Good afternoon, and welcome to the Five Below Incorporated First Quarter 2019 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, Investor Relations. Please go ahead.

Thank you, Gary. Good afternoon, everyone, and thanks for joining us today for Five Below’s first quarter 2019 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 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'll open the call for questions. Q1 was another solid quarter and within the range of our expectations. Sales grew 23% to $365 million driven by continued outperformance of our new stores and a comp of 3.1% that was fairly balanced across transactions and ticket. Earnings per share increased 18% to $0.46 or $0.35 excluding tax rate favorability, which is at the high end of our guidance range. We were especially pleased with this bottom line performance. This quarter's result is a great example of how important new stores continue to be for the Five Below model. They remain the biggest driver of our growth and we plan to open 145 to 150 locations this year. During Q1, we opened 39 new stores in diverse markets from the East Coast to the West Coast, including three new states Iowa, Nebraska, and Arizona bringing our total to 36 states. Nearly one-third or 12 of these new stores located in both new and existing markets made our top 25 all-time spring grand opening list with Cedar Rapids Iowa earnings the top spot for all of our spring grand openings. This is quite an accomplishment when you think of the level of new store performance we delivered during the last several years. 39 stores opened in Q1 are located in the markets range from dense urban locations like Brooklyn, New York, to smaller more rural areas such as Garden City, Kansas; and Ruston, Louisiana illustrating yet again the breadth of Five Below's appeal. With an industry-leading, less than one year average payback period on our new store investment, we continue to believe new stores are the best use of our capital. Now I'll provide some more color on the key drivers of our performance. With regards to merchandising, our teams continue to do an excellent job delivering a fresh, high quality, edited, and trend-right assortment of WOW products across all eight worlds. We saw particular strength in Tech, Candy, and Create this past quarter. Trends like slime and squishy and newer trends, such as gaming and unicorn drove customers into our stores. We are deepening relationships with our toy and license partners and we began to see some early results from the exciting movie lineup for this year starting with Avengers Endgame, which was released later in Q1. On to marketing. We are focused on increasing brand awareness. Our marketing mix continues to shift to digital and TV, which now accounts for over half of our spend on an annual basis. For the first time, we conducted a very small TV test in Q1, and we were pleased with the results. Also contributing to our brand awareness is our small and growing e-commerce channel. In addition, you may recall we began testing the impact of social media influencers in the fourth quarter, and we're pleased with those results. We have since worked with two new influencers to promote their favorite Five Below products on their social media. We expect this added presence to help grow our brand awareness. In addition to merchandising and marketing, we are executing on our other key strategic initiatives, namely people, systems, and infrastructure. We want to ensure our foundation supports a substantial future growth that lies ahead. Enhancing our supply chain remains a key priority for 2019. Opening our new distribution center just outside Atlanta at the end of Q1 was a highlight for the first quarter. I extend my personal appreciation to the DC, Tech, and the many support teams that opened our first facility since 2015, and now puts us on a path to open one DC a year for the next few years. As a reminder, this is our first owned facility, which will provide us with greater flexibility and control as we grow our footprint throughout the Southeast. The DC crew is doing a great job, and we are thrilled to welcome them to the Five Below family. This distribution center together with our plans for additional new DCs demonstrates our commitment to supporting our rapidly growing store base through disciplined infrastructure investments. The next step is to open a Southwest distribution center, and we are on track with an expected spring 2020 opening. Let me now turn to the progress we have made on innovation and elevating the experience for our customers and associates, which remains one of our top priorities. We previously have discussed both our remodel program, as well as a reimagined front-end experience, which provides a speedier assisted checkout option and expanded impulse section, and it enables our associates to proactively engage with our customers on a more personal level. To date, we have remodeled approximately half of the 50 planned stores for 2019 and expect the majority of the remodels to include the reimagined front-end. We also expect about 110 of the planned new store openings this year to feature the reimagined front-end. While it's still very early on, the feedback from the customers and our store teams has been very positive. Another innovation initiative, we are pleased to offer our customers is Just Wow or Ten Below. We are testing both names. This is our in-store test providing extreme value merchandise at price points up to $10. We plan to have this assortment in about 25 stores by the end of Q2. The feedback from our customers continues to be positive. They're enjoying additional values in areas like Tech and Room. For example, we are offering a digital camera and amazing gaming headphones each for $10 true WOW values. It should seem obvious to you by these many examples how important innovation is to our culture and I couldn't be more pleased with the progress our teams continue to make in this area. Now a few words about Q2, we are excited to help our customers let go and have fun this summer with amazing products from inflatables to boogie boards and hammocks to outdoor chairs all at an incredible value. Our style world features coordinated tops and bottoms and even sandals for one-stop shopping experience this summer. In addition, the movie release calendar is particularly attractive this summer and fall. Our merchants have been gearing up for this and our stores will be ready with WOW products. We are also excited to announce the launch of our summer TV and digital campaign which kicks off this week featuring, Camp Five Below and all the outdoor fun for kids. This year we are planning to reach over 50% of our store base through TV in the second quarter, an increase over last year's approximately 40% and in line with the percentage we reached this past fourth quarter. With our merchandise, our marketing, our innovation and our associates we are ready to deliver the summer store experience our customers expect from Five Below. Finally, I'd like to discuss tariffs and the increase from 10% to 25% announced in May. As a value-driven retailer we are concerned about higher tariffs as they will be impactful to our business and lead to higher prices. With the current $250 billion of products imported from China subject to tariffs, about 15% of our total receipts for 2019 are impacted including both directly and indirectly imported products. As we previously discussed we were able to fully mitigate both the dollar and the margin rate impact of the 10% tariff. We expect to mitigate the jump to 25% and are working on a number of options to do so including vendor negotiations, price increases on our $1 to $4 items, process efficiencies and overtime moving production to other countries. Our vendor partners have continued to support us in this process and I would like to thank them. They truly have been amazing partners. We will continue to pursue a combination of all of these as well as increasing prices on our $5 items. Increasing prices beyond the $5 price point is a decision we do not take lightly. We have put a lot of thought behind this decision and we'll proceed with pace and diligence. We will be testing higher pricing on select products in a group of stores before rolling out increases to the entire chain. Where there's some items that are priced at $5, $5.25 or $5.55, we remain firmly committed to providing extreme value to our customers on fresh, high quality, trend-right products in a fun differentiated shopping experience. In summary, the year is off to a solid start. We are confident about our ability to deliver on our top and our bottom line outlook. And we remain firmly focused on executing against our key priorities to support the long runway of growth that lies ahead for Five Below. Our model is very flexible with our eight worlds and breadth of categories and we will continue to successfully surprise and delight our customers. With that, I'll turn it over to Ken. Ken?

Thanks, Joel, and good afternoon everyone. I will begin my remarks with a review of the first quarter results and then discuss our outlook for the second quarter and full year. As a reminder, we adopted the new lease accounting standard at the beginning of the first quarter. This new accounting standard impacts our financial statements, but does not impact our cash flows. This new standard requires us to now record operating leases on our balance sheet. And as a result of adoption, total assets and liabilities were increased by a net $618 million at the beginning of Q1. The new standard also requires us to expense certain architectural and legal fees, which we previously capitalized. Our sales in the first quarter of 2019 were $364.8 million, up 23.1% from $296.3 million reported in the first quarter of 2018. We opened 39 new stores during the quarter compared to 33 opened in the first quarter of 2018. We ended the quarter with 789 stores, an increase of 131 stores or 20% versus 658 stores at the end of the first quarter of 2018. Comparable sales increased by 3.1% driven by an increase in both comp average ticket of 1.6% and comp transactions of 1.5%. As I mentioned on our last earnings call, we expected approximately 175 basis points of operating margin deleverage in the first quarter due to the unanniversaried tax reform-related investments, adoption of the lease accounting standard and the opening of our new Southeast distribution center. Operating margin for Q1 2019 declined by approximately 165 basis points over 2018 with better-than-expected results in gross margin driven by slightly favorable Southeast DC start-up costs. Gross profit for the first quarter increased 23.4% to $120 million from $97.2 million reported in the first quarter of 2018. Gross margin increased over last year by approximately 10 basis points to 32.9%. This increase was driven primarily by occupancy costs leverage, offset by costs associated with the opening of our new Southeast DC. As a percentage of sales SG&A for the first quarter of 2019 increased approximately 170 basis points to 26.2% from 24.5% in the first quarter of 2018. SG&A expenses as a percent of sales were higher than last year, primarily due to the unanniversaried tax reform-related investments as well as the adoption of the new lease accounting standard. As a result, operating income decreased 1% to $24.5 million versus $24.7 million in the first quarter of 2018. Our effective tax rate for the first quarter of 2019 was 1.9% compared to 15.4% in the first quarter of 2018. Our tax rate was favorably impacted by share-based accounting which as is our practice was not included in our guidance. Net income increased 17.7% to $25.7 million versus $21.8 million last year. Earnings per diluted share for the first quarter was $0.46, a 17.9% increase over last year's $0.39 per diluted share. The impact of share-based accounting was a benefit to first quarter 2019 diluted EPS of approximately $0.11 compared to a share-based accounting benefit of approximately $0.04 in the first quarter 2018. We ended the first quarter with $289 million in cash, cash equivalents, and investments and no debt. Inventory at the end of the first quarter was $268.4 million as compared to $215.4 million at the end of the first quarter last year. Average inventory on a per-store basis was approximately 4% higher versus the first quarter last year, due primarily to an increase in import penetration and the timing of other receipts. Now, I would like to turn to our guidance. As a reminder, our guidance does not include any future impact from share-based accounting or share repurchases. We will update our guidance accordingly with reported results, but as is our practice, we will not guide to the potential future impact from these items. We shared last quarter that our guidance for the year included the 10% tariff on a subset of our goods which we were able to fully mitigate for 2019. We are working on mitigating the new higher 25% tariff under list one through three by using a combination of vendor negotiations and selective price increases. Accordingly, we are not changing our guidance for the year, except for the impact of the first quarter benefit of share-based accounting on our effective tax rate. However, we are working through margin rate dynamics within the P&L for the back half of the year related to the impacts of our tariff mitigation efforts. We still expect to deliver operating income dollars and underlying EPS rate within the range originally contemplated. For fiscal 2019, we continue to expect sales to be in the range of $1.865 billion to $1.885 billion, an increase of 19.6% to 20.9%. The comparable sales increase is still expected to be approximately 3%. We plan to open 145 to 150 new stores and expect to end the year with 895 to 900 stores or unit growth of approximately 19% to 20%. The majority of these new stores will be in existing markets. Excluding the potential impacts of our tariff mitigation on operating margin, our full year guidance still assumes a slight operating margin decline due primarily to the cost of opening our new owned Southeast distribution center and the new lease accounting standard. The cost of operating our DCs are included in cost of goods sold and these DC costs are expected to be relatively flat for the full year. Depreciation on the Southeast DC and the impact of the new lease accounting standard are included in SG&A. We now expect a full year effective tax rate for 2019 of approximately 22.5%, which reflects the benefit from share-based accounting realized in the first quarter. Net income is expected to be in a range of $175.9 million to $179.9 million, representing a growth rate of approximately 17.5% to 20.3% over 2018, with diluted earnings per share in the range of $3.11 to $3.18. Excluding the tax rate benefit from share-based accounting in Q1, diluted earnings per share are expected to grow by 16.7% to 19.5%, unchanged from our previous outlook. With respect to the CapEx, we now plan to spend in total approximately $205 million in 2019 in gross CapEx, excluding the impact of tenant allowances. The increase from our prior CapEx guidance reflects an updated estimate for the expected timing of payments related to a new Southwest distribution center. CapEx also includes costs of opening 145 to 150 new stores, approximately 50 remodels completing the Southeast DC and investments in systems and infrastructure. For the second quarter ending August 3, 2019, net sales are expected to be in the range of $417 million to $422 million, an increase of 19.9% to 21.3%. We plan to open approximately 40 new stores in Q2 this year as compared to 34 stores opened in the second quarter last year and are assuming a Q2 comp sales increase of 2% to 3% versus the 2.7% comp increase in Q2, 2018. Net income for the second quarter of fiscal 2019 is expected to be in the range of $26.9 million to $28.6 million. Diluted earnings per share for the second quarter of fiscal 2019 is expected to be $0.48 to $0.51 versus $0.45 in diluted earnings per share in the second quarter of 2018. The second quarter of 2018 had a $0.03 benefit to EPS from share-based accounting. Our second quarter outlook assumes an operating margin decline of approximately 20 basis points, driven by depreciation costs of our new Southeast DC and the new lease accounting standard impact, partially offset by a shift of certain other expenses into Q3. We expect the impact of the increased tariffs to 25% to be immaterial to the second quarter results. 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 to Joel to provide some closing comments before we open it up for questions. Joel?

Thanks, Ken. We are in a strong position to deliver another great year in 2019. We are innovating throughout our organization whether it be our WOW crew in the stores, our ship centers or here at WOW Town. And by operating through that lens, we will continue to provide our customers the value and shopping experience they love. We remain focused on our key strategic areas. Number one, opening new stores, which is the largest driver of our growth. Number two, sourcing new trend-right merchandise to amaze our customers. Number three, optimizing our marketing to gain more brand awareness. Number four, expanding our distribution network and upgrading our technology to be positioned for our future growth. And finally number five, hiring the best associates to connect with our customers. All of these areas drive the WOW factor and the customer experience to keep our customers coming back. As the leading high growth value retailer, we are uniquely positioned to capitalize on the opportunities that lie ahead for Five Below and achieve our strategy of 20% top-line growth with 20% plus bottom line growth through 2020. In closing, I'd like to thank all of our teams for their work in preparing Five Below to be a destination for summer fun. I especially would like to thank the teams that worked on successfully opening the new DC in the southeast, as well as our merchandise, supply chain and finance departments for their continued support and dedication in working through the tariffs. With that, I'd like to turn the call back over to the operator for questions. Operator?

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from John Heinbockel with Guggenheim Securities. Please go ahead.

So Joel, a couple of things on the tariff, right. So how long do you think you need to test the higher prices selectively before you roll that out broadly? Number one, and then two, is it possible, I know Michael's working on quality all the time, is it possible to upgrade quality at the same time, right? So instead of taking maybe a comparable item from $5 to $5.25, you upgrade the quality and take it from $5 to $6. Is that a better way to go and is that even feasible?

Yeah, thanks John. Great question. Look, first and foremost, we're going to start with the customer and work back. And so it tends to reason we're starting with a test and we want to really read that through the summer. Our expectation is that this will be several months, but it will not drag on into the fourth quarter. This is a decision we'll make sometime this summer, but what we'll learn from the test throughout the period is our customer feedback, make sure we've got all our marketing materials right, and then roll it out with pace and diligence. No different than when we do any other initiative. I think, it's important to note that as you can tell from my prepared remarks, we're talking about sense changes, not dollar changes. And so we still believe we're going to deliver extreme value for our customers. In terms of the second half of your question about quality, I think everything's in play John, and I think it's a balancing act. I would say first and foremost right now, we are going to minimize the increase to the customer before focusing on simultaneously increasing quality. But as you, I mean, you've been following us for many years, John, and you know that we've always encouraged Michael and the merchant team to continue to improve quality. But right now our attention and focus is on mitigating the tariff impact.

Okay. Thank you.

Hey, thanks John.

Thanks, John.

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

Yeah, hi guys, good afternoon. So, Joel obviously you've been working hard on the tariff mitigation. Can you just talk a bit more about the efforts to mitigate? How much would price increase on $1 to $4 items be? I'm talking about this -- to illustrate this point. Logistically, I guess how would that be implemented? Are you also talking sense? And what type of penetration of SKUs or number of SKUs you would be thinking about and how would you communicate that to the customer?

Great question. There's a lot that question there at all around tariffs. We have been working on this ever since the May announcement to take the 25%. And as you can tell from our prepared remarks, the increases, as the examples I gave you, all represent a percent change that is less than the change from 10% to 25%, so that's the range of what we're thinking about at this time. I would also commit and communicate to all of you that the vast majority of our products will still be priced under $5, but we will focus on items that – dip in tariffs the most and have the most value to our customers. And so a piece of it will be the $1 to $4, but a piece of it also will be $5, current $5 items. But at the end of the day it's about delivering value to our customers, and then simultaneously Ed will be continuing to work on other ways to mitigate which -- but those are longer term like moving countries sourcing differently, but all those are in play at this point.

All right. And what happens to your exposure to the 15% with list 4?

Great question. This tariff situation has been so fluid. In fact, I mean just look at the last 72 hours, we've had potential tariffs announced in India and Mexico. At one point in time, we thought China was going away. And so the bottom line, at this point Ed, we are focused on what's been placed into law, it’s tranches one, two, three, and like we have mitigated those, we'll then focus on four. But I think it's too early to speculate as we assume there's going to be lots of exceptions just like they were in groups one, two, three. But at this point, we're fully focused on mitigating one, two, three.

Okay. Thanks guys.

Thanks Ed.

The next question comes from Paul Lejuez from Citi. Please go ahead.

Hey, thanks guys. I'm curious how big is the store test that you're doing, were you going above the $5 price point? Also curious if you can just remind us what percent of your goods -- percentage of SKUs are at $5? And also curious if you've considered rather than repricing maybe you considered having something like a tariff surcharge on the receipt where it's not necessarily in the customers' face until checkout. I'm curious if you considered that option or if you ran a test along those lines? Thanks.

Yes. Paul roughly about 40% of our items priced $4 or $5 are in that range. And in terms of the test you should expect it to impact roughly 5% to 10% in that chain. And then specifically as the surcharge, it is something we have looked at. It's something restaurants specifically in California have done, largely around wages. But at this point in time, we've chosen the other route largely because we think it's more transparent to the customer and we want to be upfront and not -- and no sleight of hand or anything like that. But it is something we have considered and thought about.

Got you. Just one follow-up, I'm curious how you're used to business trended. I think you came in more towards the low end of the comp guidance. So wondering if the used to business fell a bit short of your expectations. Any color you could provide around the cadence throughout the quarter? Thanks.

Actually, I mean, I think short of expectations would be a pretty strong word. It's not many retailers grew 23% last year. In fact, we added 70 million year-over-year. So look, we're pleased with coming in within the range. I think I shared with everybody. We had 12 stores in our top 25 all time of our grand openings. So it just continues to show you how the new store performance is doing so well. So there's a lot of shifts in Q1. There's a tax refund delay in February that moved into March. You've got the Easter shift from March to April, weather puts and takes. And look when we give you guidance, we give you all aspects of it. And we came in right near the top end in total sales and at the top end in earnings, and so we feel really great about the quarter and continue to deliver record sales and earnings.

Great. Thank you. Good luck.

Thank you very much Paul.

Excuse me, the next question comes from Karen Short with Barclays. Please go ahead.

Hi. Thanks. I just want to look at 2Q for a second. I understand that what you're guiding to is obviously a great comp, but it does imply a pretty meaningful tier deceleration sequentially. So, maybe a little color there. And then it does sound like gross margin is going to be or operating margins in general are going to be a little bit better. So aside from this shifting of expenses there, is there anything else to think about there?

Yes. Thanks Karen. I'll take the first one and leave it over to Ken. And by the way, I mean, it's our fault at the beginning we fail to remind everyone to keep it to one question, so we can get through this, but let me answer those. Q2 is really unique Karen, largely because you got it -- this is one of those times you just can't look at two years stacks. You've got to look at three years stacks, part of the deceleration if you only look at two years that last year's Q2 was up against the spinner. So honestly, if you look at a three-year stack, it's a pretty strong acceleration, if you compare the three-year stack in Q1 to the three-year stack in Q2. And then Ken on…

Yeah, the operating margin deleverage Karen in Q2, what I'm calling out is 20 basis points. And as you can hear it's better than what I called out the cadence at the beginning of the year. Still having an SG&A really the two key drivers there, the depreciation around the new Southeast distribution center and the new lease accounting standard. But we had some shifting of some expenses out of Q2 into Q3, which helped improve that deleverage. But still looking for about 20 basis points of operating margin deleverage in Q2.

Yes. Thanks.

Thanks Karen.

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

Hi, Paul.

Hi. This is Damon Polistina on for Paul. How's it going? Can I just – can we just start to look at the toy business and kind of how that affected Q1? And then looking forward through the summer how you're looking at the licensing business with the blockbuster summer movies?

Yeah. We were pleased with the toy business in Q1. I think we talked about we picked up a lot of customers in Q4. I think I just need to remind everybody that toy is a very back-end heavy fourth quarter business. So it's certainly not going to be a driver for the business for us in the front half of the year. And then, specifically talking about licenses, we showed on the last call and I reiterate this year, we talk about trends all the time. One of the three trends is licenses. And we still continue to feel very positive about the license schedule for this year, specifically the movie releases. It kicked-off in Q1 with Avengers Endgame. It starts to heat up a little bit here in Q2 with Toy Story and Spider-Man. And then obviously, with all the energy is really on the back half of the year mainly with Frozen 2. But that's kind of how we see the year shaping up in terms of license and still feel really strong that it's going to be ultimately a strong license year. Thanks Damon.

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

Good evening. Thanks a lot for taking my question. It is on –

Hey, Michael.

Hey, Joel. The comp outlook over the next few quarters, A, the 2% to 3% should – is this the run rate we should now come to expect because we'll have tougher multiyear stacks going forward? B, is there an inflation benefits that you're starting to bake in from the price increases at the very least that you're going to be testing at 5% to 10% of stores? And then C, are – is the tariff issue because of the timing of when it actually happened more of a 2020 event for you, because of how you flow through your inventory? Or will you see as much of an impact this year as you would next year? Thank you so much.

Yeah. Thank you. Look all questions around tariffs and everything. I think you've got the comp outlook right. We are up against tougher comparisons. Like we said last year, when we were up against the spinners what's awesome about this business model is even against tougher comparisons you still talking about a number that's positive. And we're really pleased with two to three comps, I think as I was answering Karen's question, I really see more than acceleration on a three-year stack. And then I think Michael I want to say it's little too early to speculate, if there's a pricing tailwind, or a comp tailwind, due to the price increases. And that's why we're going to do a test. And like we do in everything, we get approaches from the customer and work back. And the reason I say it's too early to speculate is you can also have a reduction in units sold as you raise prices. This is new territory for us, and so we don't really have a history to understand the elasticity curve. We'll learn all that through that. What I can commit to you and – certainly Ken did in his comments there, we still believe on the outlying guidance we gave you for the year. And we'll give you specifics as probably on the next call rather than trying to speculate on exactly what's going to happen through that. And then as far as being a 2020 event, it certainly has a full year impact in 2020. Although, I would tell you a large majority of our fourth quarter goods have not yet arrived and so there will be some impact. But the path we're on to mitigate to 25% is grounded in a lot of facts and we'll have that fully in place before we get into the holiday season.

Thanks very much and good luck.

Hey, thank you. Appreciate it.

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

Thanks. Congrats on a nice quarter guys.

Thank you.

So new store productivity remains at peak levels, I guess can you speak to learnings from your most recent openings particularly what you're seeing from the updated refresh model cohorts and just any performance metrics from remodel to-date that you could share?

Yes, thanks. I'll start with the second one and work back. Remodels it's really too early. We continue as we shared with you before, I believe, it's about 500 basis points over the full year. But as far as the new ones that we rolled out this year with a re-imagined front-end, I mean were literally weeks into it not even quarters. So, too early to speculate on that. And then as far as new store productivity you want to take that Ken?

Sure. As you heard Matt, we're really pleased how the new stores are doing. Joel even called out the good number of stores that landed in our top 25 all-time list. So we landed at just above 100% productivity for the first quarter and we're really seeing strength there whether it be in the new markets that we called out in some of the new states or in existing markets. So I think you've seen that over the last couple of years in terms of the year one productivities of the recent classes. So whether that be the refreshed model, where all the other things we’re doing in the business in terms of elevating performance, I think it's all coming into the new store productivity that we're seeing.

Great. Best of luck.

Hey thank you. Appreciate it.

The next question comes from Judah Frommer with Credit Suisse. Please go ahead.

Hi, thanks for taking the question. It's more a point of clarification. You've mentioned, it sounds like I think three price increase tests. You have increase prices on $1 to $4 items. You have increased prices on $5 items. And then there is Ten Below. Can you just square the timeline of each of those? How many stores will each be in and when they'll stop? And I think you said some will stop before Q4.

Yes. Let me try and clarify if I wasn't clear in my remarks. Let me start with Ten Below first or Just WOW, as a reminder that initiative had nothing to do with tariffs. We were working on that long before tariffs and we still continue today to see that as a different proposition to the customer. It's about delivering extreme value. Specifically though that will be in 25 stores by the end of the second quarter and let's just put Ten Below aside. As far as the $1 to $4 and $5, I think of those two as one and the same. It's about mitigating the tariff impact and still delivering on the guidance we provided all of you on our prepared remarks earlier today. So those are both being worked on simultaneously. As I said, we'll test it first before going to the chain, but the expectation is that, it would be rolled out to the chain before the end of summer. And your very end statement there is something like when will it end. So I think this is not about when will it end, it's about still delivering extreme value to the customer, although having to recognize that we are going to have to raise some prices on a select amount of products some of it $1 to $4 and some of it will $5.

Okay. And just to be clear, it sounds like $6 to $10 between $6 to $10 is off the table right now, is that right?

Yes. As you can see from our prepared remarks, the numbers we're thinking about are $5, $5.25 $5.55. The $6 to $10 is strictly with the Ten Below Just WOW concept. And that is completely different set of product and it's a whole different initiative. But that is off the table at this point in time.

Okay. Thanks.

Thank you.

The next question comes from Michael Montani with Evercore ISI. Please go ahead.

Hey, guys. Thanks for taking the question. Just wanted to ask if you could provide an update on the latest thinking around potential credit card rollout and initiative opportunities there as well as any incremental details on the multichannel front. Certainly, you mentioned strength in the website, but how do you all thinking about even the mobile app down the line as well?

Sure. I think we alluded to it a little bit on last call, but just reiterate, 2018 was all about rolling out our new POS system. I think the phase we're in now as it relates to whether it be credit card or a loyalty program or anything like that is we're in the strategy phase of it, but we do not expect to see something like that happen in 2019. We'll contemplate it in 2020 and beyond. And then finally, the multichannel is very fluid and we've certainly already rolled out the website. And I think it's safe to say at some point in time an Applebee part of our offering to the customer as well. But I think that will more all tied together in an overall loyalty program for Five Below sometime in 2020 or later.

Is there any way to quantify the impact of comp from the website at this stage? Or is it still too small to do that?

Yes, it's still too small.

Okay. Thank you.

Appreciate it.

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

Good afternoon. Good quarter. Just -- gross margins were better in the first quarter by I think about 50 basis points relative to your expectation. So just wonder if you can flush that out and how we should be thinking about the gross margin profile over the next few quarters obviously outside of tariffs? And then just a point of clarification on the expectation being able to mitigate to the 25%. How much of that is the success of the potential price increases above the $5 price point versus your ability to continue to work with vendors, process efficiencies and moving products outside of China? Thanks.

Ken, you want to take the gross margin?

Yes. I'll take the first two. Thanks, Chuck. So related to our Q1 operating margin, if you saw, we came in about 10 basis points favorable to the expectation which was 175 basis points deleverage. We came in about 165 basis points. And really what drove that little benefit in terms of our expectations was lower costs -- lower preopening costs associated with the new Southeast distribution center. As we kind of move through the year and I always kind of like to give that cadence, if there's any movement as we go out into future quarters, guided to about a 20 basis point deleverage for Q2. And you heard my comments around the back half of the year. Still if you go within the P&L, those areas around the new Southeast distribution center and the new lease accounting standard, we'll still have the impact we have discussed early in the year in the back half within SG&A. But at this point in time given we want to really understand the impact of the tariff mitigation efforts and what that's going to look like within the P&L, that's why we're going to wait a little bit and we should be able to get back to you once we realize and after we get through the test and understand that what the margin rate dynamics will be within the P&L as we move forward. So, as this point, really not much of a change from what we said before aside from it could change related to the impact related to tariff mitigation. The other point of bring up to is as you noticed our Q2 operating margin outlook -- the deleverage was less than what we had called out on our first quarter or Q4 call for the full year and some of those expenses we see moving into Q3.

And Chuck at the end of the day we think of all the mitigation efforts as one bucket. And I would tell you as a leadership team moving on prices is the last thing we'll ever do. So, the bottom-line I wish you take away from that is the majority of our mitigation efforts have been through means other than raising prices. And so we'll continue to think about it that way, but as you can tell by our -- what we shared in the prepared remarks, we are going to have to move on price to some degree. Thanks. All right next question.

The next question comes from David Buckley of Bank of America. Please go ahead.

Hi, thanks for taking my question. Can you discuss what you're learning from testing Ten Below concepts in more locations? And then your outlook on freight expenses in the second half of the year?

Yes. Look we opened -- was it six Ten Below locations last year?

Last year.

And we were really pleased with the results. I mean we had a great initial holiday. But when you make something like that drastic of a change from the core business, you don't ever want to roll something like that with such a small sample size. So, look -- going to 25 gives us a couple of different formats, it gives us a bigger sample size; gets into some other geographies and that's the main stuff we're focused on with that. We want to make sure we don't get any false positives or negatives. But I can tell you all initial signs have been very positive. And we're anxious to get this next wave of stores opened. And then we'll put it all together and we'll probably be ready to have some more direction on that after we get to holiday this year.

And then David relative to freight costs you haven't heard us talk a lot about freight costs. They're obviously embedded in our outlook at this point. We don't see -- at this point, we don't see any big headwinds related to freight costs. I think one of the benefits we have is our scale. As we continue to grow, we use that to leverage with our freight vendors and that works out for us pretty well. So, again, freight is embedded in our outlook and we haven't seen anything from a large nature at this point in the year.

All right. Thank you.

The next question comes from Brad Thomas with KeyBanc. Please go ahead.

Yeah. Thanks for taking my question. I believe you guys are going to update a study on traffic patterns and how much you all are driving traffic versus a secondary visit, while the customer was in a shopping center. Curious, if you've done that study as planned and any learnings from it.

Yeah. Brad, we don't have updated study yet on that. I can tell you the last time we did it and we don't expect to see anything different. When we do, it's about 50-50. We drive about half the traffic and our co-tenants drive the other half of the traffic. That's why we love vibrant centers and continue to rollout the chain in vibrant centers. Thanks Brad.

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

Good afternoon. Thanks for taking my question. I had a question about the TV test. If I recall correctly, you said it was going to cover about 10% of your stores. So, I just want to confirm that was the case. And then based on the results, it sounds like it went well. What your thoughts are for doing it again next year, maybe expanding the number of stores? Thank you.

Yeah. Thanks, Anthony. You're right on the numbers, it was 10%. And we are really pleased. It was -- the first time doing Easter TV. While we don't have the final -- we always go back into market afterwards and get feedback from the customers and how well it did. But our initial results were very positive and certainly there's no sign that says we won't do it, but we haven't made that final decision yet. Thanks, Anthony.

Got it. Thanks.

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

Hi. Thanks for taking the question. This is on kind of CapEx and capital allocation. Ken, I think it sounds like we're pulling forward some costs into 2019 on the Southwest distribution center. I wanted to get a sense for how that might impact 2020's CapEx spend. And then kind of related to this, again you're continuing to just have massive cash flow outside of the big CapEx spends around the DCs. Is there any level where the stock wobbled or the market wobbled a little bit more where you might be more aggressive on buying stock rather than just offsetting any share dilution from option exercise? Thanks.

Sure. Thanks, Jeremy. You're right. We we've increased our estimated CapEx for 2019 by about $35 million. And what that represents is what we know right now around a new Southwest distribution center and the dynamics around the deal there at this point in time, so just really moving dollars earlier from 2020 into 2019. With regards to the DCs and the future capital allocation, as we mentioned before, we'll look at each of these distribution center separately and see what make sense for us to do. But you're right, we -- given the economic model around and the ROI around new stores and our payback there we, obviously, have the opportunity to increase our cash. We’re going to look at all the options for us. The best option is, obviously, investing in our new stores, investing in people and systems and infrastructure. I think I mentioned we ended with about $270 million, $280 million in cash at the end of this quarter. So it's something we're going to continue to look at from a capital allocation standpoint. And also we had announced the share purchase program earlier in the year that was out for three years. That's another option for us down the road. But at this stage of the game you kind of see where we are in terms of cash generation. And one of those pieces along with the new stores is using that to invest in new DCs.

All right. Thank you.

Thanks, Jeremy.

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

Hi, good evening. This is actually Beth Reed on for Scot. I just had a quick modeling clarification. I know, you're not going to guide to 3Q but given the shift to the expenses from 2Q into 3Q, should we expect 3Q operating margin deleverage to be more than kind of 40 to 50 basis points that you initially called out last quarter? And then what exactly are those expenses that are shifting? Thank you.

Yes Beth, you're accurate. What we're seeing at least at this stage of the game and again this is before the consideration for the tariff mitigation and the impact that may have once we figure out where that goes. But given what we've seen now, I would expect operating margin deleverage of higher than what I called out before at the beginning of the year of about 50 basis points. And a lot of this is just around the timing of expenses that I mentioned before. Not to get into any specific details, but it's really just the timing of various expenses and as we move through the year, we have better information and I’m able to give some more clarity around the future.

Okay, thank you.

Thank you.

Thanks, Beth.

The next question comes from Joseph Feldman with LCD. Please go ahead.

Hi, guys good afternoon. Thanks for taking the question. I wanted to just ask a little bit about, how are you guys going to communicate the value that's still there? Do you anticipate needing to do a little more marketing around some of the potential price increases that we’re going to see? I understand maybe Bluetooth headphones that kind of could speak for itself, but if you have to take up some items that are in that $1 to $4 range a little bit? And how do you continue to make sure that the customer understands the value or why those prices may have gone up? If you could just share some thoughts there? Thanks.

Look our whole business model is based on delivering extreme value to our customers. We are constantly in the market doing surveys, both qualitatively and quantitatively and that's around lots of topics, the quality of the product, price value of the product, the type of product we carry et cetera, so none of that changes with the change in price. We will be in the market getting a lot of feedback from our customers; we have a pretty proven methodology from that. And so we'll continue down that path, and look the fact that we’re doing a test is just a great example of how we will approach this with pace and diligence. Thanks, Joseph. We’re going to have to continue on here. Operator, I think we're out of time and I just want to thank everyone for joining us today. I encourage you all to have a great summer. Make sure you visit our stores. You’re going to love the commercial and come see camp Five Below, let’s go and have some fun. Thank you. Have a great day.

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