second and third quarter is all three types of trends happened at the same time. The first was the craze in Q2, I called out several of what I call license trends in Q3. And then, we certainly have a lot of relevancy that we continue to get better at. So, longwinded answer to your question there, Dan. But I hope that helps you understand kind of how we think about trends and what -- as those all come together, produces a quarter like Q2 and Q3.

That's helpful. Thanks. Care to comment on what you think the hot trends will be in Q4?

No. I think you will begin to see us certainly put them in our ads and talk about them, but we certainly see a broad range of trends, I called out in the prepared remarks, the emergence of mermaid as an example. But it's pretty broad based. That's what I would share with you.

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

Hey, guys, couple of questions. I guess, the first is everything [ph] is hotter in the City of Philadelphia, Five Below or Carson Wentz. And then, the second is, can you talk about the trending comps during the quarter. Curious when you examine the performance across the chain, how your older stores are doing relative to the older cohorts?

As much as I would like to think it’s us, I think Carson has got us beat there, Charles. So, we’re pretty excited in the town and the Eagles are doing well, which is great to see. What I would tell you is as we look at all our class of stores, what continues to be unique about it is even if you go back to our oldest classes back in the ‘02 to ‘05 vintage, we didn’t see any classes perform less than mid single digit. So, we continue to see strong performance at all our classes when trends come alive or whether it’s in old store or a brand new store, our customers recognize it and take advantage of it. So, it’s really been pretty universal.

The next question comes from Alvin Concepcion with Citi. Please go ahead.

Just wondering if there is any way to quantify or know the sales benefit you receive from new customers that came in for spinners one or two quarters ago but continue to shop at your stores in the current quarter and fourth quarter to-date? And related to that, what kind of comp trend are you seeing in the fourth quarter, to give you confidence in your guidance?

Reminder for everybody, we don’t have our own credit card and we don’t have a loyalty program at this point in time. So, it’s hard to factually pinpoint that number exactly. But I will tell you, we do a lot of surveys with our customer. And the surveys tell us that the spinner craze brought in a lot of new customers in the Five Below, and those customers have returned and shopped at Five Below. The reason we think they returned is they come back, they have a great in-store experience, the like the product, it’s trend right. We assume that they will continue to come with us and that halo effect will continue for many quarters to come. But to pinpoint an exact number Alvin, it would be impossible to give you a number on. And as far as fourth quarter, we don’t comment on week-by-week. But as we do every quarter, we factor in quarter to-date results and we look at the past trends that we know that happen during the quarter, and then we put that all together for our expectations for the rest of the quarter and give you a guidance. I would just add that Q4 is our biggest quarter and hence the reason you see a wider range, 4 to 6 comp and with respect to sales and earnings, and I think those accurately reflect our expectation for a range of outcomes.

The next question comes from Michael Lasser with UBS. Please go ahead.

Can you give us a sense for the week-to-week volatility in the fourth quarter? The question is based on -- it’s still pretty early in the period and there’s a lot to go and lot of uncertainty. So, you may not have had to guide so aggressively for 4Q. And so, how much risk is there associated with the rest of the quarter?

Yes. I guess, what I would tell you is, if you look back since 2014, our consistency of delivering earnings relative to our guidance is pretty close to 100%. And so, I think we continue to get bigger, as I learn the business more, Ken’s team gets more versed, we look at all different scenarios. I think we’ve accurately given you a range of outcomes that we are pretty confident in delivering. And I also would remind the analysts, it’s not our goal to give you a guidance and then beat it by 500 basis points. When we have a unique quarter like Q3, we will certainly take that and are very excited about it. But, we believe we’ve appropriately given you a range that we are not concerned about missing from that perspective, based on past trends and quarter-to-date performance.

The next question comes from Paul Trussell with Deutsche Bank. Please go ahead.

I wanted to ask about margins. Ken, you mentioned that the third quarter gross margin benefited from some leverage occupancy. Could you speak more specifically about what you saw in terms of merchandise margins in 3Q? And then, as we look towards the fourth quarter, you guided 4 to 6 comps, very healthy; earlier on the call, you spoke about 3% that’s kind of the threshold. I’m just wondering, if there is anything we should be keeping in mind for why there wouldn’t be maybe a little more flow through in fourth quarter as kind of the midpoint of the guidance seems to suggest maybe margins even down despite what I would think the benefit from the 53rd week. So, if you can just kind of reconcile that for me, would be very helpful.

Sure. Thanks, Paul. Just to go back to the first part of your question around the third quarter and the gross margin. As you heard in my prepared remarks, the driver for the leverage in gross margin year-over-year was through the occupancy costs, that was really the key item there. From a merch margin perspective, again, as you’ve heard from us in the past, those tend to be pretty consistent year-over-year and we saw that again in the third quarter. So, again, the key driver in Q3 for gross margin leverage was with leveraging the fixed component of the occupancy costs. As we fast forward to the fourth quarter based on the guidance that we’re providing, we are getting fixed costs leverage, both in fixed costs and cost of goods sold and also in SG&A. That’s being offset by incremental incentive compensation. And that incentive compensation is largely based on operating income. And given the volume of operating income that’s in the fourth quarter, there is a large amount that’s recorded there. So that’s offsetting some of the fixed leverage, fixed cost leverage that we’re seeing in other areas in the fourth quarter.

The next question comes from Edward Kelly with Wells Fargo. Please go ahead.

Couple of things for you. First on California. Any color on sort of what you’re seeing there from a store perspective and how influencing your growth plan is going forward at all? And then just secondly for you on the idea of share recall, given clean balance sheet, generate cash flow despite your growth. Obviously your stock historically can be volatile with tougher comparisons, you guys have to think about that next year, I guess. Just thoughts around the idea of a possible share repo at some point in the future as well?

Yes. I'll comment on California, and Ken, you want to talk about the balance sheet. Ed, as far as California goes, we opened three more stores in Q3, and that brings our total to 15. We couldn't be more excited about California. It's a market that probably has our lowest brand awareness of any market we've entered. And yet, we believe those stores will perform on par from a productivity standpoint as a rest of our class. And it's a market that you should expect to see us aggressively continue to grow in the next several years, we’re focused on Southern California at this point in time. But really, no hiccups out of California and we couldn't be more excited to enter that state and we'll continue to keep growing at there. Ken?

Thanks, Joel. And Ed, with regards to the balance sheet and the cash flows, I mean, as you would guess, we've discussed that internally here, obviously, aware of the options that are out there for us from a capital allocation standpoint. Still early in our growth cycle, but it's something that we're looking at as we move forward and as we get some more information, obviously we'd share that with everybody else. At this stage of the game, we want to make sure we maintain flexibility around the investments that we're making in stores and infrastructure, people, systems things like that. So, it is something that we're aware of and we'll address as we move forward.

The next question come from Sean Kras with Barclays. Please go ahead.

Hey, guys. Thanks for taking my questions, and nice quarter. Looking at the calendar, there will be a extra weekend selling day just before Christmas this year with the holiday falling on Monday versus Sunday last year. And I think that the shifts will be pretty meaningful to your business just on how much sales ramp in the last weeks and days before Christmas. So, I'm wondering if there is any rule of thumb or estimate that you would have of maybe that benefit the comps?

Yes. Sean, it's been many, many years since that calendar played out. And we were much smaller chain when that last happened. So, to give you a historical pinpoint on what that means, it's hard to tell. I’d go back to historically when we gave comp guidance, we look at the quarter-to-date trends, we look at historically what we see happen the rest of the quarter, and we certainly factored that into it. We don't think it's a negative. That's for sure. And then, only other thing I'd remind you and anyone else who is asking about our guidance is, the only thing that we don't factor in, in the guidance we gave you is we don't assume whether good or bad; we assume normalized aspect from that. But other than that, Sean, really it's just -- we don't have a lot of history on that specific one, but it’s certainly not a negative that's for sure.

The next question comes from Alan Rifkin with BTIG. Please go ahead.

Thank you. Congratulations, guys on a terrific quarter, really terrific. My question has to do with new stores openings. Certainly, the 41 store openings in the quarter is greater than any quarter you’ve ever opened up stores in before and obviously that number will continue to move up as you grow 20%. But, Joel, did you see any stresses at all from maybe a human capital standpoint on opening so many stores in the 90-day period? And then, related to that, Ken, maybe, if you could maybe just tell us where pre-opening expenses are running this year compared to last year? Thank you, both.

Yes. No, thanks, Alan. Part of the reason I want to share that number with everyone, it was the most we’ve ever done. But at the same time, I’ll tell you, our real estate team, our construction team, they are best-in-class and they nailed it. We really did not feel any stress. 41 was a great test as we look forward into ‘18 and ‘19 to ask ourselves if we can open those kinds of numbers on a quarterly basis, and they did a great job. And we couldn’t have been more pleased. You also called out Alan the 20%. And just to remind everyone, this is a 53-week year. When we calculate those numbers, we do, do it on a 52 to 52 basis. But as far as new store openings and stress on the organization, we feel really good and the teams did a great job.

And Alan with regards to pre-opening costs, pretty consistent year-over-year in terms of what we’ve seen and we’ll expect that going forward. The one call out I’ll mention is anytime we go into a new market like California where we are going to cluster store opening, we do tend to invest a little bit more in those types of new market openings. But aside from that, the pre-opening costs have been pretty consistent year-over-year.

Thank you. If I could one more in real quick. Excluding the California openings, are the rest of your 2017 openings averaging 2 million a store?

When we look at the 2017, that’s 2 million is on average for all stores. So, we’re going to have some stores slightly below that, some slightly above that. But really, geographically, Alan, it’s pretty consistent out there. There’s not any real strong outliers that would sway that one direction or another.

The next question comes from Vincent Sinisi with Morgan Stanley. Please go ahead.

Wanted to ask you, just going back to kind of the third quarter comp cadence, if you will. And this is just more because as I am sure you know, investors certainly are very interested in the comps and causes some volatility around it. But, if we take a step back, so last quarter when the 3 -- I guess kind of like the 3 to 5 guidance was given right. So when you started off the quarter, of the few things that you mentioned today, what kind of improved the most? Obviously a fantastic comp number, but was it more may be the spinners didn’t fall off as much as quickly, was it more of your TV advertising, was it more of the mermaids, like what kind of spurred on the traffic which obviously drove the comp most and how kind of quickly did you see that accelerate through the quarter? That would just be helpful to whatever extent you can talk through that.

Yes, no. First of all, just a reminder, in Q3, we don’t do TV. So, there was no TV impact one way or another. But honestly, what really is so great about Q3 is how broad based the impact was. I think in my prepared remarks, I called out five different worlds, which is probably the most we’ve ever called out in our remarks. But, I think also, as you go back to what I said earlier in prepared remarks, 80% of our growth still comes from new stores. So, while, question is about comp, the performance we saw was really about comp stores and non-comp stores. And the earlier comment, I think it was Dan, I kind of took him through how we think about trends, three types of trends. And all three of those trends we saw emerge and play and impact at some point in time in Q3. But overall, I would tell you, the merchant team led by Michael has done a great job on being relevant and had an impact on many of our worlds.

[Operator Instructions] The next question comes from Patrick McKeever with MKM Partners. Please go ahead.

So, on the last call, the second quarter call, Joel, you were going through some of the impact of Hurricane Harvey in Texas, and you talked about, I think 20 plus stores being closed for a period of time and only four of those had reopened at the time of the call. So, my question is, was there an impact, a material impact on comps from the hurricanes? And also same question on earnings. Was there some incremental spending that occurred that have an impact on EPS?

Yes. Good question. I think this also ties little bit back to Vinnie’s question, one before, because I didn’t comment on that piece when he asked me the question. But clearly, as we give guidance always, we look at quarter-to-date trends. And certainly at the time of the call, we were in the middle of Hurricane Harvey. So, at that point in time, it was a negative impact. But, I think when the quarter settled and we looked at the puts and takes on that event as well as Irma that then followed ,for us, it was really net neutral. There were positive days and there were certainly negative days. But net-net, in terms of sales and earnings, and while you can’t pinpoint it exactly, we really looked at it as pretty much net neutral. We reopened those stores pretty quickly. In fact, I think it was literally the day of the call, four opened that day and I think pretty close to -- the balance opened within the next 24 or 48 hours. And then, you always get the bounce back afterwards. We were fortunate enough that we didn’t lose any stores permanently. And so -- but overall, when you put it together, Patrick, it was relatively close to net neutral for us.

And then, just a question on sourcing and just some of the amazing product in the stores right now, the $5 drones, the Guitar Hero, all the bluetooth, the bluetooth earbuds, and some of the wireless speakers and what not. So, my question is, just thinking about -- and yet, it sounds like merchandise margins are holding in pretty steady. So, the question is, how are you getting some of these products? Is the technology sort of getting to a point where it's inexpensive enough where you can get these products in the stores and sell them for $5 and make decent margin or is it more a function of you are growing scale and relationships with the vendor community and those kinds of things?

Patrick, can I just answer that question by saying, thank you? Does that count?

Sure.

No. I'd say thank you for noticing, right? But I think it's all about what we've been talking about. Michael has been here three years; the merchant teams are getting stronger; relevancy is something that is part of our core business. And as we continue to scale, it allows us to continue to reinvest in the product. We've said many times you all in the call that you shouldn't expect an improvement in merchandise margins, because we're going to reinvest it back in the product, and the product continues to get better. The teams are closer to the marketplace. We have great relationships with our vendors overseas. And we continue to source and make a big deal with it. We have very strategic vendor relationships and we know when and where to go to. So, it's really a combination of all of the above. And then we get it in the stores, the marketing teams tells a story about it and the operators do a great job. But, it comes back to we've been doing this for 15 years. The eight worlds give us the flexibility. And it's our job to then go, be relevant and chase the trends. But I appreciate to shout out on it and thank you very much. I couldn't be more pleased with the results the team delivered.

Yes. I've got a couple of the drones. I haven't opened the boxes yet though, so stocking stuffers.

Drones with the camera, how unbelievable that. Thanks for noticing, Patrick.

This concludes our question-and-answer session. I would like to turn the conference back over to Joel Anderson for closing remarks.

Thanks, operator. Thanks everyone for joining us today. We had a great quarter and we're excited to share the news with you. I hope you all stop by our stores, buy a drone or some other products and do your holiday shopping with us. We truly and sincerely wish you all happiest holidays. And we look forward to sharing our results after the holidays and seeing several of you at ICR. Thanks and have a great evening.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.