Good day and welcome to the Five Below Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [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.

Thanks, Gary. Good afternoon, everyone, and thanks for joining us today for Five Below’s third quarter 2023 financial results conference call. On today's call are Joel Anderson, President and Chief Executive Officer; and Kristy Chipman, Chief Financial Officer and Treasurer. After management has made their formal remarks, we will open the call to questions. Please limit yourself to one question to enable us to accommodate everyone in the queue. 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 our SEC filings. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements. If you do not have a copy of today’s press release, you may obtain one by visiting the Investor Relations page of our website at fivebelow.com. I will now turn the call over to Joel.

Thank you, Christiane, and thanks, everyone, for joining us for our third quarter 2023 earnings call. We are very pleased with Five Below's financial performance and operational execution in the third quarter. We exceeded our guidance on sales, comps and earnings and our comparable sales results were remarkably consistent with the first two quarters of the year. We opened a record 74 new stores while continuing to successfully convert stores to the new Five Beyond format, which also drove new customers to our stores. The Five Beyond format now accounts for approximately 50% of the comparable store base. In addition, we made progress on optimizing inventory and finalized preparations for the holiday. Now, on to the specific results for the third quarter. We delivered sales growth of over 14% to $736 million and a 2.5% comp sales increase, which continued to be driven by transactions. Comp transactions, which are our proxy for traffic increased approximately 3%. This increase represented our fourth consecutive quarter of positive comp transactions. We believe this demonstrates the relevancy of our extreme value and fun shopping experience. Diluted earnings per share for the third quarter came in at $0.26, $0.01 above the high end of our guidance. Many of the trends we've seen through several quarters continued throughout the third quarter, and we assured our assortment reflected them. As we have shared with you in prior quarters, we continue to see our customers focused on needs-based product, which for us is primarily seen in our consumables offering in the Candy World and beauty department. In addition, our unwavering focus on value is strongly resonating with our customer as reflected in discretionary category strength in games and toys and our seasonal offering with Halloween. Hello Kitty, Squish, Anime and Collectibles were also very popular and the license business returned to a more normalized sales level. In what most would consider a still challenging backdrop, we performed well and made progress against the five key strategic pillars that support Five Below's long-term triple double vision. I'll provide a quick update on each. The first pillar is store expansion, the driver of our long-term growth. In the third quarter, we opened a record 74 new stores across 31 states. One of these openings in Alaska, Wisconsin made our top 25 fall grand opening list. We remain on track to achieve the goal of opening over 200 stores and expect to complete new store openings next week. Our real estate teams have built a strong pipeline of new stores for 2024 and have also started working on 2025 stores. As we have been able to secure leases earlier in the year, we are making meaningful progress towards returning to historical store opening cadence where we complete the majority of our store openings by Thanksgiving. This will also result in progress towards a 50-50 store opening cadence for the first half versus second half of the year. Moving to the second pillar, store potential. We announced the new Five Beyond prototype in March of 2022 and have been very pleased with the customer response and the performance of the stores converted into this format. These stores are driving traffic, they're attracting new customers and they're retaining more current customers. They are driving a mid-single-digit comp outperformance in the first year post conversion and the small subset of stores that have entered their second year post conversion are delivering a positive comp. As I said earlier, at the end of the third quarter, approximately 50% of the store comp base was in this format, and we will continue to convert stores next year. Beyond the conversions, we also see a large opportunity to evolve the Five Beyond product assortment and over time, grow the penetration of these products, which will benefit top line sales. The third pillar is product and brand strategy. As you know, delivering WOW product is who we are and what we do and is key to our success. Our merchants hunt down new disruptive product at extreme value with the flexibility of our 8 worlds. They have ample opportunity to adjust as trends change. For example, in Q3, our merchants grew the Halloween assortment, sourcing new to core and costumes, including incredible huge inflatables for the front yard and light up face masks. Our customers love the new products we brought this assortment to life through our social media channels. Five Below's presence on social media is growing with a focus on TikTok, Facebook, Instagram and YouTube. We believe we have established Five Below as the go-to brand for value and fun, though a big opportunity remains to increase brand awareness. The investments we have made thus far in integrating data and analytics with digital marketing are delivering. We are pleased with the positive trends we've seen in both customer acquisition and retention. The fourth pillar, inventory optimization, is another area where we have made meaningful progress in order to drive sales and maximize profits. As I mentioned before, this is a pillar Ken is leading as COO. Our teams are focused on improving inventory productivity by leveraging more sophisticated processes, technology, and analytics. We are developing methods that will improve our ability to predict demand further optimize inventory levels and track the movement of product through the supply chain. As a result of the team's efforts under this pillar, we are well-positioned with inventory levels going into the all-important holiday season. The fifth pillar, crew innovation focuses on the store crew and the pipeline of talent that is critical to achieving our aggressive growth. At this time of the year, our primary focus is on hiring and training seasonal associates in time for the holidays. Over 20,000 seasonal associates will be working in our stores and ship centers, integrating each of these seasonal workers takes a lot of effort, and I want to thank the stores, the ship centers, and the recruiting teams are going the extra mile to ensure their smooth onboarding and a great shopping experience for our customers in the peak selling weeks. In summary, we are very pleased with our third quarter financial results and operational accomplishments. As I've mentioned in the past, we turned from a store wants in quarters one through three, into a store needs in the fourth quarter. Our customers need to buy gifts, whether for their kids or their nieces, nephews or grandchildren or even office co-workers and we are the perfect place to find that awesome gift at an incredible value. Our merchants have sourced an amazing line of fresh and trend-right products at outstanding values. We believe our customers will love our holiday assortment ranging from warm and fuzzy plush lounge, pants and blankets, holiday Tees, Marvel action figures and more. While the biggest holiday weeks are still ahead of us, we are really pleased with the start to our fourth quarter. With that, I'll turn it over to Kristy to review the financials and our outlook in more detail.

Thanks Joel and good afternoon everyone. I will begin my remarks with a review of our third quarter results and then provide guidance for the fourth quarter and the full year. As Joel said, we are pleased to report results that exceeded our guidance. Our sales for the third quarter of 2023 increased 14.2% to $736.4 million from $645 million reported in the third quarter of 2022. Comparable sales increased by 2.5%, with a comp transaction increase of 3.1%, partially offset by a comp ticket decrease of 0.6%. This decrease in comp ticket was driven by lower units per transaction, partially offset by an increase in the average unit retail price, similar to what we have seen for several quarters now. We opened 74 new stores across 31 states in the third quarter compared to 40 new stores opened in the third quarter last year. We continue to be pleased with the productivity of our new locations. We ended the quarter with 1,481 stores, an increase of 189 stores or growth of approximately 15% versus 1,292 stores at the end of the third quarter of 2022. Gross profit for the third quarter of 2023 was up 7.2% to $222.8 million versus $207.8 million in the third quarter of 2022. Gross margin decreased by approximately 190 basis points to 30.3% as anticipated. This decline was primarily driven by recording actual shrink results for the stores that completed their physical inventories in August as well as recording the true-up of shrink reserves for the full chain, which we shared during our last quarter's earnings call. As a percentage of sales, SG&A for the third quarter of 2023 decreased approximately 90 basis points to 28.1% versus last year's third quarter, driven primarily by the timing of marketing spend and leverage on certain store-related expenses. Operating income finished at $16.1 million versus $20.9 million in the third quarter of 2022, resulting in a decrease in operating margin of approximately 100 basis points to 2.2%. Net interest income was $3.4 million as compared to $0.5 million in the third quarter of 2022 as we benefited from higher interest rates and a larger average cash balance versus last year. Our effective tax rate for the third quarter of 2023 was 25.4% compared to 24.6% in the third quarter of 2022. Net income for the third quarter of 2022 was $14.6 million versus net income of $16.1 million last year. Earnings per diluted share for the third quarter was $0.26 compared to last year's earnings per diluted share of $0.29. During the quarter, we repurchased approximately 500,000 shares at an average price of $158.63, for a total of approximately $80 million. We ended the third quarter with $163 million in cash, cash equivalents and investments and no debt, including nothing outstanding on our $225 million line of credit. Inventory at the end of the third quarter was $763 million as compared to $702 million at the end of the third quarter last year. On an average per-store basis, inventory decreased 5.1% year-on-year. As last year, we strategically ordered inventory earlier to ensure strong in-stock position. We are pleased with the level and quality of our inventory going into this holiday season. Now on to guidance for the fourth quarter and full year. My remarks on full year guidance will refer to the 53-week year unless otherwise noted. Our guidance does not include any potential future impact from share-based accounting or share repurchases. As Joel mentioned, we are pleased with our November results and start to the fourth quarter. For the fourth quarter of 2023, net sales are expected to be in the range of $1.32 billion to $1.35 billion, an increase of 17.6% to 20.2%. Comp sales for the quarter are anticipated to increase between 2% and 3%. And we are on track to open over 60 stores before the end of the quarter as 43 have already opened in November. We expect an operating margin of 20.5% to 20.8% in the fourth quarter of 2023. The approximate 50 basis points of leverage at the midpoint is due to the anticipated freight benefits, partially offset by the shrink headwind as well as lapping benefits from lower incentive comp and certain cost management strategies we put in place last year. As it relates to shrink, we are working on many initiatives throughout the organization to help mitigate the anticipated increase we have forecasted, and we will update you on the progress of these efforts at year-end. The estimated effective tax rate is expected to be approximately 26%. Net income is expected to be in the range of $201 million to $211 million, representing a growth rate of approximately 17.3% to 23.2% over 2022. Diluted earnings per share for the fourth quarter of fiscal 2023 is expected to be $3.64 to $3.80 versus $3.07 in diluted earnings per share in the fourth quarter of fiscal 2022, with the share repurchases in the third quarter contributing approximately $0.03. For the full year of fiscal 2023, we are increasing the low end of our expected sales by $40 million to $3.54 billion and are reiterating the high end of expected sales at $3.57 billion, representing a sales increase in the range of 15.1% to 16%. Comp sales are expected to increase approximately 2.5%, which implies a 17.8% compound annual growth rate, or CAGR on total sales for the four-year period since 2019. We are still expecting operating margin of 11.1% at the midpoint, compared with 11.2% in 2022. The effective tax rate for the year is expected to be approximately 25.5%. Net income is expected to be in the range of $300 million to $310 million, representing a growth rate of approximately 14.7% to 18.5% over 2022. Diluted earnings per share are expected to be in the range of $5.40 to $5.56, implying year-over-year growth of 15.1% to 18.6%. On a 52-week comparative basis, growth for diluted earnings per share is implied to be 13.4% to 16.8%. Our fully diluted share count estimate for the year is 55.6 million shares, reflecting a lower share count as a result of the shares we repurchased in September. The benefit related to the share repurchases completed in the third quarter is approximately $0.03 for the full year. With respect to CapEx, we still plan to spend in total approximately $335 million in gross CapEx, excluding the impact of tenant allowances. This reflects the opening of over 200 new stores, converting over 400 store locations to the Five Beyond format commencing expansions to our distribution centers in Georgia and Arizona and investing in technology. In summary, we delivered a better-than-expected third quarter, and while we have over two-third of the holiday shopping season ahead of us, we are pleased with the beginning of the fourth quarter. In this uncertain macro environment, we continue to see strong transaction growth from both new and returning customers and new store performance is in line with our expectations, demonstrating continued relevancy of the brand and our Triple-Double strategy. We will remain disciplined in the deployment of capital and in managing expenses while we continue to use our strong balance sheet to fuel the growth that is in front of us. 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 the operator for the question-and-answer session. Operator?

[Operator Instructions] Our first question today comes from Michael Lasser with UBS. Please go ahead.

Good evening. Thank you so much for taking my question. Given what you've seen in the business recently and the other puts and takes that you know about heading into next year. If you were to comp in 2024 at a similar level that you did this year in the low to mid-single-digit range, what type of operating margin expansion could Five Below produce, especially in light of the Triple Double strategy over the long term, where even if you were to push out the goal to reach a 14% operating margin by a year, it would necessitate that you achieve 100 basis points of margin expansion each year for the next few years. Thank you so much.

Hi, Michael, great question, but it's probably really too early to foreshadow that for you. Given everything we shared with you on the last call around shrink, we obviously think our mitigation efforts are working. We've reserved at the higher rate, and - but we now have to do all those physical inventories in January. We do believe those are all in the base now or will be in the base of 2024 on an annual basis. And I think it's just safe to say that at this point in time, we continue to believe we can leverage at the 3% level. And if you give us to our call in March, it's a great question you should challenge this again to answer as we think about the years going forward. Thanks, Michael.

The next question is from Seth Sigman with Barclays. Please go ahead.

Hi, everybody. Thanks for taking the question. Nice quarter. I wanted to focus on the Five Beyond format. Can you elaborate on the performance that you're seeing as you enter year two? I realize it's early, just a select number of stores, but any color on how those are performing? And just any other learning's or modifications that you might be making as you work through the rest of the chain? Thank you.

Yes. Look, as I said in my prepared remarks, it is a small sample size, and - but all signals of that first wave of groups that popped into the year two and Q3 is that they're comping positive. And so we obviously need to get to Q4 here, we'll have another big chunk of stores entering year two, plus we'll have a second quarter of those or in year two. But as it stands right now, we are not seeing anything that would indicate that they would give back any of the games they got in year one of the conversion and seem to be more in line with what the chain is comping. So more to come on that, but we did want to give you some early reads on it. And we'll certainly, as we set up 2024 have a really good base of stores that are in that year to mark, but feel really good about it. Thanks.

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

Yes. Hi, good morning. Just a follow-up, Joel, on Five Beyond. As we think about the go-forward and half the store base or half the comp base anyway in Five Beyond. So help us, I guess, understand like the benefit that continues to roll in, in 2024. And then you mentioned increased penetration also helping comp going forward. I don't know if any of that is in year two of the Five Beyond that you mentioned or is that incremental? And then just thoughts around what that could mean over time in terms of Five Beyond continuing to help drive comp at the business?

Yes. Look, Ed, it's a great question. I think it's too early for us to kind of like foreshadow 2024 for you. Obviously, we sit here and the easy math to do on 2020 - on Q3 is our Five Beyond stores comp mid-single digits and our non-Five Beyond stores comped relatively flat, and that blended out to a 2.5% comp. As the penetration of conversion stores increases, that should be a positive tailwind to comps into next year. And then the fact that we're not seeing a – as we come into year two, a negative comp, that should be a positive too. But what you're asking me for is to quantify 2024. It's just too early to put all that together for you. But I don't think we see any headwinds on it as we look out to 2024 and 2025. Thanks, Ed.

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

Great. Thanks and congrats on another nice quarter. So Joel, on third quarter same-store sales, maybe relative to your guide three months ago, where did you see upside by category? And could you speak to the progression of comps as the third quarter progressed? Maybe elaborate on early holiday trends? And then maybe just one for Kristy or Ken. Could you elaborate on new store performance from some of the latest cohorts of stores?

Yes. Thanks, Matt. And look, as I said in my prepared remarks, the - some of the areas we saw the biggest strengths was games and toys, and seasonal and specifically calling out Halloween, that's an area we've really started to grow, and Michael and his team have done a great job on that. And clearly, with us exceeding guidance would tell you that as the quarter progressed, business certainly got stronger. I don't know, Kristy, did you have?

Yes. On new store performance, Matt, Q3 was in line with Q1 and 2, which were in the mid-80s to low 90. And Q4 at the midpoint, you'll find is pretty consistent with that as well coming in close to the mid-80% range for new store productivity.

Thanks Matt. Appreciate it.

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

So Joel, what do you think when you pull out Five Beyond right? You sort of referenced the flat comp. What do you think the stores can combat below the $5 price point? I know Michael has always challenged the merchants right to find good $1 items and $2 items. Where is that opportunity? Is that a low single-digit comp? And is it really new product innovation?

Yes. Are you talking about in the convergence first, John?

No, I'm just saying, overall, right? Stores beyond the $5 price point, right, should probably comp low single-digits or no?

Yes. No, absolutely. And we continue to see that. And I called out toys, that was largely a Five Below business in Q3. Our candy business has been really strong, that's almost 100% Five Below business. And I think the thing we've been most pleased with on the conversion stores, we're not getting all that comp from Five Beyond, we're getting it from the box and we're getting it from the box in the form of more transactions. And so look, I'll take footsteps all day long. And I think we have the opportunity for our penetration in Five Beyond to continue to grow. But it's still kind of a mid-single-digit number for our Five Beyond stores. so there's a lot of upside to that. And in the meantime, the Five Below businesses are really driving the business. And Michael and the merchants, I think this Q4, as any of you get out in the stores, the value message is probably as strong as we've ever been in there. That seasonal wall all Five Below, which is a change for us. We took the Five Beyond off the seasonal wall this year. We've got a whole $1 statement in there for holiday. So, we've really screened value and that's all driving it at Five Below. Thanks John.

The next question is from Simeon Gutman with Morgan Stanley. Please go ahead.

Hi, good afternoon everyone. Joel, just a quick follow-up to John's question. Are the units per trip in the Five beyond - in those stores that are doing mid-single, are those trending up towards all traffic? And then the real question - another stab at 2024, and I'm going to paraphrase the way you answered the question earlier, you mentioned shrink. If you do comp algo is two to three or maybe a little bit better, what are the puts and takes? And you laid out shrink to something that could be a good or a bad guide to the P&L. Are there any other ones, investments, distribution center, anything on SG&A that we should think about?

Yes. Look, we - Simeon, real quick on the units per trip, that is still negative. We are just seeing more transactions, our proxy for traffic and we would expect that to continue the better part into next year. And that's just a sign that the customer is being very discerning on what they're buying. But we expect with the increased trips, that's going to more than make up for it because our total basket is still very healthy compared to where it was pre-COVID. And then the puts and takes for next year, Simeon, I'm going to punt on that one a little bit in that we're not ready here that we are all focused on Q4 and everything and not ready to give guidance on 2024. But in general, I don't see a lot of headwinds next year unless something changes macro-wise. We think we've pretty much got shrink in the mix for it. And with the continuation of COVID - I mean if conversion is not COVID, we should – that should all help well in terms of providing more leverage. I expect 2024 to be a more normal year. We'll welcome that.

The next question is from Paul Lejuez with Citi. Please go ahead.

Hi, thanks, guys. Curious what you think are the biggest areas of opportunity for this holiday, something maybe that didn't go according to plan, maybe it wasn't executed perfectly last year, just where you have opportunity to improve this year? And then just second, as you look out to the first half, I'm curious what you're seeing in terms of product costs, input costs, is it a tailwind? Is it a headwind as you look into the first half, just as we think about the gross margin line for next year? Thanks.

Yes. I mean you asked what didn't go well. I'd like to reflect on what did go well. And I'll tell you, our inventory in-stocks are significantly better than what they've been in the last two years. So I think we're really set up nicely from an inventory perspective. In terms of inputs for next year, if we do see significant inputs, Paul, I hope we get back to reinvesting that gross margin benefits back into product. That is something we pause for the last couple of years due to all the headwinds of supply chain challenges and inflation and that type of thing. But I think what we're seeing is the inputs being tailwinds, not headwinds, both in freight, both in raw materials, labor overseas, but don't expect us to take a material increase in gross margin as we will start to reinvest some of that again, which hasn't happened in a couple of years. Thanks, Paul.

The next question is from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead.

Thanks, and I’ll add my congratulations. I wanted to ask about the Five Beyond section and with the success that you're seeing in that, you've used it really as an opportunity to expand the WOW factor in your stores. I think largely, you've stated $25 and below price point, but you guys have a history of kind of testing and learning and wanted to just understand, is there a price point where you feel like it just doesn't make sense given the history of the store and the value offering. Is this something where we could start seeing $50 product that's in that Five Beyond section?

Yes. Thanks, Jeremy, for the shout out. But I would tell you, we are not even contemplating anything above 2025 at this point in time. And in fact, if anything, should I was with Michael, just a couple of hours ago, and he's already got so many new ideas for next year based on what he's seeing success in this year. And I think I've said on a couple of calls it took us three to five years to perfect Five Below, this is all pretty public. It's taking Mike on the merchants a few years to perfect Five Beyond. And we're learning classifications that excel. We're learning times a year, those classifications will work. And so we haven't earned the right or have the need to go above $25. There are so many great items they've got in that $6 to $25 range, and that's where the focus is. But I do have expectations that, that penetration will continue to increase as the customers really responding positively to this new format of Five Below in the front, Five Beyond in the back, and keeping that separation. And now we've got to keep growing both just like John Heinbockel was asking about Five Below and you're asking about Five Beyond, I think both of those are upsides for many years to come. Thanks Jeremy.

The next question is from Krisztina Katai with Deutsche Bank. Please go ahead.

Hi, good afternoon. Joel, I wanted to ask you to talk about the product pipeline, both for holiday and going into 2024. I know you're not providing guidance for next year, but a lot of general merchandise categories are now deflationary, consumables could potentially move in that direction. So, I was wondering if that is opening up any new avenues for you from a merchandising perspective?

Well, somewhere I thought you were going with that, Krisztina, I thought you're talking about is it going to be a negative to us being deflationary. I - it's more of the question I was answering a couple of questions ago about the inputs into it. And those are deflationary that will benefit us. And at the same time, that will also allow us to reinvest some of those gross margin wins back into the product like we've done for years. I think the other big opportunity is we're seeing significant capacity overseas in terms of containers, and that also is a nice input into the gross margin line. So, all-in-all, everything is pointing a little bit to at least steady, if not deflationary. And some of that will flow through and others of it will take to improve the product quality. Thanks Krisztina.

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

Hi guys. Thanks for taking the question. I just wanted to ask about the store growth outlook into next year and beyond. Do we feel that we're in a point to do kind of high teens growth? Or is there some constraints we need to consider there? And then secondly, there's some fascinating initiatives, right, in terms of helium, piercings, potential for loyalty. Just kind of love to get your latest thinkings and learnings from those things?

Yes. Look, as I said in my prepared remarks, the store growth pipeline is really in a great spot, it hasn't been in that spot in four years. There's two angles we're focused on. One is getting the pipeline full and the other is getting back to closer to a 50-50 opening cadence first half to second half. And both those, the teams have made great progress on and we'll be in great shape for next year and 2025. But in terms of exact counts and that type, you're probably a tide high on the count. I think we've kind of indicated more mid-teens over the last couple of calls, and then we'll give you exact numbers at either ICR or your beginning call. And then everything else you pointed to is it's just more upside. Helium balloons, ear piercing, those services, loyalty, again, those just are all incremental as we continue to look at this thing long-term and beyond. Thanks, Michael.

The next question is from Brad Thomas with KeyBanc Capital Markets. Please go ahead.

Hi, good afternoon. Joel, as we look at your results relative to what we're hearing across the retail landscape, what really stands out is nearly every retailer is calling out discretionary categories as being down in some cases, down very significantly. And so I think your results really do stand out here. I was wondering if you could just talk a little bit more about what you may be seeing from kind of a cyclical perspective. Are you seeing repeat customers pulling back on the average ticket size? How much are you seeing maybe in terms of trading down and new customers coming in, trying to stretch a buck? What are you seeing maybe that puts more into context why you're all doing so well right now? Thanks.

Thanks, Brad. I think that it speaks to why a couple of questions ago about units per transaction. I mean certainly, that's a sign that the customer is being very discerning. And that's why you've got to win with transactions or traffic, which has been very positive. I think why we're winning with discretionary, and I said in my prepared remarks, Q1 through 3 is our store is largely a store wants. In Q4 starts in October, our stores a store needs. And the last place history has shown my long tenure in the kids space, is that parents cut out on their kids. And so nieces and nephews and grandparents and parents are certainly worried about stretching their dollars further and we're seeing the trade down. But as we look at what we're seeing here in Q4, we're a destination for value, and that's resonating really nice with the customer.

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

Hi, thanks a lot. And Joel, hope you still better you stands a little under the weather. I'm curious if you can maybe shine a little light into your conversation with Michael that you held a couple of hours ago, if you will, in terms of what he's seeing from suppliers and are they starting to innovate more after a couple of years of just trying to plow through unit volumes. Just curious what you're seeing on that front? And anything from a trend that has you excited?

Yes, I am finding a little bit of a cold there Chuck and look, I think, while I never give away any secrets with Michael, any of you that have toured stores with him, know he's never had a lack of ideas and this is some of the most upbeat I've seen to merchants. Don't forget, we just opened our India office this year. I was out there personally about a month ago with Michael for the kickoff to that. We had over 50 factories there. It's another example that will help us innovate. It will help us move faster. It will help us keep costing down and it really starts to spread out our supply chain to other countries. And so that's just one example where Michael is excited. But I think like always, our 8 worlds allow us to kind of really ebb and flow from one category to the next as trends change. And I called out several of those trends in my prepared remarks. And - but the merchants are excited and they're already - I was down in our mock store today, and we're looking at back-to-school for next year. So, we're well ahead of 2024 on the merchandise cycle. And a lot of positive stuff out there that, obviously, Chuck, I can't get into the specifics, but they feel really good about. Thanks Chuck.

The next question is from Kate McShane with Goldman Sachs. Please go ahead.

Hi, good afternoon. Thanks for taking our question. I just wanted to ask about the competitive landscape. It seems like at least in the mass channel that they are focused on a particular price point and lower more signage and marketing around that than I believe I've seen the last couple of years. Just wondered how you're thinking about your positioning in the competitive landscape. Obviously, there's the value component of Five Below. But just with regards to what you're seeing from other competitors, any insight there? Thank you.

It's a great question. It's a really great observation on your part. I think there's several retailers out there doing a great job of in their own space, trying to communicate value. And they're doing that through price point, they're doing it to product. They're doing it through features and benefits. And it's certainly, I would assume, resonate with the customer. That's something we've done since the day we started this business. And you marry that value message up in a Five Below with a great experience. And we're not always perfect, we've got some stores that struggle. But overall, we deliver a really great experience for our value customer. And then layer in on that for us, it's about being trend right. And I think you'll see some great trends in our stores this year. So, hopefully, that gives you some example. I think it is certainly resonating with a lot of competitors out there in the retail space. And then we got to bring it home in our stores with some fun. Appreciate it. Thanks.

The next question is from Jason Haas with Bank of America. Please go ahead.

Hi good afternoon. Thanks for taking my question. So, I think previously, you were expecting to have stronger comps in 4Q relative to 3Q. And I look at what's implied by the guidance now. It looks like we're now going to see - you're expecting to see comps that are similar in 4Q to 3Q. So, - and cognizant of the fact that you're calling out a strong start to the quarter. I think you've cited that there's been a dynamic where people are shopping closer to need so they're buying closer to holidays. So, I'm curious if that's just conservatism or is it possible that we will see even stronger demand as we get closer to the holiday season here?

Yes. Kristy, I might need you to help me out in thinking through that. But my recollection is we - I think Q4 certainly isn't lower than what we thought it was a quarter ago. And I think we - if you take our prior guidance to the full year, Kristy was, what, 1% to 3%. And now we've taken it up to 2.5% on the year. So you're going to have to help me jog my memory there, Jason, on what you're referring to.

Yes, I just meant that from 3Q to 4Q, I think the implication was more like we go from like we go from, I don't remember exact numbers, was like a 1% comp to a 2% comp or something like that. So, there's going to be an acceleration. It sounds like you have seen that acceleration. So, why not raise 4Q isn't really my question.

Yes. I think it'd be really irresponsible of us to raise it any higher than we've got it right now. We've still got 70%, 75% of the quarter in front of us. And so - but I'll tell you what this would be a really great quarter kind of finishing in the 2 to 3 range. Thanks, Jason.

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

Congrats as well on the strong quarter and thanks for taking my question. So we're starting to get some questions about Temu and whether that's a threat to Five Below. I certainly have my opinion on that, but would love your perspective on that. Thank you.

Yes. Look, I think I've answered a Temu question probably every quarter here. And what's amazing, when you look at our comp consistency, quarter-on-quarter-on-quarter, we've been within tens of basis points of 2.5% comp Q1, Q2, Q3, thinking about Jason's question a little bit further. Last question, part of Q4 is don't forget we're up against a much harder compare than we were those other three quarters. And so that layers into Q4 on a two-year stack even being better. So - but we watch Temu as much as anybody else. I think they're an online player and the natural place to go is for people to shift their online purchases from retailer A to Temu. Our online presence is - penetration is so low. It's probably why we haven't seen a big impact in our business from that perspective. But we'll continue to watch them and see where they go. But as you can see in the consistency of our results, it really hasn't had an impact for us yet.

[Operator Instructions] The next question is from Joe Feldman with Telsey Advisory Group. Please go ahead.

Hi, good afternoon, guys. Thanks for taking the question. I wanted to ask one more on real estate. And just curious what you guys are seeing in terms of real estate costs in terms of lease costs or rental rates or - and also the cost to build. Are there - is that easing at all? Or because I know it was a bit of pressure the past year or two. And I'm just wondering go forward if you're seeing that easing up at all? Thanks.

Yes, thanks, Joe. I think it continues to increase slightly year-over-year. But I think overall, our rents are pretty close to flat. It certainly hasn't risen at the same rate that we saw inflation rise. I think the bigger challenge has been just the last couple of years, landlords just weren't building. And so I think with the number of bankruptcies that happened this year, that was really positive and starting to fill up the pipeline of stores and I think may continue into next year as well. But we really taken much more control of our destination, are building many more ourselves than relying just on the landlord. And as we get into ICR and the likes we'll be able to give you kind of specific numbers on next year. But you can tell from my prepared remarks, Joe, the 2024 pipeline is pretty full. Our rate of first half to second year has improved significantly over this year. And we're feeling like the hardest part of real estate is behind us. Thanks, Joe.

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

Thank you, operator, and thank you everybody for joining us for our Q3 call and our holiday outlook. Look, in summary, our teams are focused on delivering incredible value trend-right products and a really fun shopping experience for the holidays as well as building for the long-term future. I hope to see you all in our stores. I wish all of you and your families a terrific holiday. We will look forward to speaking with you again at the ICR conference in January. Thanks and have a great December. Bye.

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