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

Judah Frommer - Credit Suisse Matthew Boss - JPMorgan Edward Kelly - Wells Fargo John Heinbockel - Securities Vincent Sinisi - Morgan Stanley Anthony Chukumba - Loop Capital Markets Dan Binder - Jefferies Kelly Crago - Buckingham Chuck Grom - Gordon Haskett Paul Trussell - Deutsche Bank Scot Ciccarelli - RBC Capital Markets Michael Lasser - UBS

Good day. And welcome to the Five Below First Quarter Fiscal 2018 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 first quarter 2018 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. One quick housekeeping note, last year was a 53-week fiscal year, which shifted this fiscal year’s quarters by one week. Ken will review this shift in his remarks and please see our press release for more information. 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 for questions. We are very pleased with our first quarter performance as we delivered both sales and earnings above our guidance ranges. Sales increased 27% to $296 million, driven by continued outperformance of our new stores and a healthy comp of 3.2%. This sales performance was accompanied by strong gross margins, SG&A leverage, and tax rate favorability resulting in net income of $22 million and earnings per share that more than doubled from last year to $0.39 a share. During quarter, we opened 33 new stores in diverse markets in 18 states. Six of these stores made our top 25 all-time spring grand opening list. These stores are located in Pooler, Georgia; Janesville, Wisconsin; Middletown, New York; Indianapolis, Indiana; Heinzville, Georgia; and Florence, South Carolina demonstrating the broad universal appeal of Five Below. New stores continue to achieve very high levels of productivity, driving our industry leading less than one year average payback period on our new store investment. Year-to-date, we have now opened 42 stores and are on track for our approximately 125 planned store openings in 2018. All in our refreshed store look and feel and we expect to end the year with approximately 750 stores. With this growth comes increasing benefits of scale throughout many facets of the organization. Our Q1 comp of 3.2% was within our guidance range and driven by average ticket. As expected, transactions were down slightly, largely due to the unusually cold and wet weather during the quarter, and lapping the spinner craze, which began to ramp in mid-April last year. With regards to merchandising, our teams continue to do an excellent job generating newness across all eight worlds, as our Easter and Spring sets reflected. Tech, Room, Seasonal, Style & Create performed well demonstrating again the broad-based strength of our business, and slime, smiley, squishy, spa and mermaid trends continued to be popular. Through our edited assortment of products relevant to our customers, we make it easy for them to simply say, yes, and get those items they just got to have. On to marketing, we remain focused on increasing our brand awareness and continue to shift our program to our broader digital efforts. We are excited to announce the launch of our Summer TV Campaign, which features a broad mix of products for outdoor fun. You will recall, we first tested Q2 TV in 2015 across 15% of our store base, and we continued to test and learn through the 2017 season. This year, our Q2 TV will reach approximately 40% of our store base, a significant increase from the last three years. Additionally, we are making further investments in mobile social media campaigns, designed to promote interest and brand awareness at a local level and many of our markets. Our growing e-commerce channel is also aiding awareness throughout the country. Finally, print circulars continue to play an important role for us, especially around key seasons throughout the year. Our most recent circular was distributed last Sunday and featured fun products for all things summer, such as the Giant Llama Pool Float, Make Your Own Squishy Toys!, and a new Jumbo Umbrella Tent, perfect for the beach. In addition to merchandising and marketing, we continue to focus on our other strategic initiatives, namely people, systems, and infrastructure; as we have done for years, we are investing in these areas to continue building the foundation to support the growth that lies ahead. With respect to systems, the implementation of the new POS system we discussed on our last call is on track to be deployed in our stores this year. This new system delivers the scale needed to support our more than 2,500 U.S.-store opportunity, and provides the functionality and flexibility for future features such as a loyalty program and omni-channel capabilities. On to infrastructure, in order to continue to support our long runway of significant store growth and effectively service our loyal customers, we plan to open three new DCs over the next few years. Today, we are excited to announce that we recently signed a purchase agreement to initially build an approximately 700,000-square-foot distribution facility just South of Atlanta, which has the ability to flex up to about 1 million square feet. We expect this DC to become operational in the spring of 2019. This is the first facility built entirely to our specifications and owning the building will provide us with the control and flexibility as we grow our footprint throughout the Southeast. This DC, together with our plan for additional new DCs, demonstrates our commitment to supporting our rapidly growing store base through disciplined infrastructure investments. Now, a few words about Q2, as you know, we are cycling a very high transaction led comp from last year due to the spinner craze and we have reflected this in our Q2 outlook. I am very proud of the efforts our teams have made to prepare our stores for Q2. We have edited a high quality, coordinated, trend right merchandise lineup, increased our marketing, and added several in-store initiatives as we continue to innovate the store experience. After the long winter and cool spring, our customers are ready for summer and our stores are set to provide them with many awesome products to help them simply let go and have fun from beach chairs and towels to boogie boards, shorts and flip-flops, all at incredible value of $5 and below. In summary, we are very pleased with our first quarter performance. The year is off to a strong start, and we remain firmly focused on executing against our key priorities to support the long runway of growth that lies ahead for Five Below. With that, I will turn it over to Ken. Ken?

Thank, 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 full year. Before I review our results, I will provide more color on this year’s calendar shift due to fiscal 2017 53rd week. As we stated in our press release, our first quarter ended one week later this year versus the first quarter of fiscal 2017. With regards to comparable sales, results on a quarterly and annual basis will be reported using the NRF’s restated calendar, which compares similar calendar weeks. While the impact of this calendar shift will continue to affect year-over-year quarterly comparisons, the full year impact is not material. With that said, it is important to note that any impact of this shift is contemplated in our guidance, as it was when we gave our initial Q1 guidance on our last call. Now I will review our first quarter results in more detail. Our sales in the first quarter of 2018 were $296.3 million, up 27.2% from $232.9 million reported in the first quarter of 2017. The impact of the calendar shift I just reviewed added approximately $6 million to sales, as we gained a higher volume week-ended May 5th and lost a lower volume week ended February 3rd. We opened 33 new stores during the quarter compared to 31 opened in the first quarter of 2017. We ended the quarter with 658 stores, an increase of 105 stores or 19% versus 553 stores at the end of the first quarter of 2017. As Joel mentioned, our new stores generated another quarter of very strong performance. Comparable sales increased by 3.2% for the first quarter of 2018. The comp increase for the first quarter of 2018 was driven by an increase in comp average ticket, with a slight decrease in comp transactions, which was primarily driven by the unseasonably cold start to spring and also the beginning of the spinner trend last year. As I mentioned on our last earnings call, we expected substantial year-over-year operating margin expansion in the first quarter and we saw this play out. This was driven by overall fixed cost leverage on our 3.2% comp, as well as leverage versus last year when we absorbed higher costs associated with incentive compensation and our initial entry into California, both of which impacted gross margin and SG&A. Gross profit increased 31.8% to $97.2 million from $73.8 million reported in the first quarter of 2017. Gross margin increased by approximately 110 basis points to 32.8%. As a percentage of sales, SG&A for the first quarter of 2018 decreased approximately 170 basis points to 24.5% from 26.2% in the first quarter of 2017. Operating income increased 93.3% to $24.7 million or 8.3% of sales, from $12.8 million or 5.5% of sales in the first quarter of 2017. Our effective tax rate for the first quarter of 2018 was 15.4%, compared to 35.9% in the first quarter of 2017. Our tax rate was favorably impacted by lower rates from Tax Reform, which was included in our guidance and the accounting for stock-based compensation, which as is our practice was not included in our guidance. The impact of the stock-based compensation accounting was an increase in earnings per diluted share of approximately $0.04. Net income increased to 159.8% to $21.8 million or $0.39 per diluted share from $8.4 million or $0.15 per diluted share last year. We ended the first quarter with $277 million in cash, cash equivalents and investments and no debt. Inventory at the end of the first quarter was $215.4 million, as compared to $180 million at the end of the first quarter of last year. Average per store inventory at the end of the first quarter of 2018 was six-tenths of a percent higher versus the first quarter last year. Now, I would like to turn to our guidance. As a reminder, our guidance does not include any impact from stock-based compensation accounting or share repurchases. We will report the impact, if any, with our actual quarterly results. For the second quarter ending August 4, 2018, net sales are expected to be between $332 million and $335 million, an increase of 17% to 18% over Q2 2017. This sales assumption includes the opening of 33 new stores, as compared to 31 new stores in the second quarter of 2017. We are assuming approximate flat Q2 2018 comp sales versus the 9.3% comp in Q2 2017. With regards to operating results for Q2 2018, we expect deleverage on fixed expenses from the lower comp and the timing of the $7.5 million in Tax Reform related investments, which begin to ramp in Q2. Accordingly, we expect to see about 100 basis points in operating margin deleverage in Q2. While we typically do not comment on future quarters, I want to point out that we expect operating margins to continue to delever in Q3 and Q4 by approximately 200 basis points and 100 basis points, respectively. Net income for Q2 2018 is expected to be in the range of $20 million to $21.2 million, an increase of 19% to 26% over Q2 2017. Diluted earnings per share for the second quarter of fiscal 2018 are expected to be $0.36 to $0.38, an increase of 20% to 27% over Q2 2017. For the full year 2018, we are raising our sales guidance by $7 million to be in the range of $1,502 billion to $1,517 billion, an increase of 19% to 20% over 2017 on a comparable 52-week basis. Comp guidance for the full year remains in a range of a 1% to 2% increase. We continue to expect to open approximately 125 stores and end fiscal 2018 with approximately 750 stores, an increase of approximately 20% as compared to our 2017 ending store count of 625. We now expect to open approximately 50% of our stores in the first half of the year, compared to 60% in the first half of 2017. We now expect an effective tax rate of approximately 23.5% for the year, which includes a normalized quarterly tax rate of 24.5%, excluding the impact of stock-based compensation accounting. Our net income outlook has increased and is now expected to be in the range of $136.5 million to $139.9 million or growth of 36% to 39% over 2017 on a 52-week basis. Diluted EPS is now expected to be in the range of $2.42 to $2.48 or growth of 34% to 37% over 2017 on a 52-week basis, compared to our prior guidance range of $2.36 to $2.42. With respect to CapEx, we plan to spend in total approximately $137 million gross in 2018, reflecting opening of approximately 125 new stores, with the remainder projected to be spent on our new Southeast distribution center, our existing store base 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?

Thanks, Ken. The year is off to a strong start as our Q1 results illustrate. Our teams are working harder and more cohesively than ever, which in combination with our growing scale is resulting in improvements across the organization. We remain focused on opening new stores, sourcing the most amazing merchandise, increasing our marketing reach, hiring the best associates, expanding our distribution network and installing new technology. All areas that drive the wow factor and elevate the customer experience to keep our customers coming back. We are uniquely positioned as a high growth value retailer to capitalize on the opportunities that lie ahead for Five Below and achieve our previously articulated strategy of 20% topline growth with 20% plus bottomline growth through 2020. Looking out longer term, with our continued and consistent success as we expand our store footprint and build out our distribution network, our conviction in the 2,500 plus store potential for Five Below only grows. In closing, I’d like to thank all of our teams for working so hard in preparing Five Below to be the go-to-destination for all things summer. With that, I’d like to turn the call back over to the operator for questions. Operator?

[Operator Instructions] Our first question comes from Judah Frommer with Credit Suisse. Please go ahead.

Hi, guys. Thanks for taking the question and congrats on the quarter. I was hoping maybe first you could help us with a housekeeping item. The new store productivity in the quarter does look unusually high because of the calendar shift. Would you be able to help us with kind of your internal calculation there, it sounds like new markets continue to do really well, but just some gauge would help?

Sure. Judah, if you – you know calculating it based on an average store opening and using our reported results in our press release, you are probably coming up to a new store productivity of about 124%. If you look at that and if you adjust it for the timing of openings during the quarter and the benefit of the calendar shift that we discussed in our prepared remarks, the new store productivity would still be north of 100%.

Okay. That’s helpful. And then changing gears a little bit, the Tax Reform related reinvestment you are talking about the $7.5 million. Has anything changed in terms of what you’d say the labor or wage environment that causes you to maybe reassess what that investment needs to be or do you feel comfortable with the investment you are going to make in both store labor or maybe even as you are rolling out new DCs, there’s some wage pressures there as well?

Yeah. Thanks. I will take that. For the year, nothing’s changed. We continue to watch wages in all our markets, and we remain competitive in every market we compete in. And I think, as we get into ‘19 and ‘20, we will take a look at if we need to make any adjustments, but as we sit here for the foreseeable future, we think the changes we made and announced at our year beginning call accurately reflect where we need to go with wages.

Great. Thanks.

The next question comes from Matthew Boss with JPMorgan. Please go ahead.

Thanks. I will add my congrats o n a nice quarter.

Thanks, Matt. Appreciate it.

Thank you.

Joel, so the last three calls, you have actually called out close to, I think, five worlds, if I am counting right in terms of strength, which is more than double over the past couple of years, calling out a couple. I guess can you talk about how the team is diversifying that performance across the box, maybe outside of the craze trends and opportunities you see to continue the momentum on that front?

Yeah. Thanks, Matt. I know you recently just started following us, and if we go back several quarters ago, we kind of laid out trends and quite a bit of detail for everybody, and I will just reiterate that. We have updated trends really in three different buckets. We call them craze trends, license trends, and then relevancy trends. And I think, what you are highlighting there is really the outstanding job the entire merchandising team has done on being relevant. And Michael leads that team and they have really done a great job across all eight worlds, and I think it’s the eight worlds that gives us the flexibility to be relevant in a lot of different areas. And you are seeing that play out as we called out, as you accurately said, five different worlds on this last call, but that’s really a factor of that third trend and what a great job the merchant team’s doing on staying relevant.

Great. And then just a follow up maybe for Ken on unit growth, so as we think about your annual high-teens growth pace, I guess, any governors that you see as we think forward regarding the number of stores the team could open in a given year and just thinking larger picture about some of the hires you have made, maybe such as George Hill or some foundational investments. I guess, what gives you the confidence that you can build the scale and maybe kind of touch on some of the investments or the hires as we think about the opportunity on an annual basis going forward?

Sure. Thanks, Matt. I will take a piece of that and kick it back over to Joel. As we have said over the last couple of years, we laid out kind of the game plan for us through 2020, which included 20% topline growth, and the key driver of that growth was, obviously, the unit growth and you continue to see that as we look back and as we look forward, we feel really confident about our ability to open up new stores. Joel called out on this call the -- some of the records we saw from stores that we opened up in the first quarter that were grand opening records of all-time for us. So, again, we continue to open up more stores. We continue to open up these stores very positively, and as you have seen from our performance in prior classes, we maintain that really positive performance. So we feel confident about our ability to deliver on that mission that we have carried out through 2020 and that we have the appropriate resources in support to be able to continue to do that. I will kick it back to Joel just to talk about some of those things that we have put in place here to be able to continue that path.

Yeah. I think that’s exactly why we called out those six diverse stores. It just really continues to give us confidence and demonstrate to all of you that follow us how universally appealing the brand is. And so at this point, Matt, we really haven’t reached any type of limiting factors that is slowing down our growth, obviously, the expansion of our distribution centers is another example of belief in our growth. And then, I think, the other piece you called out is people, and really when you are a high growth company like we are, people, systems, and infrastructure are the three areas we spend a lot of time on and bringing somebody like George on the team a little bit a year ago is a great example. He came to us from a much higher volume retailer. He has been through go-go growth years of other retailers, and like Michael did when he got into the merchandising organization as he gets into year two and certainly in year three next year, will continue to get stronger and stronger on delivering a great store experience. So we welcome what George has done and he has been a great addition to the team. Thanks, Matt.

Thanks, Matt.

Okay.

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

Hi, guys. Good afternoon and nice quarter as well. Can I just start I want to ask about second quarter comps. Joel, I think, if I remember correctly, you had at least sort of opened the door to it’s possible that comps could be negative in Q2 and Q3, obviously you are guiding to flat. If we think about where Q1 came in that’s an improvement on a two-year and three-year stack basis. I was just wondering could you just give us a little bit of color around your confidence and the Q2 comp as you lap. I don’t know you are probably seeing how you are lapping spinners currently, maybe you could give us some color there as well in terms of like how you are doing against that comparison at the moment?

Yeah. Clearly, we are obviously right in the middle of lapping it right now. We like the progress we have made in May. I think the important thing on what’s giving us that confidence, Ed and we have talked about a number of quarters as we have done some of our marketing studies, we saw that the data showed us that 50% of the customers that bought spinners last year were new to Five Below and we shared many a times that we love all trends, and so the spinner trend was an example of a lot of new customers got introduced to Five Below. And then it was really on our shoulders to keep those customers, and I think, it’s a combination of our store experience continues to get better, the marketing team has captured those customers, and then the merchants continue to bring relevant product to it. So it’s really been a broad based performance of all our merchandising categories. What I was talking about earlier with Matt that has given us the confidence that as we get through Q2 here that we are backing towards a positive comp and we are excited to do that and pleased to share that with all of you today.

Great. And just a quick follow up though, I want to ask something a little bit more longer term, I guess. But as you think about customer loyalty you have talked about now the new POS system coming in this year, what it would allow you to do from a loyalty standpoint. I guess, how far are you from actually having a program that you think could be rolled out and how important could this be to the business over time?

Matt [ph], we haven’t honestly even started, I think, the first focus is getting that POS system in place before we take those next steps. It’s too early to speculate on what it means. We are pretty disciplined in everything we do, just as we took several years to test out TV until we got it right. Same is true with many of the other things we have done and as we have continue to expand our digital marketing efforts. And that’s the same way we are going to approach loyalty when we get to that point. But we do believe it’s something you will see from us in the future and it will only continue to enhance the loyalty we have with the customers. But I will, let’s not lose the fundamentals of what makes the stock and this company so great is that we had a great store experience, coupled with delivering wow product in a value atmosphere and that’s at the heart of what is the foundation Five Below was made on and then as you add loyalty programs and things like that, it’s just icing on the cake, but it’s not the foundation.

Yes. Understood. Thanks, guys.

Thanks, Ed.

Thanks, Ed.

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

Yes. So, guys, I want to start with the infrastructure development here over the next couple of years. What’s the thought process in terms of cost of the facilities, the degree to which they are automated and is the -- and the -- how many stores will these ultimately support in your push toward 2,500?

Yeah. I will take that and Ken if you want to add any color on costs we can do that too.

Sure.

What -- first and foremost, John, the strategy is that we need to expand our infrastructure out there and right now we are -- our store operation base is probably outstretched our distribution network and so the immediate strategy is to get those five nodes across the country and that’s what we are focused on to continue to support that. What you should take away from it, there’s no backing off on our side, there’s no concerns we have on, what our store growth can and will be.

Yeah.

And that’s really what the main focus is. In terms of the number of stores they can service, that -- that’s really a fungible answer in the sense that if you take the one I just explained on the call today, we are going to build that at 700,000 square feet. Over time that can expand to a million. Alternatively we might decide to build another DC in the Southeast and may never touch the size of that. So there’s really a lot of different ways in which we will ultimately build out that network of stores and right now by building each of these next three a little smaller, but having the footprint to grow them a lot bigger gives us really the ultimate flexibility, John. But it’s safe to say that as we get those three built out between what we initially build and their potential to expand, it will certainly cover well north of a thousand stores and we will play out by what we end up with size.

Sure. And then, John, just from a cost perspective, we historically have leased all our assets, whether they be store locations, distribution centers, home office. It made sense for us in this decision to agree head and build this facility to Joel’s point to give us that control, the building that’s being built to our specifications and also gives us flexibility down the road. From an overall cost perspective, I have called out the total CapEx for this year is $137 million and really the incremental increase year-over-year, the big push or big part of that was being driven by the cost of the distribution center and a combination of obviously the building costs and then our typical material handling equipment, conveyor and sortation that we are going to put in the facility. So, again, we will look at that as we move forward and the future DC that we put in place will determine what’s the right decision there. But at this point it made sense for us to build this location.

All right. And then just secondly, Joel, you talked about scale. What -- are you yet seeing the benefit and I am not talking about procurement scale, but more availability of product from vendors that you might have -- might not have had before. You and Michael, are you seeing that increase sort of geometrically here or we have still yet to hit sort of a tipping point on that topic?

Yeah. We are clearly seeing it grow and expand in many ways. We have launched some of our first-ever direct-to-retail, DTRs as they are called, as an example. We have been introduced to several new vendors as the Toys R Us transition is taking place. And so I think we will continue to see that grow, John.

Yeah.

I don’t know if exponentially is the right word, but it’s certainly kind of up and to the right and no signs of slowing down. We are really pleased with the vendor network we currently have and are seeing as new ones.

Okay. Thank you.

Thanks, John. You bet.

Thanks, John.

[Operator Instructions] The next question comes from Vincent Sinisi with Morgan Stanley. Please go ahead.

Hey, guys. Good evening. Thanks for taking my question and congrats on the continued execution over there.

Thanks, Vinnie.

Thanks, Vinnie.

Absolutely. I wanted to ask about the 2Q marketing campaign, nice to see that things like gaining some further traction, as you said, kind of the most store coverage that you have had. So I guess my basic question and sort of two parts, one, kind of more near-term and one longer term. But, first, anything further you could share at this point about the campaign itself and is it going to be concentrated seemingly in basically all your more dense markets or might you be testing some of the newer less dense ones as well this year? And then the longer-term part of it is, with what you are seeing from 2Q specifically, do you think longer term that you will see a meaningful shift of kind of the weightedness of 4Q as kind of percent of the year? Thanks a lot.

Yeah. Thanks, Vinnie. As I see it, clearly, we have been very methodical about our ramp of TV in Q2. This is actually our fourth year. Taking it up to 40% is a significant increase from last year. It should show you the confidence we have and what we learned from the last three years. But strategically nothing’s changed. We talk a lot about our real estate strategy and the further densification of existing markets. You will notice this year we are only entering one new state. California as an example, we are staying focused firmly in Southern California. Those are all examples of the discipline we have about making sure we densify the markets. And as we densify it makes it easier for our operators, it makes it easier for our distribution teams and then it certainly makes the ROI, the A to S spend, the advertising to sales spend, from a marketing perspective start to make a lot more sense. So strategically it is largely remains focused on our denser markets. We are not bringing TV into our newer markets. That’s not the plan. In terms of longer piece, look Q4 is always going to be important to us. We don’t shy away from it. I actually think it’s what continues to strengthen the moat around the concept is as we get better and better at Q4, it gets harder and harder for that to be replicated. Having said that, we welcome continued increase in Q2, it is our second strongest quarter. The teams continue to deliver amazing summer product and as we get the word out as that we are not only a Q4 destination that we are truly of all season destination. I think it’s only going to make us stronger but I don’t think Q4 goes away as being our biggest quarter. It just as our base gets bigger it gets easier to have the other quarters be more profitable. But Q4 will always be the most important. Thanks, Vinnie.

Thank you, guys. Good luck.

You bet.

Thanks.

The next question comes from Anthony Chukumba with Loop Capital Markets. Please go ahead.

Good afternoon and thanks for taking my questions. So I just had a quick question, obviously, there’s a lot of retails that talked about weather and it doesn’t, well, it seems like it impacted you maybe not to the same extent. But, I guess, do you think that your Q2 sales might benefit from some people who might not have bought summer and outdoor product in Q1 going ahead and doing that in Q2, in other word the shift out of Q1 into Q2 given the unseasonably cold weather in March and April?

That’s a lot of speculation there. And I think when you look at the results we had in Q1 and you look at our guide for Q2 and you put the two quarters together, it’s honestly a heck of a first half of the year for us, up against some really tough trends from last year. I think what’s more important is how successful we have been, Anthony, in so-called monetizing those new customers that we acquired last year throughout that whole spinner trend. And let’s not forget, as our store base continues to move south and west, there’s less and less impact on the weather piece of it. So if what you called out happens, it happens mostly in our northeast stores and you go back five years ago that would have been a much bigger piece of our business. But we continue to kind of look at it in totality and we will always have weather shifts. Clearly, I think, if that weather shift hadn’t happened in April we would have seen slightly higher comps, but we are overall really pleased with the Q1 performance. That’s kind of how we take a look at it.

Fair enough. Keep up the good work. Thank you.

Thanks, Anthony.

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

Thanks. I was wondering if you could comment a little bit more on the remodel performance since you last updated us, how that’s progressing, how good you feel about potentially ramping that for next year? And then just on the topic of marketing. It seems like brand awareness moving up is certainly helping both new and older stores. I am just curious if you can give us sort of the plan of reference on where that was maybe two years or three years ago and where do you think that is today?

Yes. Dan, on the remodel piece, we are still on track this year to remodel give or take 10 stores and what our plan is, is to use the learning from 2018 to then put in place a formal remodel plan and program for 2019. If you will recall, we did about five last year. We were really pleased with the initial results. What we weren’t pleased with or I shouldn’t say not pleased with but what we have to work on this year is not closing the stores, bringing the cost down and getting it down to a respectable ROI. But I can tell you that the operating teams have done a great job with the initial ones that have gotten out the door. We will finish up the rest of them here in Q2 and early Q3, and we are still on track to be ready later in the year, end of the year call at the latest to kind of outline for you what our remodel plan is. But safe to say you should expect us to have one formalized for 2019. And then as far as brand awareness goes, our last ICR deck is the last time we updated it. And Ken, I don’t know if you can pull the numbers up off the top of your head, but I think, we are up about 15…

15 percentage points.

Yeah.

From the last time we did it. I think it was a couple years ago…

Right. And that’s…

… two years.

That’s in markets where we have been open at least two years.

Yeah.

We are in market right now with one. We just haven’t gotten the results yet back that we have just been in for May and so we don’t have those results yet. So the latest ones we have are the ones we have got posted on our website. And it continues to move up and to the right there as well and that’s really good news and we are pleased with the results on awareness.

Great. Thank you.

Thanks, Dan.

Thanks, Dan.

The next question comes from Kelly Crago with Buckingham. Please go ahead.

Hi, guys. Thanks for taking my question and congrats on a really good quarter. Could you talk a little bit more about the California store, as the stores open there are just now entering the comp base. How are they trending relative to your typical store model in year two? And my second question is related back to new store productivity and what is embedded in 2Q sales guidance. Should we assume you are picking up another more productive back-to-school week at the end of 2Q, and if so, should it look similar to what you saw in the first quarter, because it looks like your 2Q sales guidance is embedding a pretty meaningful step down in new store productivity relative to the first quarter even after you adjust out that $6 million benefit?

Yeah. California stores just to remind you, Kelly, we don’t go into comp until the 15th full month, so we have still got about two months or three months till they -- I think they go in July or August space, so too early to tell on that. But we are opening a number of California stores this year. We are very pleased with California. There’s been no sign that California is not going to be a very successful state for us. It will over time be our largest state with hundreds of stores and the strategically though we are staying focused in Southern California. We will enter San Diego County but that’s about the only new county that will enter this year and we are pleased with how California is going. Ken you want to talk about NSPs?

Yeah. On -- Kelly on the new store productivity. We do expect to benefit from the calendar shift in Q2 similar to what we saw in Q1. And you are right, there is some distortion if you are looking at new store productivity just based on our reported guidance, but if you take in the consideration the benefit from that calendar shift plus you will assume a similar year-over-year store opening timing, the implied new store productivity is still north of 90%.

Okay. Thanks.

We have several stores, Kelly, opening late in the…

Late in the quarter.

Late in the Q2, so it might be what you are seeing different there.

Yeah.

Okay. All right. Great. Thank you.

You’re welcome.

Thanks, Kelly

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

Hey.

Hi, Chuck.

Thanks. How’s it going? On the customer acquisition front, as you guys said half the spinner buyers I think were new customers to Five Below last summer. And I believe in November of last year you said 90% of those stores had shopped again at Five Below. I guess, I am curious if you revisited that study in the first quarter. And then bigger picture, as your brand awareness continues to grow, what you think the long-term outlook to be for store volume, which I think is around 2 million today.

Yeah. We haven’t updated that study since then and if you will recall several questions ago, I think, Ed, Kelly, was asking about customer loyalty programs. We don’t have one today. So we have to do studies and get implied data back from the customers. We don’t have a loyalty card so it’s really hard to track that ongoing, obviously, when you see us guide to a flattish comp for Q2, it demonstrates a lot of those customers continue to come back and there’s no sign of that piece slowing down. What was the second part of that, Chuck?

Just in terms of brand awareness and what do you think…

Oh! Yeah. I think…

… volume…

Yeah. I think.

… volumes were at 1.5 million now you are a little bit north of 2.

Yeah.

I think [inaudible] historically on Five Below there is no maturation curve, but in essence you kind of do have one. And I am just -- I am guess thinking you look out multiple years what you think the average volume could potentially be?

Yeah. It’s really hard to speculate that at this point, Chuck. I mean, I think, for models and looking at it, I would hope that what we are doing. And the reason I say that is, another scenario is we could build more stores and we have already shared with you the increase earlier this year from 2,000 to 2,500 and implied in all these stores that we open. We are stamping down the growth potential on a lot of stores to go higher. So our strategy ultimately will be about market share and not necessarily about just taking all our stores from 2 million to 3 million or to 2.5 million. So there’s a lot of different ways we will look at this over time, but right now, I think, it would be too early to be starting to speculate on a much higher average store volume. I think, it would be more important that we focus on market share.

Okay. Great. Thank you.

Thanks, Chuck.

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

Good afternoon. I wanted to just touch on the first quarter, even if we were to back out, right, the lower tax rate related to the stock-based compensation. I believe we would have still ended up at the very high end of the earnings range that you provided, despite comps not being at the high end of the range. Just wanted to know if there are any other kind of puts and takes we should keep in mind as relates to margin performance in 1Q and whether there has been any adjustments made to the margin thought process going forward since the year started?

Sure. Thanks, Paul. We -- as I mentioned, we finished Q1 pretty much in line with our expectations from an operating margin performance, pretty meaningful expansion as you noted. And it was really due to those areas that we had expected to see it and based on the guidance going into Q1, right. So we have got, we had some leverage on the 3.2% comp and then also the benefit of lapping some onetime costs last year. We had the expenses around the California entry and also some incentive-based compensation that was recorded in Q1 of 2017. So nothing really changes our outlook and expectations as we move forward. And as I mentioned in my prepared remarks to lay it out, for Q2, our guidance implies about 100 basis point deleverage in operating margin and then larger in Q3 about 200 basis points and then Q4 another 100 basis points. And again that’s a combination of the delever on the lower comps and then also we have the tax investments that really started kicking in Q2.

Got it. That’s helpful. And just very quickly, Joel, you mentioned adding several in-store initiatives. Could you just elaborate?

Since George has come onboard, what you should start to see in our stores is, we are doing a much better job at welcoming our customers, being friendly, we do a thing called Win the Weekend. There’s a lot of different demos and interactions with our customers, sidewalk chalk paints, over the Memorial Day weekend we had an Inflate While You Wait program on floats and the customer just loves our stores and that just continues to drive up the store experience and come on in and let go and have fun. Thanks, Paul.

Thank you.

Thank you, Paul.

The next question comes from Scot Ciccarelli with RBC Capital Markets. Please go ahead.

Hey, guys. It’s Scot Ciccarelli. So, I think, it was…

Yeah.

Ken, hi. So all-time highs in terms of grand openings this quarter. So, I guess, the question is did you see these records occurring in what you would view as new markets or existing markets and related to that what would you attribute it to, is it better real estate, is it the new store format, is it the brand name recognition people have been asking about, if you can help us with that, that would be great?

Yeah. Of the stores we opened this year in the first quarter, 31 of the 33 were in existing markets. Is that the right…

Correct. Yeah. Only one new market.

New market.

Yeah.

And there was two stores in that market. So the large piece of it, Scot, was in existing markets. So that’s part of our overall densification. I think what we called out for you in sharing those six different markets is how widely spread out they were throughout the United States and how they were not concentrated in our hometown or high dense markets like New York and New Jersey. So that really just shows you the universal appeal. In terms of what’s driving it? It’s really a combination of everything you just said. Awareness is getting stronger for the brand. The new refreshed format is working, the customers like it, the store is brighter and we continue to see progress in that area. So it’s a combination of all those things and I think it was important that we be transparent and share with you how universally appealing the new store success has been.

Great. Thanks, guys.

Thanks, Scot.

Thanks, Scot.

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

Good evening. Thanks a lot for taking my question. So, Ken, if we assume a pro rata portion of that $6 million benefit from the calendar shift is from your existing stores, that implies that you have got about 200 basis points of comp from that shift? So, A, is that correct? And, B, it looks like you might be in that range maybe slightly less from your suggestion for the calendar shift in 2Q? And then as part of that, you are guiding to a 350 basis point acceleration in your two years stack comp from 1Q to 2Q. Should we think about that as the contribution from fidget spinners last year and that’s what’s really going to drive the acceleration in your two years stack comp trend?

Thanks, Michael. You had a lot in that question there.

A lot, but there’s a lot going on in your comp.

Yeah. No. No. I understand. We will -- I will try to take it a piece at a time here. But, first, I just want to mention to you, on a full year basis we talked about the calendar shift, that impact on a full year basis is immaterial, right. But looking at it by quarter with regards to total sales, as you heard we noted in -- on the call the benefit that we saw in Q1, we expect to see a benefit in Q2, but that’s going reverse in Q3 and Q4, negative impacts in those quarters and that’s around the weeks that are coming in and out of those quarters and it also is driven by our overall seasonality. We also noted that our comp sales calculation is based on the NRF restated calendar. So there is -- we line up similar weeks when we are reporting our comps. So we feel that that’s the best way to report our comps. It sounded like you were trying to link maybe the calendar shifts and the comps. Again, what we would see normally is that the shift that’s taking place in total sales if it’s a benefit is probably a detriment to overall comps. But again we look at it on a comparable calendar year basis from a comp perspective, and all of this, by the way, has been included in our guidance. So we have given it to you for Q2. So it’s all embedded in the numbers that we are providing to you.

And then the 350 basis point implied two-year stack acceleration is that the fidget spinner?

Well, Michael, there’s a lot of puts and takes in there. You look at last year when we got through the 9 plus comp quarter a lot of people said how much was it attributed to spinners and we put a lot of numbers in that 300 basis points to 500 basis points number, and it’s always harder to put an exact number on that, because do you only look at the spinner sales themselves, you look at spinner transactions, you take the whole transaction, you take a piece of the transaction. So there’s a lot of puts and takes that go into that. I think the better way to look at it is as you come into Q2 here, with a flattish comp guide and a 9.3 last year, we continue to be three to four annual comp and you look at that, it’s slightly above that, a piece of it is spinners, but it’s a really, really healthy comp. I called out five different worlds. I mean, we are feeling really, really good about where the business is at and as we go into Q2 here, what the marketing team has done. What the operators are doing to make the store experience. And most importantly, when you see the merchandise calling out five of the eight worlds, it just shows you how broad-based and how relevant we continue to stay. And it bodes well for having a great Q2 and then leading that into Q3 and beyond.

And can you just clarify one last point, you raised your annual sales guidance by $7 million, you beat the high end of your 1Q guidance by $2 million, so there’s an incremental $5 million. You reiterated the same comp growth. So were some stores opening earlier than you had previously thought or was the upside all due to the new stores producing more sales than you originally thought?

Yeah. I think you heard. It’s really the new store productivity. As we said we are really pleased with that, very positive performance coming out of Q1, and you are right, that increase in the overall annual sales guide is coming from the beat to our high end guidance from Q1 and obviously the implied guidance for Q2.

Yeah.

We are going to have to wrap here, Michael, but I think, a lot of people try and understand Five Below. This is a great quarter really show you the power of what we have planned the next five years with new stores and the impact they make positively on the overall concept.

With that, we are going to have to close. I want to thank everyone for joining us today. Have a great summer. I expect to see you in the stores. Just get in there, let go and have fun and enjoy Five Below. Thanks and we will see you later in the year in our Q2 call. Thanks, everybody.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.