Thomas G. Vellios - President and CEO Joel D. Anderson - President, COO Kenneth R. Bull - CFO, Secretary and Treasurer Farah Soi - ICR.

John Heinbockel - Guggenheim Securities Charles Grom - Sterne Agee Michael Lasser - UBS Investment Bank Dan Binder - Jefferies & Company Meredith Adler - Barclays Capital Jeremy Hamblin - Dougherty & Company Jennifer Davis - Buckingham Research Group Patrick McKeever - MKM Partners Paul Trussell - Deutsche Bank.

Good day and welcome to the Five Below Second Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Ms. Farah Soi. Please go ahead..

Thank you, operator. Good afternoon, everyone and thanks for joining us today for Five Below’s second quarter 2014 financial results conference call. On today’s call are Tom Vellios, Co-Founder and Chief Executive Officer; Joel Anderson, President; and Ken Bull, Chief Financial Officer.

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 Web site at fivebelow.com. I’ll now turn the call over to Tom..

Thank you, Farah, and thanks everyone for joining us today. As usual, I’ll review our second quarter highlights and also discuss some of our recent additions to the team.

Joel Anderson, our new President, who joined us just a few weeks ago will then make a few comments and finally Ken will discuss our financial performance and guidance before we open it up to your questions. Q2 was a strong quarter with sales of $152 million, a 30% increase over last year.

Adjusted operating income came in at $13.3 million, a 37% increase over LY and adjusted EPS up $0.15, a 36% increase, and we achieved these results even as we continue to make all the investments necessary to support our future growth.

We opened 30 stores in the second quarter for a total of 49 stores in the first half against our plan for the year of 62 stores. 8 of the 30 Q2 openings were in Houston which as you know is a new market for Five Below.

Reception received in Houston was very strong, similar to our experience in Dallas and Austin where customers new to our concept reacted to our entry with great enthusiasm. In just one year we now have 26 stores in Texas and could not be more pleased with the initial performance we see in the Texas market.

And as we’ve mentioned to you before, we believe this market has the potential for over 100 Five Below stores. Our 2014 stores are shaping up to be another strong class which comes on the heels of three consecutive years of new store outperformance.

And we have some great locations lined up for the rest of the year, including our first Brooklyn New York location which opened on August 29th, bringing our total store count in Metro New York to 11 stores.

As we’ve mentioned in the past, this consistent customer response to Five Below stores across both new and existing markets drives the outstanding new store economics we enjoy and continues to validate the long-term growth potential. Q2 marks a 33rd consecutive quarter of positive comps which began back in the second quarter of 2006.

This consistent performance demonstrates the strength of our brand and its appeal to customers in varying economic periods. Our comp store sales of 3.2% in Q2 were driven by a number of categories including sports, games, and tech.

It’s been a busy 2014 for us so far as we continue to deliver strong top and bottom line financial performance, while also building the foundation necessary to support future growth. As you all saw us announce in June, we’re thrilled to have Joel Anderson join us as President and Eric Specter as Chief Administrative Officer.

Joel is here today and you will hear a few brief words from him in a minute. He brings considerable and diverse retail experience that spans a 20 year career most recently as President and CEO of Walmart.com.

Merchandising stores and marketing report into Joel and though he has been here just a short time, he has hit the ground running immersing himself in understanding our business as well as spending time in the field with our associates and our customers. Eric brings three decades of retail experience and as a proven operational leader.

Most recently he was Chief Integration Officer at Ascena Retail Group, and Acting President of Catherines Stores. He will oversee supply chain operations, real estate and IT. It’s great to have Eric on board with the holiday season just around the corner and the new Northeast DC that we will be opening next year.

Eric’s broad based skillset and deep operating experience will help us ensure the smooth transition of our near and long-term growth strategy. These two new hires strengthen our capabilities and position us to successfully execute the next chapter of Five Below’s growth.

As we saw in the press release we issued yesterday, in Q2 we signed a lease for a new northeast distribution center. You’ve heard us talk about the need for additional distribution capacity in the northeast, a region that includes many of our highest volume stores, but also one that continues to hold significant densification opportunities.

After a thorough analysis, we made a decision to build a new distribution center in Southern New Jersey, in which we will initially occupy 700,000 square feet growing just over a million square feet over time. We believe this is an ideal location for us that will support our growth in the east coast.

An added benefit is the proximity of this new facility to our current New Castle, Delaware DC, which this new facility will replace. This proximity allows us to maintain our workforce, which we believe benefit the transition and ramp up of a new distribution center next year.

On the merchandising and product development front, we’re making great strides and believe you will see some of the impact of these investments in our stores late in Q3 and into Q4.

Even our merchandising DNA, it has been so rewarding to see our merchant team were closely with our product development team and we can’t wait for the fruits of their labor to be visible in the stores later this year and into next. On the marketing front, we’re focused on expanding our digital and marketing footprint.

Since 2012, we’ve been building our digital marketing channels including Integra, YouTube, Twitter and Facebook. We’re also placing greater emphasis on our mobile experience with engaging content including product videos, exciting contexts, and customer generated social media content.

Last but not least, we’ve been building our email database and now have approximately 4 million customers in our database, enabling us to regularly message our customers about new product arrivals and special events. So as you can see, it’s been a busy and extremely productive summer of Five Below.

We’ve added proven retail leadership, we’ve secured a great location for our increased east coast distribution needs, we’ve integrated our product development and merchandising teams, we continue to expand our digital initiatives to increase customer engagements and we’ve done all this while delivering strong year-over-year earnings growth.

Looking ahead to Q3, as you know, we’re up against a 9% comp with the toughest comparison in the back half of the quarter and that is the driver of the third quarter guidance, Ken will review in a moment. Finally, I feel very good about our readiness for the all-important holiday season across merchandising, marketing, distribution, and stores.

This team does not stand still and I think our customers are going to really like what they see at Five Below this holiday season. And now, I’ll ask Joel to say a few words about his initial observations. Even he is only been at Five Below a few weeks, I think you will agree it would be unfair to expect him to answer question on today’s call.

So let’s give him some time to settle in and there will be plenty of opportunity for Q&A with him in future quarters. Now over to Joel for a few comments.

Joel?.

Thank you, Tom, and good afternoon, everyone. I’m thrilled to be here. My initial observations since I started at this Company in late July have validated all for the reasons I joined Five Below. I’ve spend my initial weeks visiting stores across the country and attending several grand openings.

I’ve also spend considerable time in our home office here in Philadelphia with team members in several departments. So what struck me the most you might ask, without question I think the passion our customers have for Five Below is simply amazing.

Just as striking is the associate commitment, it is authentic and honestly exceeded my already high expectations. I knew coming in with the merchandising capabilities here were very strong.

But the ability of the team to quickly react and the speed of new product introductions that helps keep the concept fresh and the customer coming back is impressive. And from what I’ve seen so far, the product for the back half of the year simply looks great. On the digital side, Tom earlier shared some of the areas we’ve been focusing.

I’ve spend considerable time in this area and I’ve been impressed with how engaged the team is here with utilizing social channels to connect with our customers. I can see the potential Five Below has to do so much more here and it is going to be exciting to see this area grow even further.

I know everyone is interested in what e-commerce could potentially play for us. We believe there is definitely an e-commerce opportunity for this concept. However, our priority today continues to be executing on the great store growth we’ve at Five Below.

As I study the e-commerce concept and formulate a go-to-market strategy, we will have more to say on this topic. What you can’t expect though is for Five Below to approach this opportunity with the same discipline we’ve shown in managing every aspect of our business.

This is really a unique concept with a very long runway of growth and so many exciting prospects that lie ahead. I’m energized to be working with Tom, David, and the rest of the team and feel fortunate to be part of what I know will be the continued success of Five Below.

The rollout in the new markets and harnessing the many opportunities will further strengthen our brands and our reach. I look forward to getting to know many of you in the coming months. And for now, though, I will turn it over to Ken, to discuss our financials.

Ken?.

Thanks, Joel, and good afternoon, everyone. I’ll begin my remarks with the review of our second quarter results and then discuss our outlook for the third quarter and full-year. Our sales in the second quarter of 2014 were $152.5 million, up 30.2% from the $117.1 million reported in the second quarter of 2013.

We ended the quarter with 353 stores, an increase of 77 net new stores or 27.9% versus the 276 stores at the end of the second quarter of 2013. Comparable store sales increased by 3.2% for the second quarter of fiscal 2014 as compared to 6.6% comp increase in the second quarter of 2013. This comp increase was largely driven by transactions.

Gross profit increased 29.2% to $50.9 million from the $39.4 million reported in the second quarter of fiscal 2013. Gross margin decreased by approximately 30 basis points to 33.4% driven primarily by increased occupancy expense related to the timing of new store openings.

Before I discuss SG&A, operating income, net income, and EPS, I want to point out that the results for the second quarter of 2013 included the impact of the founders’ transaction and secondary public offering fees, both of which have no impact on our second quarter of fiscal 2014.

When I refer to adjusted SG&A, adjusted operating income and adjusted net income, this excludes the impact of the founders’ transaction in secondary public offering fee for the second quarter of 2013.

And when I refer to adjusted EPS, it is EPS based on adjusted net income using an adjusted diluted weighted average shares calculation for the second quarter of 2013. Please see the GAAP to non-GAAP reconciliation table in our press release for further detail.

As a percentage of sales, SG&A for the second quarter of fiscal 2014 decreased to 24.6% from 27.5% in the second quarter of fiscal 2013 due primarily to costs incurred in the prior year period related to the founders’ transaction expense and costs associated with the secondary offering.

Adjusted SG&A for the second quarter of fiscal 2014 decreased to 24.6% from 25.4% in the second quarter of fiscal 2013. This decrease was primarily driven by the comparison against certain marketing expenses in the prior year period that we did not incur this quarter.

Our GAAP operating income increased 85.6% to $13.3 million or 8.7% of sales from $7.2 million or 6.1% of sales last year. Adjusted operating income for the second quarter of 2014 increased 37.5% from last year’s adjusted operating income of $9.7 million.

Our effective tax rate for the second quarter of 2014 was 37.6% compared to 37.7% in the second quarter of 2013. On a GAAP basis, net income increased 104.5% to $8.3 million or $0.15 per diluted share from $4.1 million or $0.07 per diluted share last year.

Adjusted net income increased 37.3% to $8.3 million or $0.15 per diluted share from $6.1 million or $0.11 per diluted share last year. We ended the second quarter of fiscal 2014 with $25.6 million in cash and cash equivalents, availability of $20 million under our revolving credit facility and no debt.

Inventory at the end of the second quarter was $106.7 million as compared to $83.5 million at the end of the second quarter of last year. Ending total inventory on a per store basis was flat year-over-year. For the end of Q3, we expect inventory on a per store basis to increase in the double-digit range.

This is driven primarily by an anticipated increase in in-transit inventory as the penetration of imported products has increased, especially for the upcoming holiday season. We take ownership of these direct imported goods earlier as we recorded in-transit inventory on our balance sheet when that leaves the overseas ports.

Additionally, in order to streamline deliveries for Q4, and mitigate any risks associated with the current west coast port labor issues, we’ve shifted some receipts from early Q4 into late Q3. Now, I’d like to turn to our guidance.

For the third quarter ending November 1, 2014, net sales are expected to be between $136 million to $138 million, assuming flat to slightly positive comparable store sales and the opening of approximately 12 new stores. GAAP earnings per share are expected to be $0.05 to $0.06. As Tom mentioned, we’re up against a 9% comp from Q3 last year.

This was aided by the rubber band sales trend, which was most meaningful in the back half of Q3 last year and represents our toughest comparison as we move through Q3. Our comp guidance reflects both our quarter-to-date performance as well as this challenging comparison for the back half of the quarter.

Given our flat to slightly positive Q3 comp guidance against a 9% comp last year, we expect to see occupancy de-leverage in the third quarter this year. We are also seeing some pressure on our current ocean freight costs in Q3.

This is due to the recent spike in ocean container demand, as importers have planned earlier deliveries partly due to a shift in peak season shipments to avoid potential labor related disruptions on the west coast. We estimate that this will be a modest gross margin headwind to Q3.

These additional freight charges combined with the deleverage of occupancy expense, is expected to cause a gross margin decline in the third quarter this year.

This anticipated gross margin decline is expected to be partially offset by SG&A leverage primarily due to lower pre-opening expense as we plan on opening 12 new stores in Q3 versus 28 net new openings in the prior year period.

For the full fiscal year 2014, sales are expected to be in the range of $681 million to $687 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 27% to 28%.

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

While we did deliver two pennies of EPS upside in Q2, we also have incremental expense related to freight, as I just explained, that will be a penny offset in Q3. GAAP net income is expected to be in the range of $47.2 million to $48.8 million with GAAP diluted earnings per share of $0.86 to $0.89.

Adjusted net income is expected to be in the range of $47.8 million to $49.3 million or approximately a 29% to 34% increase over fiscal 2013 with adjusted earnings per share expected to be $0.87 to $0.90. With respect to CapEx, we plan to spend approximately $36 million in fiscal 2014.

And as I mentioned last quarter, our capital expenditures will be for the opening of 62 new stores and investing in existing stores, corporate infrastructure and systems upgrades. 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 new northeast distribution facility that we expect to be operational towards the second half of 2015.

We are still working to finalize 5the design for this facility and currently estimate that we will spend approximately $20 million on this project, of which approximately $4 million will be spend on initial outlays in 2014. 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’d 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, Q2 was a strong quarter and as we enter the back half of the year, I feel we’re well positioned to execute on our goals. Q3 is off to a good start including a solid back-to-school performance. We do face a tough comp comparison in the back half of the quarter which is baked into our guidance as Ken just discussed.

Looking ahead to Q4, I feel good about our readiness heading into the all-important holiday season. I believe our product is great, our stores are ready, our teams are set, and our DCs are prepared to handle the holiday sales volume.

We are focused on surprising and delighting our customers while maintaining the operational discipline that has served us so well. Thank you all for your continued support of Five Below. And with that, I’d like to open it up to your questions at this point.

Operator?.

Yes, sir. Thank you. (Operator Instructions) And we will take our first question from John Heinbockel with Guggenheim Securities..

Yes, hi guys. So two things. First Tom, when you talked about the comp, you didn’t call out now and style.

Curious how you thought they performed in the second quarter and how optimistic you’re about those, because those are sizeable businesses, how optimistic you’re about particularly the holidays going into the fourth quarter about those?.

Thanks, John. Let me comment on both of that. As you know we don’t spend a lot of time over the call trying to focus individual categories. We did mention some of the areas that we saw some of the strength.

I think it’s fair to also say that on the style side of our business I think I’d probably say that was a relative underperformer against some of the categories that I mentioned. The comment I love to make on the now section, we had a -- certain parts of our business in summer did very well.

I think I’d actually say that maybe in parts of it we maybe planned it a bit too aggressively and some of the products sold out and we had a great sell-throughs and possibly could left maybe a little bit of business on the table.

But overall of how I feel and how we’re positioned to go forward in the second half, I think we feel good about all those categories..

Okay. And then, you’ve added a lot of management capacity here in the last not just with Joel and Eric, but even people before that.

So what are you going to spend more time on, if you think over the next one year, two year, three years, would you want to spend more time on -- what are the kinds of things that you haven’t been able to do strategically because -- maybe time constraints that you can now do?.

Well, there is a lot of questions baked into that one, but I think here is the that I would look at it. If you look at Five Below, the growth that’s ahead of us and we’ve done to date, clearly what we feel we did is strengthened the organization. I think we had a terrific talent to round out the team.

We’ve still so much ahead of us, so much opportunity on the growth side of the merchandising side, looking at our strategy, understanding sort of what’s next for Five Below both short and long-term. So I can assure you of one thing.

There is plenty on the table for all of us to have a piece as we move forward with this business, not only for this year, but I think for many years to come. And at the same time I think it’s important that we’re transitioning this talent.

We always mentioned how unique we believe Five Below is, the merchandising DNA, our approach to the customer of the success that we have in existing markets and in new markets, our new stores and their performance, the culture.

So I think apart of what the Five Below team, all of us should be doing is make sure that we’re spending a part of our time transitioning the talent and making sure that with the on boarding process is really one that creates an environment and a future platform for more success to come..

Okay. Thank you..

You’re welcome..

And ladies and gentlemen, we do ask that you limit yourself to one question. And we will move further to Charles Grom with Sterne Agee. Please go ahead..

Thanks. Good afternoon guys. Nice quarter.

I guess, just a question on the comp and just trying to connect the dots with what you guys said back in June about the softness -- relative softness, I guess, at the start of the quarter to your commentary just now about how you’re guiding the third quarter, considering that there is the tougher compare in October, so just wondering if you could just speak to how the comp trended during the quarter and also any color so far on back-to-school and quarter-to-date here?.

Sure. Let me just a point of clarification first, I think to a question that John had earlier of around our summer business. I think part of it we actually planned summer conservatively not aggressively.

And if you recall last year, not that I want to go that far back, but with some of the weather issues, etcetera that we had coming out of last year, I think its fair to say we plan parts of our summer business a bit conservative. I should also mention that some of the pack away product that we packed away last year we had terrific sell-throughs on.

So putting that behind us, and you saw the 3.2 comp against the guidance of 3 to 4. I think here is the way we look at our business as we’ve always guided and communicated to you all in the past, we take current trend which I think as I mentioned in my notes, it’s still early in the season, but we like where we’re today.

We’re very pleased with the back-to-school business.

We’ve taken the current sales trend, try to give our best assessment of what we think the impact of the weeks that lie ahead of us in the later part of the quarter that did have that high penetration of rubber bands last year and sort of put those two pieces together and we came out with a flat to slightly positive comp guidance that we put forth for this quarter and when you put that against last year’s comp of 9% we think that’s a good place to be from the information that we have today..

Okay.

And then just Ken, just the mix between traffic and ticket figures, do you have that handy?.

Of course. Yes, what we saw in Q2 similar to what we see in the past where the comp was driven primarily by an increase in transaction..

Okay. And just one last one, I could, just on the cadence of store openings. Your NSP was a little bit softer than what we had modeled.

Was there a fair amount of stores late in the quarter that you guys opened?.

We did. I don’t know how you’re calculating the NSP, but we were relatively close to a 100% in our calculations using averages, but it’s probably the later openings in the quarter that could be driving your calculation a little bit lower..

Yes, we had a 10%, it’s still very good. Okay. Thanks, guys..

Thank you..

Thank you, Charles..

And we will take our next question from Michael Lasser with UBS..

Good afternoon. I had a couple of questions. First, on the -- when you reported your second quarter you talked about a drop off in traffic following Easter and I think if we combine that with you just performing in line with your guidance whereas in the past you’ve done a nice job of outperforming the expectations you’ve set.

Should we infer that the start of the quarter was tough and maybe you didn’t get as much of a rebound as you had expected?.

I don’t want to spend Michael too much time trying to sort of connect all the dots and get them there, but maybe this will help you. I think it’s fair to say and your assessment is right. We had a slow start to the quarter and we had mentioned that in our Q1 call. I will tell you, we saw improvement both in June and July.

So I will -- I think it’s important to note that. So we saw the improvement in June-July. Did we set it all properly? Did we put altogether? Then you add a bit of summer in our conservative planning and thinking around summer, the sort of beach product and summer product, which in hindsight probably served us well, given that bit of the weather.

So to be honest with you personally, I -- well we were within the range and I know your reference to past performance we actually feel good at where we came in, given how the quarter started, the trend shift that we saw and the improvement in trend that we saw in June and in July and where we’re today, I think we feel really good about the business..

Okay. And Tom you seem to be talking a little bit more about variability between categories, whereas maybe in the past I think we drew the conclusion that your performance across categories was pretty consistent.

Should we -- is there interpretation there that perhaps as consumers were introduced to your model, they shopped across the entire store and then when they return to your model they shop more within particular product categories and that explain the difference or is there something else going on there?.

It’s mostly age. I think you guys have worn me out. I’m trying to appease you guys and Farah, but she is doing a good job representing you. Now -- but here is what I’d say, our categories -- here is what I’d say as far as really being very consistent about our message.

We have in the past and we will continue to have variability amongst category that’s a good thing. This flexibility around the eight category worlds is what makes us special. So when one underperforms, the other steps in because it could be a preference that the kids are choosing to make.

It could be product that’s changing and I think it’s what speaks to the consistency and performance as you’ve seen over the last 33 quarters. What I think we’re trying to do, all joking aside, when I made the reference earlier, trying to give you some information to maybe help you better connect the dots.

But I will tell you there is nothing that I see in the overall mix of a business and the category/world performances that I’d say is in anyway inconsistent with our performance in the past or that I see anything that I’d conclude or draw a conclusion against future performance.

That I think is something we really need to make sure and really I welcome your suggestion, because that’s part of the reason why I choose at times not to comment on categories because I think it actually may confuse the issue.

We love when our customer shift, because that tells us that today’s category that maybe is underperforming is a great opportunity the next time the customer comes in or maybe even next year. And trends don’t happen in specific categories.

They change all the time and it’s that variety of offering, that excitement, and the breadth of offering that gives us the leverage and the engagement that we have with our customer, which drives consistent traffic and drives performance through transactions and traffic..

Okay. That’s very helpful. And just one last follow-up question, on the increasing penetration of direct import, can you give us some sense for how much that’s grown year-over-year and where you -- where do you expect it to move to over time? Thank you very much..

Yes, Michael, I think we’ve spoken before we’re coming off of last year where our import penetration was about 20%. We expect that to go up probably in the 25% range as we get through 2014. Actually we’re seeing bigger increases on the back end of the year in terms of that penetration, but those are estimates at this stage..

Okay. Thanks again..

Thanks, Michael..

Thanks, Michael..

And we will take our next question from Dan Binder with Jefferies & Company..

Hi, good afternoon. It’s Dan Binder. My questions were around merchandising.

I saw just some of the emails you’ve been sending out to customers, product like Frozen and Indoor Play Sand, some items I don’t think I’ve seen in the store before, I’m just curious, is that part of the product development work that you’re doing? Is there any emerging product theme much like we -- with rubber bands that you see coming out now or for holiday?.

Certainly rubber band is an item. It was a very meaningful and a business to us and product last year. Let me just address both of those. I think you -- by now you -- I think you will have seen and certainly you will start seeing some Frozen product in the stores. We’ve always been in the license business.

Licenses are a part of everyday part of Five Below, whether it was One Direction, whether it’s turtles, whatever the license maybe, and they always have a home inside the world’s of Five Below. From time to time you will see a license that spikes.

It’s conceivable that Frozen will get and we’ve seen some initial sort of reads on it, that could have more traction than an average license. But we don’t see it as a trend from an item spend point of view.

There is not item that I would is driving any type of numbers that in anyway similar to what the bands did as an item and that reference, let’s move over to the sand. Sand is an item you probably had seen everywhere. We just got into it as well with a $5 price point for our self. I’d probably say that the send item is a nice item for us.

It just hit the stores. It’s a nice item. Again, not an item with that I would in anyway at this point, put up against a rubber bands. Fact is there are many items inside Five Below today that have been around for quite a while, that are doing far better as individual items than even the Sand is doing, but it’s a nice item..

Can you remind us what the contribution or the estimated contribution from rubber bands was in Q3 last year?.

I will turn that over to Ken Bull. He has got the algorithm..

Yes. Hi. Again, not knowing what the ultimate impact of comp was in Q3 last year. I think we had mentioned before Dan in that few hundred basis point impact for last year in Q3..

Okay. Thank you. And well actually you did raise your sales guidance by, it looks like $6 million on the year, but you didn’t really beat it by that much on the quarter.

I’m just curious if you could reconcile that?.

I think you’re looking at performance of the new stores and non-comp stores. As we get through the year, we get a better gauge on where we think those stores will land towards the end of the year. So you’re seeing some of that improvement in that increase guide..

Okay. Thanks..

Thanks, Dan..

Thanks, Dan..

And we will take our next question from Christian Buss with Credit Suisse..

Hi. This is Sarah (indiscernible) on for Christian. Can you talk about your store density in the north east, the expansion of your distribution capacity, just high conviction that you can add to the store base in the markets you’ve already entered.

Can you provide some guidelines for how to think about store potential with that in mind?.

Let’s make sure we -- maybe break up into distribution, if I understood it correctly.

The addition of distribution capacity to the north east was that part of it?.

Yes..

Okay.

And then densification in that same market?.

Yes..

Okay. I think that it maybe a better way to look at real estate and densification in all our markets today. In every one of the states now we have our 22, 23 states now..

20 states right now. And in every one of our states that we were in, we believe there is densification opportunity. Pennsylvania was the first state that we were in. We continue to densify that markets still and we will be doing that.

I think there is an opportunity to densify across all markets and we really don’t get what I’m going to be report a breakout numbers externally, but identification opportunity by market we have the numbers out there and still a potential over the long haul in the 2000 range. The capacity need and this is something we discussed in prior calls.

Distribution capacity as you know we have a facility in the north east today.

Its roughly about 400,000 square feet, but when you consider the volume of some of the stores that we have as well as the opportunity for the number of stores that can serve up and down the east coast and while the facility is located in what we’d call the north east region, it really is intended to be our east coast facility and will handle stores over time as we continue to grow plus existing, that’s why we’re taking 700 and then growing to a 1 million square feet over time.

So more stores to come not only that market, but across all our markets..

Okay, That’s great. Thank you very much..

You’re welcome..

We will take our next question from Meredith Adler from Barclays. Please go ahead..

Hey guys. You mentioned one of the offsets to the gross margin was marketing, that there was less marketing spend in the second quarter.

Could you talk a little bit about what it was maybe you didn’t do this year that you did last year, and could that have had some impact on sales?.

Yes, we did see some kind of less spend as you compare Q2 this year versus last year. It was really more about some one-time kind of non-recurring expenses and marketing expenses in last year that we did not incur this year, but when you look at the ads and that’s really -- that’s the primary amount -- dollar amount of our marketing spend.

Our ad cadence was similar, if you look at Q2 this year versus Q2 last year..

It was really more around collateral that -- whether it was efficiency that we got, things that maybe we chose not to anniversary or not, but it had nothing to do with the cadence of ads as Ken mentioned, that was consistent sell wide..

Okay. And then I’m going to switch gears quickly and ask you a little bit about real estate. Are you seeing anything different than you have seen in terms of availability or the cost of real estate? And I know that in the past you have found that many different kinds of real estate work for a Five Below store.

Has that changed at all? Do you find that there are some locations, standalone locations, whatever, that you just really stay away from or are you finding success in all kinds of areas?.

It’s a great question Meredith. I think Meredith, we’ve seen obviously we continue to look at all options whether it’s existing space that vacates, whether its downsize opportunities, whether its companies that maybe close to us.

But as important given the fact that they really has it been as much development over the last few years coming out of the recession or the amount of real estate that was available.

I think what we’re starting to see more and more is also maybe some new construction that in a way, gives us opportunity to actually even look further ahead as we’re planning our store count for future years out. So I think a bit more of focus and emphasis and yield coming out of new construction, but the rest is pretty consistent.

If anything, I think our confidence has probably gone up a bit, now that we have so many stores across so many markets and the type of locations that’s actually work for us, smaller markets, socioeconomic profile, various.

But the only major difference I’d say is the fact that we’re actually starting to see some new development coming on board which is a good thing. Our prices are definitely not going down. .

Okay, great. Thank you very much..

You’re welcome..

And we move next to Matthew Nemer with Wells Fargo..

Hi. Thanks. Its (indiscernible) on for Matt. A few quick questions. The first is that you noted a solid back-to-school season.

If you could point to where you saw any strength in the back-to-school category? And also, was there a shift from Q2 into Q3 on the back-to-school, given either later start dates for schools or anything that you saw there?.

Really not -- we don’t break down the back-to-school business by categories. I think what we consider to be back-to-school and it does cross a few categories. We feel really good about the performance of back-to-school. With regard to the shift from July to -- or I will Q2 into Q3. I think (indiscernible) actually we’re talking about that just recently.

What we see with our seasonal businesses -- back-to-school specifically, we tend to be more of a closer to need retailer. So for us, back-to-school the amount of back-to-school business that we do in Q2 is actually not a very big part of the total back-to-school business. So it’s not a material number either way.

Its well back-to-school and the core of our back to school business is Q3..

Okay, thanks. And if I could just follow up on an earlier question about the import inventory that you guys are bringing in for Q4.

How does that -- how do we think about that as it relates to impacting gross margin starting in Q4, going into next year?.

Impacting gross -- really no impact on gross margin in Q4. Again, the reason to move up those deliveries was really a combination of two things. One to try to avoid any disruption in the supply chain and then just the increase in our penetrations.

But from a -- so we’re going to see those freight costs, some other things in Q3, but from an inventory standpoint don't see any changes in merch margins as we move forward..

Just to add to that again I know we’ve probably said it although and over again, part of our model, part of the DNA of what we do, part of what drives top line and repeat visits from our customers is a continual investments in our product.

So as we continue to get synergies, as we continue to get scale and benefits from our suppliers, our goal is to reinvest that in great products and to continue to wow customers which will drive the top line and that’s how we drive bottom line performance..

Great. Thanks so much..

You’re welcome..

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

Jeremy Hamblin from Dougherty. Thanks for taking my question. I wanted to come -- to ask a question about the new distribution center.

Given that it’s opening, I’d say sooner than most of us had expected, and be fully operational by the second half of next year, does that allow you the opportunity, if you found the right real estate becoming more available, to potentially accelerate your unit growth going forward, because you would have the infrastructure to support that?.

Yes, I think we look at distribution more from a long-term perspective. And I will tell you our growth to date I think has served us really well. It’s been aggressive enough that we really have I think delivered a very good return for our shareholders, for customers that look towards to have more stores in the marketplace.

Will there be capacity in the distribution center to handle more stores? Absolutely and that’s why we’re building it. I think for now though our goal is to continue to manage our growth in the way that we have to date. To continue to manage our performance, remember we could open more stores if we chose to even to date.

One of the approaches that we’ve taken to date that has really served as well was this need for us to deliver not only great results, but a great environment for our customers, associates that understand what Five Below is, not risk the culture of the Company as we enter new markets and we’ve this consistent performance.

I think we got to be -- we would probably think twice about accelerating our growth, but I think it’s fair to say from a capacity standpoint of view that new distribution facility will handle a lot of stores.

And I should -- I’m sorry, I should also mention in our store -- in our distribution in Olive Branch, obviously has room for lot more capacity as well..

It’s a perfect follow-up to that.

So if I look at the map on what these two DCs potentially could support, are we looking at something in the range of like 750 total stores?.

I think it’s definitely in the range..

Okay. And then, just one follow-up, Ken. You mentioned some additional expenses associated with the new DC that would be falling into 2014.

All of that is accounted for in your EPS guidance for the year?.

It is. And its primarily -- it’s really CapEx that I spoke about kind of initial outlays for some of the equipment there with obviously the expense coming on next year as we take possession towards the back half of the year..

Right. I was thinking just in terms of lease costs and so forth..

Yes, we won’t see any of those this year. That will all be in 2015..

Got you. All right, thanks so much for taking my questions..

Thanks Jeremy..

You’re welcome. Thanks, Jeremy..

And next we’ve Jennifer Davis with Buckingham Research Group..

Hey, guys. Good evening and welcome Joel. Congratulations on another strong quarter. I have a couple of quick housekeeping questions for you Tom.

Ken, how should we think about ending inventory at the end of 4Q? Should we think about it more like in line with comp trends?.

Yes, it is exactly. I mean what I spoke about was really some shift just from early Q4 and Q3, just really a few weeks of receipts and deliveries. But when we get to the end of the year, you should expect this back in line with what you’ve seen in the past from us around comp store increases..

Okay. Perfect. And then third quarter you gave, I think you said freight and occupancy deleverage would result in gross margin deleverage.

Should we think about merchandise margins as relatively flat?.

Yes. I think as we discussed before, really haven’t seen anything historically here and going forward in terms of the merch margins having any material change, so that’s pretty much the same for Q3..

All right. Thanks.

And then Tom, I was just wondering if you could elaborate on the product or the merchandise that you are excited about coming in later this quarter and early next year? I guess, without giving away too many trade secrets or competitive secrets, is it new categories, expanded categories, upgraded products or all of the above?.

I would say -- I think it's fair to say that it’s both new upgraded products and maybe some expansions within certain categories. But no new categories, per se, at this point, but I think there is an impact in quite a few of the categories. It’s fair to say it will be noticeable..

Okay, all right. Great. Thanks and best of luck..

Thank you..

Thanks, Jennifer..

We take our next question from Patrick McKeever with MKM Partners..

Thanks. Hi, guys. Just on the fourth quarter last year, you had a number of weather-related store closures, and reduced hours, and that sort of thing and as you plan for this year’s fourth quarter, how are you thinking about that? I’m assuming you kind of did a pretty deep dive to assess the impact on the business.

I can’t remember if you quantified the impact to same-store sales in the quarter, but there was a pretty big step-down from the third quarter of last year into the fourth quarter, when you were just slightly positive.

So just, I guess the short question is, can you quantify the impact of the store closures and reduced hours on the comp from the fourth quarter of last year?.

To be honest I don’t recall exactly what we have put through..

I think what ….

I remember we can just get back..

Yes, Patrick only look at last year, I mean obviously the performance, the flat comp performance there versus where we thought going into the quarter was really driven by the weather.

And I think one of the -- kind of facts that we put out there was 90% of our stores where impacted by weather in Q4 being it went through the Midwest, mid Atlantic and Northeast regions.

So I don’t know if we really put it down and put it down to a specific number, but really the -- we felt the entire decline in performance was driven by that the weather impact..

Okay. And then just on -- I know you don’t want to -- like to talk too much about the different products in the store and whatnot, but one of the things I feel like I’m seeing more of is apparel, like yoga pants and activewear, and even broadening assortment of socks, and maybe not T-shirts, so much. But I just feel like I’m seeing more apparel.

So the question is, is that true, number one and then how is that doing for you? Is that a change in strategy?.

At the core of the strategy is intact which is understand trends, look at trends, look at what drives those trends, jump on them fast and focus on the key items that drive a lot of business for us. So fundamentally it is not a strategy change that we’re getting into the apparel business.

There is a lot risk associated with the apparel business and that’s not something we all about deleveraging the risk associated with teen and preteen retailing and the way we do that is two ways. One, we’d only trends we follow and second we got after key items that really make up the bulk of the business.

So part of what you’ve seen is a trend that’s out there around this whole issue of leisure and a nice I think effort on the merch and PD team to jump on something to see what we can do with it. But no more questions on that..

Yes, yes. It looks great by the way..

Item specific and if you notice, the key again is for us to focus on things that matter as opposed to trying to cover all bases for our customers..

Got it. Okay. Thanks, Tom..

You’re welcome..

And we will take our last question from Paul Trussell with Deutsche Bank..

Hey, good afternoon guys. Just a quick follow-up to Patrick’s question on the fourth quarter, as we look forward -- and I apologize I don’t have -- I’m traveling, I don't have the model in front of me.

Ken is it fair to say that the fourth quarter comp expectation that’s based into the full-year view is around a 5%, 6% comp or just wanted to get clarity on what's implied in the full-year view..

Yes, I think if you look at where we’re today, we’re at a 4.6 comp through the first two quarters. We are guiding to a flat to slightly positive in Q3 and then a full-year comp of 4, the implied comp is really in the range you just mentioned. And that mid single-digit range fro Q4..

Right. Okay. Fair enough. Thanks and good quarter..

Thanks, Paul..

Thanks Paul..

With that, thank you all. I appreciate and let’s speak to you at the end of Q3. Thank you operator..

Thank you. And ladies and gentlemen, that does conclude today’s conference. We thank you for your participation. You may now disconnect. Have a great rest of your day..