Five Below, Inc. (FIVE) Q2 2018 Earnings Report, Transcript and Summary

Good day, and welcome to the Five Below Second Quarter Fiscal 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Christiane Pelz, VP of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and thanks for joining us today for Five Below’s second quarter 2018 financial results conference call. On today’s call are Joel Anderson, President and Chief Executive Officer; and Ken Bull, Chief Financial Officer and Treasurer. After management has made their formal remarks, we will open the call to questions. I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and Five Below’s SEC filings. The forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward-looking statements. If you do not have a copy of today’s press release, you may obtain one by visiting the Investor Relations page of our website at fivebelow.com. One quick housekeeping note, last year was a 53-week fiscal year, which shifted this fiscal year’s quarters by one week. Ken will review this shift in his remarks and please see our press release for more information. I will now turn the call over to Joel.

Thank you, Christiane, and thanks everyone for joining us for our second quarter earnings call. I will review the highlights of the quarter before handing it over to Ken to discuss our financials and outlook, and then we will open the call for questions. We are very pleased with our second quarter performance. Sales, comps and earnings, all outperformed and surpassed the high end of our guidance. Total sales increased 23% to $348 million, driven by continued strong results from our new stores and a comp of 2.7%. Earnings per share grew 50% to $0.45. As you know, we’re up against an incredibly successful second quarter last year and I’d like to take a moment to acknowledge this quarter’s achievement and thank all of our teams from stores, and distribution to our entire home office who work tirelessly together to make these results possible. The strength, consistency, and flexibility of Five Below is reflected in our results and gives us further confidence in both our 2500 plus store potential and ability to achieve our 2020 through 2020 plan. The biggest driver of our growth continues to be our new stores and the performance by our new stores remains strong. During the second quarter, we opened 34 new stores in diverse markets across a range of 17 states. Nine of these stores made it to the top-25 all-time summer grand opening lists. We also entered Arkansas, our 33rd state. We believe the success of our new stores across geographies and markets is a testament to the universal appeal of Five Below. In the first half of 2018, we opened a total of 67 new stores representing just over half of our planned 125 store openings for 2018. Our real estate team continues to execute at a very high level finding great locations in vibrant shopping centers with solid traffic while our construction, design and store opening teams do a terrific job preparing the stores to open. In Q3, we are planning on opening approximately 50 stores. This would be a record for us and we have already opened 17 of them. Two weeks ago, we opened our 700th store in Glendale, California, which was also our 25th California store. Moving on to comp, you will recall in Q2 of last year, we delivered a very strong transaction-driven comp of 9.3%, our highest quarterly comp since going public. We challenged ourselves to comp the comp this year and are thrilled with our second quarter results. Once again, we experienced broad based performance across our worlds led by Tech, Handy, Create, Style and Room. Our merchants infused the stores with fresh, trend-right summer products across departments at incredible values and our customers responded. We’ve previously talked about three broad types of trends in our business. First, crazes like Spinners, second, brands and licenses like Frozen and Star Wars, and third, constitutes a very core of Five Below, relevancy. And as we’ve said, we embrace all types of trends, because each can drive transactions and sales, increase brand awareness and build our customer base. Trends bring in new customers who discover the terrific value and amazing store experience of Five Below for the first time, who then make a return visit to our stores and join our loyal customer base. While we will not have a craze or license trend in every quarter, we will almost always have relevancy trends such as slime, squishy, spa and mermaid which continued in the second quarter this year. Our growing scale and improving merchandizing capabilities enable us to quickly identify trends and the diversity of our eight worlds allows us to capitalize on many different trends, large and small that our teams effectively manage. Flexibility is indeed a key strength of our model. With respect to marketing, our teams remain focused on attracting new customers, as well as keeping our existing customers coming back. As we grow, we continue to optimize both our marketing dollars and media mix to increase brand awareness and drive traffic, engagement, and repeat visits. In Q2, in addition to our traditional print circulars, we ran a successful summer TV ad in markets covering about 40% of our stores, a significant increase from the approximately 25% of our stores we covered in Q2 last year. We also continue to test various mobile and social media campaigns and expand our digital capabilities. We are pleased with what we believe is the increasing effectiveness of our overall marketing programs as our brand awareness that we have measured in the same 56 markets for several years continues to grow year-over-year. As we expand our footprint across the country, we continue to focus on having the right people, systems, and infrastructure in place to support our growth while keeping execution at a high and consistent level. Last quarter, we discussed the acceleration of the POS implementation to be completed this year before the holiday season and also announced plans for our southeastern DC to be completed in the spring of 2019. I am happy to report that both of these initiatives remain on track. On the people side, we are excited to announce that Rob Feuerman has joined Five Below in the newly created position of CIO. Rob joined us recently from a senior executive role at the Gap and he brings years of retail and consulting experience. He also founded two successful startups. We believe his entrepreneurial mindset and ability to scale retail businesses are a great fit for Five Below. As we continue to grow, we look forward to Rob leading the IT function for us. Now, a few words about Q3 and the back half of 2018. The stores look fantastic and have been merchandised for the back-to-school season with new fashions, as well as dorm, room, and locker got to haves to wow our customers. Next week, we began our transition to fall, with newness and wow across all our worlds. While we continue to deliver amazing products, we also look for ways to innovate and elevate the customer experience. An example of this is the weekend in-store event program we introduced this year and plan to continue throughout 2018. For instance, we celebrated Mother’s Day with a treat mom to a spa day event. We created [fantastic] [ph] fun with our teens and tweens throughout the summer season and we recognized dads with some of our coolest, trendiest Tech and Game Gear. Our purpose is to provide the best in-store experiences by creating moments and memories for shoppers and associates to let go and have fun and these events help them do just that. Another example of innovation is our new store format that we began to rollout in 2017. The changes improved our store look and feel and created an even more inviting and fun atmosphere for our customers. We believe the strength of this new format has contributed to the class of 2018 that’s currently on track to be the strongest class we have ever opened. We are now building on the successful new store format by remodeling about a dozen of our older stores. With these new store elements and perfecting the process before we rollout an expanded remodel program next year. We remain firmly focused on executing our growth strategy for Five Below stores and also strongly believe that trend identification, innovation and reinvention are key to remaining relevant with our customer base. Let me add some additional thoughts about trends. We have shared with you several relevancy trends that we have successfully chased year-to-date. We are beginning to see the emergence of a toy trend in our stores resulting from the displacement of Toys"R"Us. We shared on the last call that we have had expanded dialogue with several toy vendors and we believe the product we have secured is very strong. You will begin to see an expanded toy selection in our stores this month and we will assess this trend throughout Q3 and provide you with a forecast for Q4 on our next earnings call. While Toys"R"Us is no longer in the market, families are searching for new toy destinations and we are excited to serve that need. This is one example of how you should expect us to continue to innovate and elevate the Five Below customer experience this year and in the years to come. In summary, we are extremely pleased with our performance thus far in 2018 and we believe we are well positioned to keep the momentum going through the remainder of the year. We are firmly focused on both the third quarter and the all-important fourth quarter. We look forward to engaging our customers with marketing programs that draw them into our stores to delighting them with amazing new products at incredible value across our eight worlds and to delivering the fun shopping experience that is so very special and unique to Five Below. With that, I’ll turn it over to Ken. Ken?

Thanks, Joel, and good afternoon, everyone. I will begin my remarks with a review of our second quarter results and then discuss our outlook for the third quarter and full year. Before I review our results, I want to remind everyone of this year’s calendar shift due to fiscal 2017’s 53rd week. This calendar shift which is contemplated in our guidance resulted in additional sales in the first and second quarters of the year and were largely reversed in the third and fourth quarters. Now I will review our second quarter results in more detail. Our sales in the second quarter of 2018 were $347.7 million, up 22.7% from $283.3 million reported in the second quarter of 2017. Sales for the quarter included approximately $7 million in additional sales related to the calendar shift, which was included in our guidance. We opened 34 new stores during the quarter, compared to 31 opened in the second quarter of 2017. We ended the quarter with 692 stores, an increase of a 108 stores or 18.5% versus 584 stores at the end of the second quarter of 2017. Through the second quarter, we've opened about half of our planned new stores for 2018 compared to about 60% in the first half last year. As Joel mentioned, our new stores generated another quarter of very strong performance and the class of 2018 is currently on track to be our highest performing class of all times. Comparable sales increased by 2.7% for the second quarter of 2018, which was driven by an increase in comp average ticket with a slight decrease in comp transactions due to anniversarying the spinner trend from last year. As I mentioned on our last earnings call, we expected about a 100 basis points of operating margin deleverage in the second quarter on the expected flat comp, the start of our announced tax reform reinvestments in SG&A and difficult gross margin comparisons from the spinner sales in Q2 last year. However, given our sales outperformance from both comp and new stores, operating margin for Q2 2018 delevered by approximately 50 basis points over Q2 last year with better than expected results in both gross margins and SG&A rate. Gross profit for the second quarter increased 23.6% to $121.8 million from $98.5 million reported in the second quarter of 2017. Gross margin increased by approximately 20 basis points to 35%. This increase was driven primarily by occupancy cost leverage on the higher sales. As a percentage of sales, SG&A for the second quarter of 2018 increased approximately 80 basis points to 26.3% from 25.5% in the second quarter of 2017. SG&A expenses as a percent of sales were higher than last year due primarily to the tax reform-related reinvestments mentioned earlier. Operating income increased 15.7% to $30.4 million or 8.7% of sales from $26.3 million or 9.3% of sales in the second quarter of 2017. Our effective tax rate for the second quarter of 2018 was 20.2%, compared to 36.7% in the second quarter of 2017. Our tax rate was favorably impacted by lower rates from tax reform which was included in our guidance and the accounting for stock-based compensation, which as is our practice was not included in our guidance. The impact to the second quarter stock-based compensation accounting was an increase in earnings per diluted share of approximately $0.03. Net income increased 49.1% to $25.1 million or an increase per diluted share of 50% to $0.45 from $16.8 million or $0.30 per diluted share last year. We ended the second quarter with $266 million in cash, cash equivalents and investments and no debt. Inventory at the end of the second quarter was $228.1 million, as compared to $184.5 million at the end of the second quarter of last year. Average per store inventory at the end of the second quarter of 2018 was approximately 4% higher versus the second quarter last year primarily due to the timing of direct import receipts related to the 53 week calendar shift. As a reminder, we take ownership of direct imported goods earlier as we record in-transit inventory on our balance sheet when goods leave the overseas ports. Now, I would like to turn to our guidance. As a reminder, our guidance does not include any impact from stock-based compensation accounting or share repurchases. We will report the impact, if any, with our actual quarterly results. For the third quarter ending November 3, 2018, net sales are expected to be between $301 million and $304 million, an increase of 17% to 18% over Q3 2017. This sales assumption includes the opening of approximately 50 new stores, as compared to 41 new stores in the third quarter of 2017. We are assuming a comp sales for Q3 2018 of approximately 3% to 4% versus the 8.5% comp in Q3 2017. With regards to operating results for Q3 2018, we expect operating margin will deleverage by over a 100 basis points from Q3 last year, due primarily to our tax reform-related investments. While we typically do not comment on future quarters, I want to point out that we expect operating margins to continue to delever in Q4 by over a 100 basis points driven by our tax reform-related investments and deleveraging certain fixed assets on an implied low single-digit comp. The expected operating margin decline in Q4 is roughly evenly split between gross margins and SG&A. Net income for Q3 2018 is expected to be in the range of $9.7 million to $10.7 million, or $0.17 to $0.19 on a per diluted share basis. For the full year 2018, we are raising our sales guidance which we expect to be in the range of $1,528 billion to $1,540 billion, an increase of 21% to 22% over 2017 on a comparable 52-week basis. Comp guidance for the full year increases to a range of 2.5% to 3%. We continue to expect to open approximately 125 stores to end fiscal 2018 with about 750 stores, an increase of roughly 20% as compared to our 2017 ending store count of 625. We expect an effective tax rate of approximately 22.5% for the full year, which includes a normalized quarterly tax rate of 24.5%, for the second half excluding any go-forward impacts of stock-based compensation accounting. Our net income outlook has increased and is expected to be in the range of $141.7 million to $144.9 million or growth of 41% to 44% over 2017 on a 52-week basis. Diluted EPS is now expected to be in the range of $2.51 to $2.57 or growth of 39% to 42% over 2017 on a 52-week basis, compared to our previous EPS outlook of $2.42 to $2.48. With respect to CapEx, we plan to spend in total approximately $130 million gross expenditures in 2018, reflecting approximately a 125 new stores with the remainder projected to be spent on our new Southeast distribution center, our existing store base and corporate infrastructure. For all other details related to our results and guidance, please refer to our earnings press release. And lastly, before I turn it over to Joel, I’d like to say a few words about the current and proposed tariffs on products from China which are expected to have a far reaching impact across the retail industry. The tariffs already implemented on $50 billion of Chinese goods are not expected to have a material impact to our business or our results. While there is still uncertainty around the implementation of an additional $200 billion in tariffs, we do not expect these additional tariffs to have a material impact on fiscal 2018. We have been working closely with our vendor partners on options to mitigate the impact of these potential tariffs including changing products, pricing and sourcing. Additionally, there is the possibility that certain products currently included in the proposed tariffs may be excluded. We will continue to monitor developments closely and pursue opportunities to help mitigate any impact. And with that, I would like to turn the call back over to Joel to provide some closing comments before we open it up for questions. Joel?

Thanks, Ken. We’ve had a terrific first half with broad based strength across our business. The teams are executing at the highest levels as you can see from our new store performance, comp results, and profitability metrics. We believe we are ready for the second half with a great line-up of products for the holiday season. We will continue to leverage our growing scale and deep vendor relationships to innovate and reinvest in products to offer even more value, newness and wow to our customers. We firmly believe our edited assortment of exceptional value products, combined with our amazing store experience is what differentiates Five Below. It keeps our customers excited to come back. Once again, I want to thank the entire team at Five Below who are working so hard to deliver the results that we are so proud to share with you today. I know I have said this before, but I have to say it again. It is truly an amazing time to be part of the Five Below family. Five Below is a unique retailer and brand that is on a mission to help make life better for our customers, so they can let go and have fun. With that, I will turn the call back to the operator for questions. Operator?

[Operator Instructions] Our first question comes from Edward Kelly with Wells Fargo. Please go ahead.

Hi, good afternoon, guys, and a nice quarter. Joel, could we start, I want to ask you about the acceleration in the underlying comp momentum and obviously a pretty remarkable numbers on a two and three year stack basis. The consumer is very strong, but you have a younger consumer. How much of the acceleration do you attribute to macro versus underlying brand continuing to gain momentum or other things in the business like you mentioned toys I guess? And then, the second part of this question that I wanted to ask you about is, as we think about the outlook for the back half of the year and particularly around the fourth quarter, your guidance seems to imply some deceleration around Q4. I am just wondering is that conservatism? And generally how you are feeling about the holiday period?

Thanks, Ed. I appreciate the comments and thoughts. As it relates to comp, we began to see that acceleration in Q2 as we lapped the spinners from last year. And that is now obviously continued into Q3 as you can tell by the guidance we just shared with you. It’s hard to estimate honestly, Ed, how much of it’s macro versus what we are doing internally. But what I would allude to for you is that, I shared with you five different worlds that really drove the comp and so what that would lead us to believe is that, the merchandize teams are doing a great job chasing trends and keeping our business really relevant. So, I would say overall, while the retail sector is strong, we really feel great about our momentum and what we are doing to drive business. We’ve said many times, we believe half of our traffic is self-generated and half is living off the traffic that’s in a vibrant center. So, we are probably driving the majority of it. But it’s not lost on us that retail is strong right now. As for the outlook on Q4, this is really our guidance on Q3. I shared with you some comments on toys and that emerging as a trend in our stores. Having been in the toy business a long time, Toys"R"Us, summer is a really soft time for toys. It's really too early for us to be speculating on Q4. So what’s implied in our guidance is really our original guidance for Q4 and then as we get through Q3 here, assess what's happening with the toy trend, as well as our other trends when we get back on the call with our Q3 results, we’ll update our Q4 guidance. Thanks, Ed.

Thank you. Very helpful.

Yes, I appreciate it.

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

Great. Congrats on a nice quarter.

Thanks, Matt. What can I do for you today?

On the gross margin side, I guess any update to your relatively flat forecast that was – that you guys gave at the beginning of the year and just how best to think about the gross margin headwinds versus tailwinds embedded in the back half?

Yes, Matt, as you remember, we provided our guidance at the beginning of the year. One of the key elements this year was where our investments in the tax reinvestments are at which are actually down in SG&A. So that’s really driving kind of the overall implied operating margin deleverage for the full year. With regards to gross margin, again, we had some significant beats in Q1 if you remember around some leverage, some incentive comp and some California entry that we had last year that we didn’t have this year. And then you saw, we were able to lever this quarter in Q2, up against the 2.7 comps and then as we move forward, relatively flat in Q3 and then again, we are not guiding out to Q4. But I did mentioned to you that we expect overall operating margin leverage to delever in Q4 and that being split pretty evenly between gross margin and SG&A. And I think that’s where what that gets you for the end of the year is pretty much a flat gross margin overall.

Great.

Thanks, Matt.

Thanks.

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

Hey, John.

Hey, Joel, I wanted to dig – hey, how are you? I wanted to dig into the toy opportunity a little bit. So do you yet have an idea whether you think that's a temporary or permanent addition of assortment, that’s number one? Number two, how extensive might that be, right, is it’s going to be a couple hundred items? Where does the space come from, right, if it's more permanent? And I guess just lastly, how do you think about changing marketing this holiday try to pick up the displays Toys"R"Us shoppers?

Honestly, yes, great question, John and it’s why we alluded to it in our prepared remarks. We think of the toy opportunity just like we think of any other trend. And so, certainly while this trend emerged largely due to the displacement of Toys"R"Us. It’s – there are customers out there looking for new toy resources. And so we largely think of this as permanent. There is going to be out looking – there is a lot of retailers leaning in on this space and I think the value of this brand is the flexibility we have with the eight worlds. And we’ve been in the toy space always before. You know it’s heavily weighted to fourth quarter and so, while, I think it’s largely a fourth quarter play it’s something that will be permanent year-over-year. So, I think as customers are looking for new retailers, we are going to be in the selection criteria for it. As far as where the space comes from, we’re constantly shifting our space. You will see it largely this year come out of our license businesses which are softer this year over last year. And we’ll tweak our marketing to focus more on toys this fall than we have in the past. But overall, we think of it as permanent and – but at the same time, I’d tell you John, it’s a little too early for us to speculate on what it’s worth to us and we will give you that guidance when we get to Q4 or it will be our Q3 earnings call. I’ve been in the space a long time. We’ve got to watch what happens in the fall here, from that, we will be able to triangulate on what it’s worth to us in the fourth quarter. That answer your question?

Yes. Yes. Thank you.

Hey, thanks, John. Appreciate the sport.

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

Good afternoon. I’ll give my congratulations, as well. Just wanted to ask about the cadence of the comps through the summer months and if you could speak on back-to-school, and how you approach that season, versus prior years and the results on that, as well as if there is any particular categories or products that drove the outperformance versus your expectations in 2Q that has led to your strong 3Q comp guidance?

Yes, Paul, thanks. Largely, it was really broad based outperformance. I called out five different worlds and really the health of all our worlds is very strong right now. As far as the cadence go, we usually don’t get into in a quarter, but obviously, as we got through the peak of the spinner trend we continued to see our comps improve. The guidance we’ve given you for Q4 – or for Q3 here would tell you that we expect that trend to continue. Many people asked this last year when we were just getting through the spinner trend, just one and done and through several surveys we did with our marketing department, we attracted a lot of new customers through the spinner craze. We’ve had several trends emerge since then. Slime and Swishy and Spa, affectionately known as of the S trends, all of those bring in new customers. So you come around the horn a year later Paul, and we continue to have strong momentum largely driven from the spinners, but also many of the other trends that Michael and the merchants have chased and that will continue here into the Q3 as you can see by our guidance.

Thanks.

Oh, yes, and Paul, you asked about back-to-school. This year we focused on more dorm-related products than the traditional needs-based product and that’s really who we are. We are a trend store, we are a treasure hunt for kids and the customers really responded nicely to that new assortment we’ve brought in. Thanks, Paul.

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

Hey, thanks guys. Great quarter. Just a question, you spoke to it on the brand awareness in your prepared remarks. Just want if you could share with us where you are on that statistic based on your study? And then, looking ahead to 2019, again, you touched on your prepared remarks just to remodel, have you thought about the number that you think you could target and what you think the potential lift could be? Thanks a lot.

Yes, thanks, Chuck. On the first one, brand awareness, the specific number is it went up to 61and that’s over the high 50s from last year. So it continues to grow year-over-year up from mid-40s a little over – or about three years ago. So, it’s climbed from mid-40s to now tipping over 60. And just to remind everybody that refers to the core 56 markets that we’ve have the long tenure to history on – it does not refer to newer markets as they get into the fix into the fold. And then, as far as remodels go, it’s too early. We are still finishing up. We got about a half dozen more that will remodel this in Q3 here. We did about half in Q2 and half in Q3 and we need to get those up and get to holiday season before we kind of speculate on the official program for 2019. But safe to say, we like what we are seeing and you should expect us to see an expanded remodel program next year. We just need some more time. Thanks, Chuck.

And our next question comes from Sean Kras with Barclays. Please go ahead.

Hi guys. Thanks for taking my question. I guess, I have some questions on TV advertising. Joel, you indicated that you're pleased with TV in the quarter. Are you considering testing a small level of TV advertising in – like the first quarter perhaps the third quarter? Or is it just too low of an ROI at this point? And secondly, I guess, just your plans for the fourth quarter this year. Are you thinking about expanding coverage beyond the 40% you did last year?

Yes, thanks, Sean. Let me just take the off-quarters first. At this point in time, we are not considering Q1 or Q3 largely for what you called out, the ROI. It’s not to say, some day we won’t. Right now, we think there is a bigger opportunity to continue to grow the percent in Q2 and Q4. I think what you’d see from us first at some point in time we’ll flip to a national and we're a ways away from that. But that – we go that direction before we would go towards the direction of adding Qs one and three. As far as Q4 goes, we haven’t nailed down the exact percent. It’s pretty safe to say it will be higher than last year. We are very disciplined in our TV growth. We look at ROI on a DMA-by-DMA and largely studying A to S ratios, advertising-to-sales ratios. And the marketing team is really kind of going through all the DMAs which we’ve grown enough stores in and then that will determine how many markets we do for Q4. But it will be higher than last year’s number. Thanks, Sean. Appreciated.

Okay, thanks, Joel.

You bet.

Next question will come from Paul Lejuez with Citi. Please go ahead.

Hi, this is Kelly Crago on for Paul. Thanks for taking my question. I just wanted to circle back to the toy opportunity. You’ve seen a pretty nice upgrades across the toy assortment over the last couple of years. So, could elaborate a bit more on what you mean by the expanded assortment? Are you seeing more willingness for vendors to offer you products that they wouldn’t typically sell at $5 price point? Just any color there would be great.

Yes, thanks, Kelly. It’s a combination of both. We are certainly seeing a lot of the closeout opportunities and are in the market for closeouts and continue to pick those up as the toy vendor community sees us as an opportunity for that. But we are also seeing, regular price goods at – bigger opportunity, broader opportunity, now with 750 stores, the vendors see us as a real solution to sell lot of toy products. And as far as space goes, I may have alluded to it on a couple calls before, but we plan to expand that. It’s probably in the 15 foot range, expansion over last year. And largely in there where we had licensed products last year. But we are excited about toys and we are excited about the goods we are getting and both on the closeout side, as well as on the every day, be with us forever lot of business in the collectibles.

Great, thanks. And then just, my second question is housekeeping questions for Ken. Could you quantify the calendar shift benefit in the second quarter and what new store productivity will look like excluding that shift and then also how we should be thinking about new store productivity both excluding and including the calendar shifts in the back half of the year? Thank you.

Sure. Thanks Kelly. For Q2, you probably, if you did your math, there you probably came up with a number of, north of 100%, probably close to a 107%. And if you take into consideration both the 53rd week shift and the adjustment for operating weeks, we still finished Q2 above a 100%. And then, if you look in the kind of the back half of the year, the numbers that we guided to for Q3, it shows and it applies a lower productivity in the mid-70s. But if you adjust that for store operating weeks and for the 53rd week shift that’s going to occur in Q3, you will get to a number north of 90% and then the back half will come in – the entire back half will come in north of 90%.

All right. Thanks, Kelly. We got to keep moving.

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

Hi, Brad.

Yes, hey good afternoon everybody. Great quarter here. I know it’s little early, but I was hoping for any thoughts on margins for 2019 as we are fine tuning our models, particularly with the new distribution center opening. Thank you.

Yes, well, Brad it is early for that, but – and we’ll obviously provide color on our year end call. We give our guidance for 2019. But the one thing I can say and I think Joel mentioned it in his prepared remarks is, the 2020 until 2020. I mean, that’s still out there and that implies obviously a certain level of growth in the top-line and level of growth on the bottom-line. But, there is going to be puts and takes in certain years and we did talk about a new distribution center coming up in 2019. But we will get to more detail on that as we get closer to the end of the year and provide that later.

That’d be great. Thanks, Brad.

Thanks, Ken.

Thanks.

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

Good evening. Thanks a lot for taking my question. So, given the comp performance and what seems like becoming – the model becoming a little bit less dependent on hot products or trends, because you did anniversary the fidget spinners. Do you have any better visibility or understanding into what the ultimate productivity per box might look for a while whose thoughts maybe $2 million presumably you have a number of stores that are doing a lot more than that. So, how should we frame and over the long run, how productive each and every Five Below store might look like?

Yes. Michael, great question and not to dodge it, but I would tell you, it’s something you know, we will probably give more color on as we start to think about the Five Below long range story beyond 2020. Right now, I think the best way, Ken said in the last call, 2020 through 2020 is still live and we believe in it and we grow that top-line and the bottom-line. When we went public, the stores were around 1.5. We just came through a run of four consistent years and right around 1.9, since we’ve rolled out the new refreshed concept, we broke $2 million for the first time last year. As I shared with everyone on the prepared remarks, this is going to be our strongest class yet which would imply even stronger than $2 million. It really is a little too early to speculate on what the long range ultimate number is. And the reason I say that is, Michael, we could tamp that number down if we decide to ramp up the number of stores we open in the US. So, it is a lot of different ways to get at it and the answer is now it just – let the individual store productivity continue to grow. What I would also tell you is, our marketing team is getting better. Our merchants are way stronger in identifying trends. We just came out of a quarter, I called out five different worlds. So, it’s really broad based and then you layer in the store operation teams delivering consistency. You put all together and it’s just kind of feeds the productivity loop. But ultimately, what I would tell you is there is more room for growth and we just need to look at that when we get beyond the 2020 goals. Thanks, Michael.

Okay. Thank you very much.

You bet.

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

Hi, guys. Thanks for taking the question and congrats on the quarter. One more focused on the margin side. Congrats also on not even mentioning freight or labor headwinds. There is a lot of people are talking about. Is it something that is just less impactful given how well the business is doing? You did call out kind of talent availability in the press release? Are you seeing actually having an easier time finding people work at Five Below these days?

Yes. Why we didn’t call it out, it’s largely due to our scale and growth that we are able to mitigate all that. By no means should that not be sending you the message that it’s out there. We are aware of it. Our distribution teams are focused on it. The operating teams are focused on it. And as we continue to increase our productivity, it's been able to-date to largely mitigate that from that perspective. Was there something to begin - what do you ask about gross margin?

Well, it’s freight.

Oh, freight margin, yes.

Yes, the freight piece of it. Judah, the – yes, we are seeing inflationary trends in freight just as everybody else is, but to Joel’s point, we watch it closely. But we do have the ability to mitigate some of that with our increased scale. So, you don’t hear us talking about it a lot. We don’t consider it to be, at this stage, a material impact to the business and again, obviously it’s included in a guidance that we’ve provided for the year.

Thanks, Judah.

Thanks.

The next question is from Vincent Sinisi with Morgan Stanley. Please go ahead.

Hi guys. This is actually Michael Kessler on for Vinnie. Thanks for taking my question and congrats on a great quarter here. So, I wanted to ask about…

Hi, Michael.

Yes, yes. I wanted to ask about your California expansion, now that you guys have these 25 stores in California now. Curious kind of how those have been performing relative to your expectations and other new markets you’ve expanded to? Kind of where brand awareness is now relative to other markets? And do you still view California as the biggest potential market across the country? Thanks guys.

Yes, thanks. Michael, the initial wave at California store is literally went comp, like four weeks ago. So, it’s really early on that to speculate. As I said in my prepared remarks, we just opened our 25th store. We’ve got several more in the pipeline for 2018. We are leaning in hard on 2019. Brand awareness is extremely low out there. I mean, we jumped all the way to California with a lot of empty states in between. So, we didn’t carry in strengths like when we went into Florida. But we’ve been to that before. We went to that – when we went into Texas, when we went into Chicago, it’s largely the same amount of trend we’ve seen in the past. But there has been no signs that we are backing off California. We are excited about it. We are concentrating largely on Southern and Central California. And we expect that we will really double our growth in year one there. So it’s a strong market for us and we will continue to grow. Thanks, Michael.

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

Good afternoon guys. How are you?

Thanks, Scot.

So I know you guys are early in the – too early in the remodel process coming on the results side of it. I was wondering if you might be able to talk about the cost side, because I know that was something you guys had talked about trying to work on, et cetera. So, specifically, where are the costs now for a remodel and having done a handful, where do you think those costs could go over time? Thanks.

Good question, Scot. It’s a little early on that. Well I’ll tell you we’ve made significant progress and the store operating teams have done an amazing job as, last year, when we were trying to figure out remodels, we closed a store for a month. We now don’t close the stores at all. And they are only taking less than two weeks to complete. So, made great progress in the length of time and now no longer closing the stores. And as far as the absolute cost and where it’s going to land, we’ll put all that together and have that for you guys in 2019. But, I think what I am signaling to you is, being able to not close the store, being able to do it in a shorter period of time, the disruption piece of it is significantly less than it was a year ago and we really like the results we are seeing. We just need to get to a point where we can quantify the number of stores and what the absolute cost will be.

Understood, thank you.

Yes, thanks, Scot.

And our next question comes from Patrick McKeever with MKM Partners. Please go ahead.

Okay, thanks. Joel, I am just trying to visualize a little better the toy opportunity that you are talking about for the back half of the year. The additional square footage, I think you said, 15. Is that linear square feet or linear feet?

Yes.

And then, what kind of – maybe it’s just we have to wait and see, but wondering if you might just talk about what kinds of toys and then, just thinking – I mean, would you, with this opportunity that has presented itself with the Toys"R"Us shutdown, would you consider putting toys into the store north of the $5 price point? Or is that sacred so to speak and something you just don’t want to mess around with?

Thanks, Pat. Look, we’ve done this year in and year out and I think the first year I got here was frozen and we expanded frozen from an end cap a whole 12 to 14 feet. We then did Star Wars. It’s kind of been one after another and clearly, this opportunity at toys, customers are coming to us as a destination. We’ve had great partnerships with the toy vendors out there. I really thank them a lot. They’ve been leaning in. the dialogue with our merchandizing team has been fantastic. And so, we see it as a great opportunity. We are a kid store. We are not going to concentrate on the infant pre-school toys. We got an offer to buy diapers the other day. Guess what, we passed on it. So, we are leaning in on our sweet spot and range of kids. And then, finally on that price point piece, I think anything on the table nothing sacred. But at this point in time, we really are seeing a lot of great product that still is in the under $5 price point and we are going to keep chasing that and we got great relationships and there is no reason to have to change that strategy at this point. Thanks, Patrick.

And this will conclude our question and answer session. I would like to turn the conference back over to Joel Anderson for any closing remarks.

Thanks everyone for joining us today. We look forward to seeing you in the stores. I really appreciate all of your support of Five Below. It’s truly been a great first half of the year and we are looking forward to bringing on a great 2018. Thanks and have a great day.

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