Farah Soi - ICR Tom Vellios - Co-Founder, President and Chief Executive Officer Ken Bull - Chief Financial Officer, Secretary and Treasurer.

Steve Forbes - Guggenheim Securities Renato Basanta - Sterne Agee Dan Binder - Jefferies Matt Siler - Deutsche Bank Christian Buss - Credit Suisse Matt Nemer - Wells Fargo Securities Jeremy Hamblin - Dougherty & Company Jennifer Davis - Buckingham Research Group Stephen Grambling - Goldman Sachs Michael Lasser - UBS Investment Bank Patrick McKeever - MKM Partners.

Good day, everyone and welcome to the Five Below First Quarter Earnings Conference. As a reminder, today’s presentation is being recorded. At this time, I would like to turn the conference over to Farah Soi of ICR. Please go ahead, ma’am..

Thank you, operator. Good afternoon, everyone and thanks for joining us today for Five Below’s first quarter 2014 financial results conference call. On today’s call are Tom Vellios, Co-Founder, President and Chief Executive Officer and Ken Bull, Chief Financial Officer, Secretary 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. Finally, we may refer to certain adjusted or non-GAAP financial measures on this call.

A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available in our press release issued today. 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 Tom..

Thank you, Farah. Good afternoon and thanks everyone for joining us today. As always, I will review highlights of our first quarter performance and Ken will discuss our financial performance and guidance before we open up the call for your questions. We are very pleased with the Q1 performance that came in ahead of our guidance.

When we last spoke to you at the end of March, we issued Q1 guidance against a backdrop of weather that was still more of a headwind and a tailwind, that with the shift in Easter from March to April this year that affected our compatibility.

But as Easter shopping kicked off, once again our customers made Five Below a destination for the seasonal shopping needs as their response was strong to our compelling offering of trend right merchandise and exceptional values. The result was above guidance sales of $126 million or a 32% increase over Q1 LY.

We opened 19 stores in Q1, including 5 on the last weekend of the quarter. Since the end of Q1, we have opened 7 stores to-date and 8 more stores we will open this Friday in Houston. This is a new market for Five Below. With these openings, we will have completed more than half of our 62 planned openings for 2014.

We are very excited about the potential in Houston, a market we believe will accommodate many more stores as we continue to densify. With our stores in Dallas, Austin, and now Houston, we will have a total of 25 stores in Texas, a state we entered less than a year ago that we believe has the potential to support 100 plus Five Below stores over time.

And while it’s still early, we feel great about what we are seeing out of those Texas stores. New stores are the engine of growth for Five Below. The continued consistency and strengthen and performance of our new stores is the most exciting aspect of the Five Below story.

As we see this consistent store performance in both existing and new markets as we export Five Below across the country. In new markets, customers get introduced to a brand for the first time, but we see them embracing us with the same level of enthusiasm as customers in our existing markets.

Saw this again in Q1, with our entry into the Tennessee market, where we opened 5 stores in Q1.

As we continue to densify in existing markets, including the opening of stores in Pennsylvania, Ohio, Michigan and Illinois this past quarter, our new stores continue to generate consistently strong performance as the customers in these markets often have some level of familiarity with Five Below already.

I want to take a moment and commend our team for a very impressive job and executing our new store openings. Q1 marks our 32nd consecutive quarter of positive comps. Our comp store sales of 6.2% for the quarter were fueled by a very strong Easter selling across many of our category worlds including seasonal.

Even the late Easter this year we saw high volume pre-Easter weeks taking place in April with somewhat of a pullback in the post-Easter selling period. This is not unusual for our business as our customers take a pause after shopping as heavily into a holiday.

We have reflected this as well as our outlook for the important months of June and July when schools are out in our Q2 guidance that Ken will go over shortly.

The solid sales performance was accompanied by 30% increase in adjusted operating profit and adjusted EPS of $0.07 even as we continued to invest in the many areas of the business that you have heard me discuss on previous calls, namely infrastructure, systems and most important of all talent. Five Below was founded 12 years.

We spent the first decade proving our concept, its portability and the consistency of its performance.

For the next decade as we take this amazing business we have today and effectively scale it to harness it’s full potential we will be proactive and aggressive in making foundational investments, constantly assessing the growing needs of a company and anticipating where future needs may arise.

We spoke to you about the need of increased East Coast distribution capacity on our Q4 call and we anticipate that will happen in the second half of next year.

Implementation of an upgraded ERP system will begin towards the end of – the end of next year and into 2016 and we will also continue to add talent at the leadership level including the President position for which as you know we have a search underway.

So our priorities are unchanged for what we spoke to you a little over two months ago and we are hard at work executing against them. We have focused on maximizing the potential of our current business while also placing equal importance on building the roadmap and foundation for our future.

And while we are pleased with our Q1 performance, the bulk of the year lies ahead and I believe we are well positioned to execute against the goals we have set for ourselves. At this point I would like to turn over the call to Ken to review financial results and provide outlook in more detail.

Ken?.

Thanks Tom and good afternoon everyone. I will begin my remarks with the review of our first quarter results and then discuss our outlook for the second quarter of fiscal – and fiscal 2014. Our sales in the first quarter of 2014 were $126 million, up 31.8% from the $95.6 million reported in the first quarter of 2013.

We ended the quarter with 323 stores, an increase of 65 net new stores or 25.2% versus the 258 stores at the end of the first quarter of 2013. Comparable store sales increased by 6.2% for the first quarter of fiscal 2014 as compared to 4.2% comp increase in the first quarter of 2013.

This comp increase was largely driven by transactions, strong Easter selling drove the comp upside relative to our expectations. Gross profit increased 28.9% to $38.9 million from the $30.2 million reported in the first quarter of fiscal 2013.

Gross margin decreased by 70 basis points to 30.9% driven primarily by the expected de-leverage of buying costs reflecting the increased merchandising headcount as a result of the talent additions in 2013 and early 2014.

As a percentage of sales, SG&A for the first quarter of fiscal 2014 decreased to 26.7% from 28.3% reported in the first quarter of fiscal 2013 due to lower stock compensation related to the founders’ transaction as well as leverage on corporate expenses.

As a reminder, this was the last quarter that we will have stock compensation related to the founders’ transaction item at an adjustment on our income statements.

Excluding the cost of the founders’ transaction in both periods, adjusted SG&A was $32.8 million in the first quarter of 2014 or 26% of sales as compared to $25.5 million or 26.7% of sales for the first quarter of last year as we saw leverage on our corporate expenses as compared to the prior year period.

This was offset in part by higher pre-opening expenses based on the 46 new stores that will be opened in the first half of fiscal 2014 versus 33 new stores opened in the first half of 2013. Our GAAP operating income was $5.3 million for the first quarter of 2014.

Excluding the cost of the founders’ transaction in both periods, adjusted operating income for the first quarter of 2014 was $6.1 million, which was a 30.1% increase from last year’s adjusted operating income of $4.7 million. As a percentage of sales, adjusted operating margin was 4.9% compared to 4.9% for the same period last year.

Our effective tax rate for the first quarter of 2014 was 37.7% compared to 41.4% in the first quarter of 2013. The decline was due primarily to lower effective state tax rates resulting from our business restructuring in Q2 2013.

Before I discuss net income, I want to point out that for the quarter-to-date period, I will be referring to adjusted net income and EPS that excludes the impact of the founders’ transaction in both periods. When I refer to EPS, it is EPS based on adjusted net income using an adjusted diluted weighted average shares calculation for the period.

A reconciliation of GAAP net income and net income per share to these adjusted numbers on an adjusted weighted share basis can be found in the financial tables included in our earnings press release issued today.

The adjusted diluted weighted average shares outstanding assumes among other things the impact of all unvested and vested restricted stock as of the beginning of the period.

As a result of the factors I just described, adjusted net income for the first quarter of fiscal 2014 was $3.6 million or $0.07 per share as compared to $2.5 million or $0.05 per share in the first quarter last year.

We ended the first quarter of fiscal 2014 with $17.8 million in cash and cash equivalents, availability of $20 million under our revolving credit facility and no debt as we repaid the remaining $19.5 million of principal on the term loan during the quarter.

Inventory at the end of the first quarter of fiscal 2014 was $98.6 million as compared to $75.3 million at the end of the first quarter of fiscal 2013. Ending total inventory on a per store basis increased 4.5% year-over-year. Now, I would like to turn to our outlook.

For the second quarter ending August 2, 2014, net sales are expected to be between $150 million and $152 million assuming a 3% to 4% comparable store sales increase and the opening of approximately 27 new stores. Earnings per share are expected to be $0.12 to $0.13.

For the full fiscal year 2014, sales are expected to be in the range of $675 million to $681 million with the comparable store sales increase of 4%. This compares to net sales of $535.4 million for fiscal 2013 representing a growth rate range of 26% to 27%.

We continued to expect to open 62 new stores in 2014 and to end the year with a store count of 366 as compared to our 2013 ending store count of 304. We are reiterating our full year earnings guidance that we provided back in March. We expect relatively flat growth in operating margins for the full year.

While we did deliver $0.01 of EPS upside in Q1, we also had incremental investments we are making on the people side of the business that will be offset in the future quarters. GAAP net income is expected to be in the range of $46.6 million to $48.2 million with GAAP diluted earnings per share of $0.85 to $0.88.

Adjusted net income is expected to be in the range of $47.1 million to $48.7 million or approximately a 28% to 32% increase over fiscal 2013 with adjusted earnings per share expected to be $0.86 to $0.89.

And as Tom noted we are particularly proud of our ability to deliver this level of earnings growth as we continued to make all of the critical investments in talent, systems and infrastructure.

And as I mentioned last quarter given we have repaid all of our debt, we expect net interest expense in 2014 including the write-off of deferred financing fees to be in the range – to be in the $400,000 range with the majority of this expense occurring during the first quarter.

With respect to CapEx we still plan to spend approximately $35 million in fiscal 2014. And as I mentioned last quarter our capital expenditures will be for opening of 62 new stores and investing in existing stores. In addition we will be making improvements to our distribution centers including the continued fit out of Olive branch.

We will also incur initial spend for the planned expansion of our Northeast distribution facility that we expect to take place towards the second half of 2015 or early in 2016. And we will continue to invest in corporate infrastructure and systems upgrades.

For all other details related to our second quarter and full year 2014 guidance please refer to our earnings press release. And with that, I would like to turn the call back over to Tom to provide some closing comments before we open it up for questions.

Tom?.

Thank you, Ken. So in closing we are pleased with the very solid start to 2014. Our new stores continue to demonstrate consistently strong performance across markets as do our comp stores. With our merchandising focus and discipline, we continue to delight our customers.

Our emphasis remains on executing – and execution against a very attractive store growth opportunity that lies ahead of us. The goal for us and what we think will drive the success of this business for our customers and our shareholders is to ensure we keep pushing ourselves on product, people and systems.

I truly believe we need to be relentless about constantly reinvigorating our product assortment that serves to drive traffic to our stores. We need to constantly assess our human capital needs and add the necessary talent both in leadership as well as across layers of the organization.

And finally we need to continue to invest in systems to become even more nimble and further enhance our ability to respond to customer demand. I want to thank you for your support. And at this point, operator we are ready for the questions..

Thank you. (Operator Instructions) And we will go first to John Heinbockel from Guggenheim Securities..

Hi guys. This is actually Steve Forbes on for John today..

Hi, Steve.

How are you doing?.

Good.

With 48 of the 62 locations already announced for this year, can you discuss how far along you are with the 2015 expansion program? And with that, would you anticipate a major new market entry or just a few smaller ones?.

Well, as you know, we won’t provide specific guidance, including new markets until further down the road. I think it’s fair to say that as you have been hearing in the past we feel great about where we are with the 2014 class of stores having opened more than half already. And we have made terrific progress against the class of ‘15.

We have no concerns at this point on our ability to deliver on ‘15 from what we see so far and where we stand. It all looks good..

Okay.

And then just with seasonal merchandising from our perspective, the content looks as good as it has in a while, but I guess just in general how do you feel about it versus prior seasons and how do you feel about the seasonal inventory levels?.

Well, I think for me personally to say that I feel great would mean that I am settling so to speak, but all joking aside we feel great about the product where we are, the customers responding very favorably obviously.

And I think from an inventory standpoint of view as Ken mentioned, if you look at where our inventories came in last quarter, including full performance etcetera, we are in a very, very good position inventory wise. We are comfortable with the quality of our inventory.

And while we did see a bit of a pullback as we mentioned immediately after Easter, I am confident and believe that we are very well positioned for the all important June and July summer months, which just again to remind people, these are very important months for us.

Schools are out, kids come in to our stores we do a lot of Q2 business in those two months..

Thanks guys..

Thank you..

We will go next to Chuck Grom with Sterne Agee..

Good evening. This is actually Renato Basanta on the line for Chuck. Congratulations on the nice quarter..

Thank you..

So, I guess first on the gross margins, they were down to the touch more than we had expected, but at the same time, it looks like your inventory growth is much more in line with your sales growth.

So, I know you mentioned the talent additions, but can you touch a little bit on the different drivers of their gross margin decline in the quarter and if there was any impact from clearing out of inventory in the ramp up of the Olive Branch DC?.

Yes. I think as we mentioned really that key driver in the gross margin delever that we saw in Q1 was the additional investment of the buying personnel that came on late in 2013 and into ‘14. That was really the key driver there. Again, we feel good about our inventory position in terms of where that is.

I think we mentioned as part of our Q4 call, we had felt that we captured the majority of any issues related to Q4 and markdowns back in 2013. So that really wasn’t an issue for us in Q1..

Great.

And then I guess on our math, it looks like you had some pretty good new store productivity numbers close to 100%, but I think you also mentioned you had some late quarter openings, so that number could have been even higher? Can you just talk a little bit about what you are seeing in new markets that is allowing productivity to go even higher? I mean, is it a function of more metropolitan markets or just executing better in stores just any color there would be helpful?.

Well, you are right, I think when you look at the productivity calculations for Q1 they are very healthy. As Tom mentioned, we are really pleased with the performance, the early performance of the 2014 stores. And again, just to emphasize the word early, it still is early there.

We have got 62 stores that we are going to be opening up this year, obviously a mix of stores, but at this point we feel very good about the performance that we have seen, but again, we still have ways to go for the rest of the year..

Got it.

And then lastly, can you just briefly touch on the real estate organization in the context of your long-term 20% store growth target? I know that 2014 plans are set, but is there an opportunity to nudge that number up a bit for couple of years given your continued success with new stores and the attractive returns you are earning, particularly as you think about new markets outside of your core areas?.

Well, I typically give you an analogy around that question, but I won’t. I will just answer the question. Look, I think the best way to put it is this way, the thesis around Five Below remains intact.

Our ability to execute our new stores consistently both on performance and bottom and top line performance in existing markets and new markets is something that we have done consistently. I think it’s imperative that we don’t get carried away.

There is plenty of opportunity, I think we have said it in the past potential of this company could be 2000 plus stores across the nation. What is important and what I believe has driven the success to-date that we have had is our ability to execute at a high level. And that being said I think it’s important that we stay focused.

And when you look at our top line and bottom line returns that we have in growth, we are in a really terrific spot. I don’t think we need to be pushing ourselves to get that to even a higher level. We are sitting on a model today that has a payback of way less than two years.

You have a top line of – in the range of model of about 1.6 to 1.7 and we have deepened that consistently over the last few years. I think it’s important to just continue to excite our customer to deliver properly for our customer both in new and existing stores.

And our goal and my focus for the organization is to make sure that we continued to delight our customers across both new and existing stores while serving our shareholders with a consistent rate of return. Bottom line that comes first and this idea of trying to really push the growth rates is not something that we would pay much attention to.

As a matter of fact, we could have a 20% unit growth this year. At some point down the road it may be less, it may be more, we will see. But we will make those decisions as we look ahead and we will communicate accordingly.

Right now, our goal for the foreseeable future is to continue to deliver in the same consistent fashion to the extent that we can that we have done in the past..

Okay, that’s great. Congrats again..

Thank you..

Thank you..

Our next question comes from Dan Binder with Jefferies..

Hi, good afternoon. Nice job on the quarter given the early weather challenges.

My question is also – I have few questions one about real estate, as you have gone back into some of these markets where you are already fairly dense and you have added more stores, have you recalibrated your real estate model to get a bigger output on that 2000 store goal.

My second question was around gross margin, you mentioned a personnel expense drag in the quarter, I am assuming and correct me if I am wrong that should be an issue all year, so can you give us a little bit of color on how you get to flat for the full year, if that continues to be an issue?.

Sure. Let me just take the real estate side and then I will turn it to Ken. Nothing has really changed in our real estate strategy. Backfilling existing states including – we are still opening stores in Pennsylvania. It was the state that we opened our first store.

I think we have said in the past, while we may see some level of cannibalization which by the way it’s all in our numbers. It’s nothing material at this stage.

What we do see is that the response in those stores is actually quite amazing, it’s no different than the new markets and the level of performance in the stores, it’s not that we have given anything up performance is at the same level, the customers if anything know is awareness maybe kicks in even a bit sooner than maybe new markets, but no change in our real estate strategy.

We will continue to densify and there are still stores for us to build in all of our existing states.

Some times availability is the only factor that keeps us from actually densifying even more so because certainly as I am sure you know desifying is by far the best place to put your stores first, if you had the ability to do so because you can leverage part of your expense structure in existing markets..

And then Dan on the – our your question around gross margin and the merchandising talent investment, we really started making that in the middle of last year, so we are going to be lapping that towards the end of the second quarter, so not as much of an impact in the back half of the year at all.

And then if you look it on a full year basis, there is going to be some other slight puts and takes in cost of goods sold and gross margin which will be getting us to that what we expect to be a relatively flattish gross margin year-over-year..

Are you at a point where the DC is – the new DC is neutral to the rate?.

Yes. We have – again, well, as we mentioned, we have reiterated the guidance there for the full year. And relative to the DC, yes, I mean it’s relatively flat year-on-year if you look at a full year basis..

Great, thank you..

I think just a comment on the DC, if you look at that new DC that we have, total store count today is roughly about a third..

A third..

It’s also about a third of the capacity, maybe a little, okay..

Yes..

So, total capacity in the DC today we are probably operating at about 30% to 33% of total capacity. So, in any new distribution strategy you are going to go as we continue to add stores, we will be able to leverage not only occupancy, but as important some of the freight that we incur by shipping to places like Texas.

Additionally, when you first go into a new DC, you typically won’t see the level of productivity in the early stages of taking over the facility that you would in the existing facilities.

So, as we get further along, certainly as we add more stores and as the team down there, gets up to speed, certainly I think we’ll see some, hopefully some benefit at some point..

And our next question comes from Paul Trussell with Deutsche Bank..

Hey, guys. How are you doing? It’s actually Matt Siler for Paul. Nice quarter..

Hey, Matt..

Thank you..

My only real question involves a lot of the questions have been answered, but my question involves kind of around merchandise categories and the world, as you call them, what you saw in terms of strength throughout the 2Q? What you think you have some nice product lined up for heading into the next quarter and kind of your thoughts on how those performed relative to one another? And then I have one follow-up after that.

Thanks..

Sure. I think part of the strength, we have said this in the past, part of the strength of the Five Below concept is the category worlds and the ability of the customer to shift from world to world around need. What’s interesting for us and when you look at our businesses, well some businesses tend to be pretty constant.

Some of the worlds that fared really well around the Easter shopping may not necessarily be the same worlds that do well in Q2. Certainly, in Q2, we expect some weather is obviously in our favor. The spring/summer outdoor beach/pool business is a very important business for us. I believe we are well positioned for that.

And that should be one that we would look to really to see some good performance out of – in particular coming out of the Q2..

Great, thanks. And in terms of you have always talked about your new store classes and how they have opened up kind of around where the company average has been.

Is that something you are still seeing given some of the entries into the new markets or has it improved?.

But we are still seeing this, that’s really again for a company whose growth engine is new stores. And when you consider just how much runway this company still has ahead, we really feel pretty bullish about the opportunity that’s ahead of us, because we see that consistency of performance in the new markets that we have been seeing in the past..

In the recent classes?.

In the recent classes..

Great, thanks..

You’re welcome..

And we will go next to Christian Buss with Credit Suisse..

Just as a follow-up to that question, could you talk a little bit about store performance by geography and what you are seeing in some of the newest geographies that you have been in?.

Yes. I think we have spoken about this before and it’s remained pretty consistent in terms of the performance of stores in general and new stores really across the board.

So, whether we are looking at it by region, whether we are looking at it by class, and we are looking at comps and things like that, we are still seeing a relatively consistent performance across the board with overall store performance..

That’s great to hear.

Could you provide a little bit of color on how the President search is coming along and what kind of timing you have in your expectations?.

It’s a very important position for us. Search is on a way. We have certainly getting a lot of interest, but I think what’s important for us is not to rush. What’s important for us is to make sure that we do the best job we can to find the best candidate for the role.

At the point that we are ready to announce anything, we will definitely put it out to all of you at this point that much more to say..

Alright, great. Thank you very much and best of luck..

Thank you..

And from Wells Fargo Securities, we will go to Matt Nemer..

Good afternoon everyone.

I just wanted to clarify a point that was made earlier on the post-Easter pause, are you meaning to suggest that that was a short pause after Easter in the trend or did that continue in the late May and early June?.

Well, I think as Tom noted it’s not unusual for us to see that after significant shopping from the customer in a holiday like Easter for us which is important.

From a timing standpoint I don’t know if we need to talk about the time of all that, but it’s pretty natural for us and we are seeing that again given the late Easter and the timing this year versus last year. So that was one of the things that we consider when we give our guidance.

And I think Tom mentioned that also we always that into consideration in terms of what we see today..

Okay.

And then secondly on the gross margin decline in addition to the buyer talent that you have added, I don’t know if you had mentioned this already but was DC expense still a pressure point and was – should we assume that merch margins were relatively neutral to that overall gross margin rate?.

Yes. I think from a merch margin perspective it’s been similar to what we have seen in the past and we have spoken about again not to expect significant improvements or changes in merch margin, that’s what we saw again.

And actually the follow-up to Tom’s point regarding the DC, again the – having the new Olive branch distribution center on line there, things that we see there in terms of the trade that we still continue to ramp up and utilize. So I think there were slight challenges there on the DC line.

But really I just want to make sure everyone understands the real, the driver was the investment in merchandising personnel. The other areas were really some smaller puts and takes..

Okay. That’s helpful.

And then just one last one, you mentioned reinvesting some of the upside this quarter into sort of incremental people investments over the next few quarters and Tom you had mentioned in your remarks your intention to invest in people and I am just wondering where you are focused over the next few quarters, is it more on the merchant side planning, distribution etcetera?.

I think it’s sort of all of the above but really I think as we look at leadership in general both sort of top and across some of the categories. I think it’s not as much in merchandising for the foreseeable future because I think we have made quite a bit of investment already in that organization.

We are looking at obviously at some of the other areas that you mentioned as well as leadership..

Okay, great. Thanks. Great quarter..

Thank you..

Thanks..

Our next question comes from Jeremy Hamblin with Dougherty & Company..

Good afternoon guys and thanks for taking my question. I wanted to follow-up on the new unit growth in the first half of the year which I think is 46 new units versus 32 last year.

And Ken I think you spoke a little bit about the pre-opening expenses associated with that, could you quantify that 14 unit difference, how much in additional cost that you are likely to see what that this year versus last year?.

Yes. It’s from a timing standpoint I think just again in the first half of the year you are going to see that impact on pre-opening expenses and we saw that in Q1, so the benefits we saw in leveraging of corporate expenses on the sales they were offset in part by the pre-opening expenses.

I don’t really want to get into specifics in terms of basis points here or there but suffice it to say that the first half of the year we will have more of those pre-opening expenses year-over-year based on the number of stores we are opening this year versus last year because remember last year we had the Texas market opening which came in the back half of the year and this year we are going to have the majority of store openings in the first half..

Okay, I can just follow-up and can we assume that then as it’s been a drag in the first half of the year that in the second half of the year this would be a slight benefit year-over-year?.

And then that’s a reasonable assumption..

And then just as one additional question on the categories and I know you don’t speak too much to category performance but remind me last year I think seasonal was weak category for you in Q2, is that a category? And I think Tom you spoke to this in your remarks, where you are expecting that you have a really nice opportunity going into it? And then adding on to that, you have made some changes in the format or the store layout in some of the category worlds, can I assume that those were part of the drivers of where you are seeing success in your comp?.

Well, I think if to the best of my recollection from last year, I think we had a little bit of rain in part and some weather, but we also saw, again, once kids get out of school for us, it was interesting that maybe some of the other categories I recall mentioning in our conference calls that while one category didn’t fare well, in that case, seasonal, we fared quite well in some of the others, which offset the sort of the miss in seasonal.

And depending how weather goes this year, I think it could go in a different direction. What’s important to note for us is we have a great connection with our customers. Our customers love to shop our stores. It’s been – it’s over and over again, they have told us that, but they also will shift from category to category.

So, I don’t think it’s come in to buy seasonal and they are not going to buy everything else. If we have great weather, I think you probably can expect the seasonal business to fare quite well, because I think we have positioned well.

As for the moves and the adjustments, to us what you see in our stores is again, this constant drive that we have to excite and delight our customers and to move product around within the stores more than anything else. And you will continue to see more of that.

But that is what Five Below is all about, that is why the investment and talent, that is why the investment and training etcetera to continue to push the envelope as we have in the past going back to where the company was when we first started and where it is today, it’s product offering, it’s disciplines, it’s inventory disciplines, it’s presentation in stores, it’s changed a lot and we will continue to do so.

We only have one goal, drive traffic by delighting our customers and we will do that through great product, great in-store experience and all our products at $1 to $5..

Thanks for taking my question guys..

You’re welcome..

Thanks..

And from Buckingham Research Group, we will go to Jennifer Davis..

Hey, guys. Congratulations on a very good start to the year..

Thank you..

Most of my questions have been answered, but I guess I have a couple of clarifications. I think in the second quarter this year, it looks like you said you are opening 27 new stores versus 18 last year.

So, I was wondering if you could kind of guide us maybe or give us a little color around the EPS impact from those additional 9 stores just in terms of the higher pre-opening and pre-opening rents and pre-opening expenses?.

Yes. I think for Q2 around the pre-opening expenses, again you have got the rent portion that’s in margin and the other expenses. I think that’s going to be really a slight drag. We saw more of that in Q1, so that will be slight in Q2..

Okay, alright, so to a lesser extent than we saw in the first quarter?.

Correct..

Okay. And then this might be just rounding, but it looks like you raised full year revenue guidance, but you maintained your full year comp guidance.

Is that just rounding or are new stores opening stronger than you had originally planned?.

Yes. I mean, really on an overall basis, it probably is rounding, but it’s embedded more in the new stores than any additional or incremental performance we saw coming out of Q1..

Alright, great. Thanks and best of luck. The larger summer presentation you guys are able to pull together really looks good. So congratulations..

Great, thank you..

Did you shop?.

I did..

Okay..

I always do..

Alright, so I will take – shoot me a photo next time..

Will do..

Okay, thank you..

And we will go next to Stephen Grambling with Goldman Sachs..

Hey, good afternoon. Thanks for taking the questions. I guess, one is a little bit longer term as we think about the EPS algorithm that you have laid out you just basically announced a number of investments, the ERP, the new DC.

As we look out over the next year, I realize it’s still early, I mean, should we be assuming that this – that, that will be a year, I guess fiscal ‘15 they will be below the historical algorithm albeit temporary?.

Steve, the algorithm you are speaking to is what the operating margin?.

I am just talking about EPS growth rates and op margin, I guess, would be within that..

Yes. Again, we haven’t done a lot of work going out looking too far, so I wouldn’t get too far ahead on this. And again the timing may shift on some of these things as you know we tend to be conservative especially in terms of what we are going to tell everyone for where our spend is going to be.

But I mean at this stage of the game I wouldn’t see any material changes in what – up against our longer-term growth rates that we have spoken about that we still should be within those ranges in the near-term years even with those investments that we have spoken that we have mentioned today..

Okay.

And I guess on the DC is there any reason why that would be – have a different impact than the current DC that you recently opened?.

The only thing I could see there again Tom mentioned this before the new DC in Olive branch that we are ramping up utilization.

We – and expanded Northeast facility wherever that may be, that would come on with many more stores right out of the gate, so there maybe a little bit of a difference there in terms of what we are seeing coming out of the brand new distribution center that was ramping up versus the DC that’s going to be taking on some stores in existing markets right out of the gate..

That makes sense and that’s helpful.

And I guess changing gears a little bit, we had our dotCommerce conference today and one of the things that kept being echoed from both online retailers and brick and mortar retailers was a new dab at digital strategy regardless of whether you are having direct delivery as consumers seem to be making their intent of purchase even before entering the store, so what are some of the things that you are working on from a digital standpoint to drive that?.

To drive store visits?.

Yes, I mean I guess just in general what are you doing from a digital standpoint especially given the consumer who likely indexes higher?.

Well, certainly I think there are actually two parts of that question. But before I get to that question on digital let me just add a comment to the distribution.

And I think it’s important for both our customers, but as important for our investors, not to get caught sometimes into sort of like the quarter or the months or what happens at the beginning and just sort of look at the facilities that we are looking to build or to have in the Northeast.

We currently have a facility that’s 400,000 square feet, it handles roughly I think Ken I think about 200 plus stores.

So what we want to do given our ability to densify existing markets is really build a much bigger facility there to handle not only all the new stores that we can put into this market, but also some of the higher volumes that some of these stores tend to have.

And while we may feel a bit of a pain for a period of time whether that’s six months or a year, the opportunity, the longer term opportunity of these decisions to leverage our ability – I think of the freight benefit alone long-term that we could have of a full blown facility that can maybe handle I don’t know 2X the store count that we have today.

So some of these decisions we are making and the investments that we are making I think it’s important that we see them as true and real benefits to our return and to our investors benefit on a longer term basis and not try and get too caught up I think in some of these one-off sort of quarterly hits 10 basis points here, 10 basis points there, etcetera.

So we are very excited if nothing else about the opportunity to put a larger facility in the Northeast for a lot of good reasons to benefit both the top line and the bottom line of those stores. Now back to the digital, there is really two sides to that equation.

One is how do we continue to leverage social media, that’s our customer, that’s our sweet spot and we are doing a lot and hopefully at some point we get to see some of you folks or visit some of you folks or on a conference maybe we can get into in more detail.

But I can tell you we are starting to spend both time and resource around that through our marketing efforts, because we need to really be sort of like best in class on social media and that side.

It is the best way to communicate with our customers and we are not going to win the war or the battle if we continued to see our long-term future of using circulars for a lack of a better term to drive traffic to our stores.

The other piece is what is the company at some point do with somewhat of an online strategy which is a great question, but is one really that I don’t think we are prepared to discuss today, but maybe a great opportunity at some point..

Alright. Well, thanks for all the color. And best of luck the rest of the year..

I really appreciate it. Thank you..

Thanks..

Our next question comes from Michael Lasser with UBS Investment Bank..

Good evening. Thanks a lot for taking my question.

My first question is on the step down that you talked about in the week of Easter, was the change in the cadence of business greater than you typically have seen? And is that because store volumes are just getting to maybe more mature levels and so the business is becoming more volatile? And then I have a follow-up..

Time will tell. Our thinking from what we see and when we look at sort of past holidays, our feeling is we are a terrific destination for Easter. And we saw it even more so when we sit with the solid performance that we had in Q1. Kids are out of school, mom’s shop, etcetera, etcetera we had a very strong performance around Easter.

And following Easter, we saw a bit of a low and a pullback in our business, we believe that’s indicative of the customer having shopped and almost taking a break for lack of a better term from our stores.

There was no shift in the fundamentals of our business or the product content in our stores, which lead us to believe that in fact it was maybe a post-Easter low for lack of a better term. There was nothing that we saw that was inconsistent across either categories or something specific that would have us be concerned about the next couple of months.

Ken, anything you want to?.

No, I think you are right. I think it was pretty typical of what we have seen from a volume standpoint post later Easter that we looked at. So, yes nothing unusual..

Okay. My second question is there is a lot of focus on the third quarter and how you are going to anniversary the contribution you got from rubber band bracelets last year.

So a) are you planning anything in particular as you confront that more difficult comparisons from product contribution? And b), are you planning for positive comps in both quarters in the second half of the year? Thank you..

We plan on making sure that we have the right product for the customer for a quarter that actually is not that big. I mean, if you look at Q1, Q3, they sort of feel the same to us from an impact standpoint of view.

I think for us getting the categories right, getting the product right is priority number one, trying to sort of offset and to jump through hoops to do a lot of extra sort of initiatives, particularly in a quarter like Q3 which is not a big quarter for us to offset a nice trend that we have last year. I just don’t think it’s no makeup.

We want to service our customers and then we will see where the comps come in. More important for us is to make sure that we are ready for the all important Q4. And I believe that we are in a good spot against Q4 and continue to do the work that’s necessary to get us ready for that. But as far as Q3, we had a great trend.

Other retailers had it as well last year. This year, as long as we are well positioned across the category worlds, we will give you a guidance for Q3 after we see where Q2 comes in and what the trend looks like, but nothing special that we are planning to do specifically to offset the rubber band trend from last year..

Okay. And so the investment community and the market prepare as we get here 9 days from now, it wouldn’t be surprising if you do plan for a flattish comp or something that’s below a little bit of what you might see outside of the other three quarters just in light of that.

But to your point, as far as the full year earnings contribution, it’s far from meaningful to the full year?.

Yes. Michael, I think that’s accurate, the way you stated it..

That’s right, Michael..

Okay. Thank you so much and good luck with everything..

Thank you..

Thanks, Michael..

And our last question comes from Patrick McKeever with MKM Partners..

Thank you. So, just getting back a little bit to the question about social media and digital and whatnot, my question is on advertising. And it sounds like Tom, you are saying that you get more bang for the buck from what you are doing with social media versus the flyers, which you continue to do.

So, just wondering if that in fact is the case and what the thought might be there going forward? Also how are you approaching advertising around new store openings, including the Houston store openings? And will there be some incremental advertising expense in the second quarter because of that, is that in guidance or is that not a factor on a year-over-year basis?.

Sure. Let me hit the new store first, that’s pretty straightforward. Nothing special that we haven’t done in the past and anything and everything that we are doing around these grand openings is already built into our numbers. So, that’s straightforward.

Going back to your question, social media, no question about it, that it’s an area that we have to continue to both invest and get good or even better at.

Still today though unfortunately for traditional retail, I wouldn’t necessarily say, you get a sort of better bang for the buck as you connect with your consumer much more direct and the feedback is almost instantaneous.

So, we still need some of these circulars, unfortunately for the foreseeable future, particularly around key events to be able to present the offering of – particularly as we go into key seasons.

That being said, again and more to come, I think the area of social media for us is one that we are starting to invest in again, all in our numbers of, it has to be our way forward given the audience that we are serving. It’s helping us even in some cases just so I mean just a small anecdotal comment to make on that.

We are starting to even use that as a platform for us to make – our merchants to make decisions around product, which is amazing and to get instant feedback.

So, there are some great things going on in the company on that front, that they will not only I think over time help the top line by this thoughtful response, but really help us get some terrific feedback. You have a very loyal customer around product decisions and assortment content..

Okay, great. Thank you very much..

Thank you..

Thank you..

And that concludes the question-and-answer session. I will turn the call back to management..

Thanks everyone. Really appreciate it. At this point, there are no more questions. We will end the call..

And ladies and gentlemen, that does conclude today’s presentation. We thank you for your participation..