Good day, and welcome to the Five Below Third Quarter 2020 Earnings Conference Call. [Operator Instructions]. I'd now like to turn the conference over to Christiane Pelz, VP of Investor Relations. Please go ahead.

Thank you, Cole. Good afternoon, everyone, and thanks for joining us today for Five Below's third quarter 2020 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 our SEC filings. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements. If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our Web site at fivebelow.com. I will now turn the call over to Joel.

Thank you, Christiane. And thanks everyone for joining us for our third quarter 2020 earnings call. Before I turn to our quarterly results, I want to make some general comments about the business. The third quarter was an amazing one for Five Below with results that surpassed our expectations. It was the first period in 2020, which our stores were open the entire quarter and we saw a strong customer response to our offering. Our teams, internally known as the Wild Crew have done a terrific job of keeping the stores clean and our customers safe. Our merchants acted very quickly to pivot into new product areas for our customers. And our finance organization did an amazing job navigating us back to a position of financial strength. Overall, I couldn't be prouder of the team's execution, continued hard work and agility throughout the quarter and year-to-date. Our performance is yet another demonstration of the discipline of our teams, the flexibility of our model and the universal appeal of Five Below. We offer great wild product and outstanding value with an incredible shopping experience for our customers. Now on to the results. Total sales in the third quarter grew 26% over last year to nearly $477 million. Comparable sales grew 12.8% driven by bigger baskets. This was our best Q3 comp since 2010. Operating profit nearly doubled, leading to earnings per share of $0.36, compared to $0.18 in the third quarter last year. New store growth and performance continued to be strong in the third quarter. We opened 36 new stores across 20 states in Q3 bringing our new store openings to 120 and our total chain count to 1018. The new stores were located in diverse areas across the country, ranging from more established markets where we've operated for years…

Thanks, Joel, and good afternoon, everyone. I will begin my remarks with a review of our third quarter results and then provide some commentary around the fourth quarter. As Joel said with our chain reopened for all of the third quarter, our teams did a great job keeping our stores safe for our customers to shop and adapting our assortment to respond to evolving customer preferences. Our sales for the third quarter of 2020 were $476.6 million, up 26.3% from $377.4 million reported in the third quarter last year. We operated our stores with about 25% fewer hours versus the standard pre-COVID weekly operating schedule. Comparable sales for the third quarter increased by 12.8%, with our stores delivering a double-digit comparable sales increase. Customer shopping patterns from Q2 continued into Q3 with higher average tickets and lower transactions than last year. While comparable transactions decreased for Q3, they improved over our Q2 results. ecom sales were strong in Q3, yet they still represented a low single-digit percentage of our total sales. We opened 36 new stores in the third quarter compared to 61 new stores opened in the third quarter last year. We ended the quarter with 1018 stores, a net increase of 124 stores or 13.9% versus 894 stores at the end of the third quarter of 2019. We continue to be pleased with the performance of new stores, especially given the reduced operating hours and lower spend on grand opening marketing. Turning to profitability, gross profit increased to 27.3% from the third quarter of 2019 to $151.1 million and gross margin increased approximately 30 basis points to 31.7% compared to 31.4% in the third quarter last year. Leverage on fixed cost components and the benefit of lapping unmitigated tariff costs from last year were partially offset by the…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Matthew Boss with JPMorgan. Please go ahead.

Congrats on the performance. So, Joel, maybe since stores reopened, comps have pretty consistently exceeded the model’s historical performance, and then this quarter is clearly an inflection. Could you help us break down the driver of the inflection that you're seeing? How much do you attribute this to new customer acquisition or basket growth from Five Beyond? And then post vaccine, what's the best way to rank initiatives as we think about you moving to offense, which I think you started to talk about last quarter to accelerate the market share opportunity that you see?

Thanks, Matt. It's a great question. And I might be a little vague in the answer, because as you know, we don't have a loyalty program or credit card. So it's hard to be specific. But I think the way you've got to think about this is in the broader sense, like, we always think about trends. And you’ve followed us for a long time, and whether it's been the spinner trend or adult coloring, or selfies, I think the pandemic presents itself as a new trend. And Five Below does well, anytime there's a trend, whether it's a fad, license. And in this case, I think it's really about relevancy. And both on our store operating teams and especially our merchants, we really pivoted from the time when we our stores were closed to make sure our store was relevant from a product side, with amazing value. And I'll give you some examples. And that the store experience matched what the customer was looking for. And in this case, we've gone out of our way to make sure they're very safe. We've done the social distancing, we've added a lot of extended cleanings, we've added the plastic. And so the customer feels really safe in our stores. From a product standpoint, Matt, I called out style room and sports. And those examples and all those like you think about style, the amount of T shirts we're doing is just been fantastic. And the team's done an amazing job of making sure they're on trend. They're relevant. One of my favorites is, “I Totally Miss Humans,” I wear that T shirt all the time. It's just one example. But at the end of the day, Matt, it's really about the merchant group, staying relevant and this is a massive trend…

And our next question will come from Simeon Gutman with Morgan Stanley. Please go ahead.

Hey, everyone, it's Simeon. Pardon my short termism on this question. So two parts. The first is regarding the fourth quarter. I don't know if we're supposed to interpret it as a strong as a pickup from the third quarter. I'm not sure if that's the right way to read it. But you've mentioned the potential pull forward. So I'm curious if you can talk about that and maybe if it accelerated all Q3, would it point to that it is more sustainable. And then, with regard to some of the margins that Ken spoke to, I guess you're pointing to leverage if I follow that right, but yet you're not guiding on sales. And so I just wanted to reconcile that point on the SG&A line. Yes, and those are the questions.

Ken, you want to start on SG&A? And I can just give some color on the quarter?

Yes, Simeon, thanks for the question. With regards to margins, specifically around Q4, again, most of that was a kind of a repeat of what our expectations were earlier in the year. We continue to see some of those challenges on the gross margin line, again, going up against last year which was out of our normalized gross margin range. So I think we had said before, we do expect to at least initially fall within the range that we've seen in years prior to 2019. And then also, some additional deleverage with the ongoing merchandise mix, similar to what we saw in Q3. And then, the SG&A deleverage around incentive compensation. And you're right, we did not provide any type of specific sales guidance, but I would still, I would still expect that level. And that deleverage in both of those areas, when you look at a wide range of results, and that's one of the reasons why I kind of put that out there. And then also, did especially with SG&A, just an approximate number, but it would assume a wide range of sales results.

I think that's good. I think, Simeon, the reason for no guidance is, really trying to understand, the strong start to Q4 that I talked about, especially coming off the Q3 results, and not understanding since first time we've gone through a pandemic, for any of us is how much of its pull forward of sales? Are there few further COVID restrictions in various states? And we still got the biggest volume days ahead in front of us. But like I said, very pleased with how we start and looking forward to bringing home a great quarter. Thanks, Simeon.

And our next question will come from David Buckley with Bank of America. Please go ahead.

Are you running into any capacity issues with store traffic? If so, how are you managing it? And then, can you just discuss briefly the mix of items that are now essential products in stores? Thank you.

Sure. The short answer is no on the capacity. I think the steps the operators made this year, I called out specifically we took over 100 of our existing stores and converted them to assisted self-checkout. And typically that then takes a store from five registers to nine. And that really helps on the throughput. So in cases where we do have capacity limits, instead of having people stuck in a line, we're really getting them through the store quicker and therefore we don't have to create a line outside. So, quarter-to-date, we have not experienced anything meaningful on a capacity constraint. But, David, the big days are still in front of us. But the operators are doing a great job. We're trying to process customers faster than we ever have and feel real good about it. Did David have a second part to that?

Yes, around essential.

Look essentials are still very low single digit to the business. And I think it's more about what I said to Matt on the question, what's driving a lot of this business is us having our product be relevant. And so, certainly the pandemic caused people to buy essential product, but more importantly, to change their buying behavior of what they were looking for, fitness goods, T-shirts I talked about. And merchants did a great job making sure we were in stock on that.

And our next question will come from Paul Lejuez with Citi Research. Please go ahead.

Hey, thanks, guys. Can you talk about maybe quantify the gross margin pieces during the quarter? Curious what the mix drag was? Just in terms of what selling stronger versus weaker. And curious, Joel, maybe more for you, can you talk about the percentage of your transactions that include an item above five bucks? What's the average ticket of those transactions versus those that don't include an item above five and what's your vision going forward in terms of, ultimately what will the assortment look like? What percentage of the business can be above that range? Thanks.

Yes, Paul. Look, on Five Beyond, let me just clarify for Q3, it was very small. We didn't, we don't set the wall until fourth quarter start. And but the overall vision is something I think we'll spend a lot more time talking about as we start to look at '21 and beyond. But it's obvious, as you can see, our new prototype includes a permanent section of Five Beyond product. So it's just an example of what I was talking about with Matt about, or Matt was asking about us playing offense, and we will continue to evolve this concept and Five Beyond is going to be a big part of it. We'll get into more of the specifics next year.

Yes. And then, Paul, you had asked the gross margins, and then kind of the mix of the merchandise, so just I will go back on that too for Q3. We did see significant fixed costs leverage -- meaningful fixed costs leverage up in gross margin within the cost of goods sold, obviously with the sim around an item like occupancy. And then, the anniversary of those unmitigated tariff costs. That was pretty meaningful, too. And then, all of those, they were offset in part by the merch mix. And the merch mix, again, just in response, as Joel talks about relevancy and how we respond to customers preferences. It was just the items that we've been selling in Q3, and we expect to sell also in Q4, they're pandemic related items. And then, just the other areas that we talk about work in school and play at home. And just the margins associated with those are what's driving the merchandise mix.

And our next question will come from Charles Grom with Gordon Haskett. Please go ahead.

It's pretty impressive to drive the comp you did with 25% fewer shopping hour. So I guess I'm curious, if it's made you rethink that the model longer term. And then, also, if you could just remind us where you are in November, on that metric. And then also, on the digital front, including the BOPUS test and the Instacart, can you give us a little bit of color of where the basket size is today. And I guess, also kind of where the merchandise margin flexes out on those baskets. Thanks.

Look the BOPUS test is still very small, it's like less than 40 stores. The Instacart, it's in about 300, and Chuck, it's really early on that. Like all our ecom initiatives, the basket size runs bigger than the store. I hesitate to start to like get into the specifics on that, because we're just so new in it. And I think we got to kind of get through the holiday period and see where it ultimately plays out. But we expect the basket size to be bigger, our ecom basket tends to be double. We just need a little bit more time on this before we kind of establish a trend. It's really brand new out the door, in fact, the expansion to 300 stores was literally earlier this week. So it was more important, we continue to provide a safe way to shop, especially for those customers that are stuck in their homes and modern alternative way for Five Below. And then, as far as sales go, very great start to Q4. And, we've been a little vague there just because we want to kind of get through the quarter here and really understand how much of it is new shopping trend versus some pull forward. But we really feel that it's going to turn out to be a great quarter of course.

And I think operating hours was –

Look, we have expand them here in Q4. We're pretty much like for like right now. To make sure again, we spread out the traffic and we'll be open when we think it's right for the customer. But clearly there was an opportunity in Q3 to mirror a much shorter trend that we're seeing from customers. But I don't expect that to be long-term. I don't think we have to go a lot older, be opened longer than we've been but I don't think we will see a long-term shorter operating hours.

And our next question will come from John Heinbockel with Guggenheim. Please go ahead.

Joel, two questions. Five Beyond for this holiday, it looks like you have, I don't know, three times maybe as many items as you had last year. Is that fair? And then, when you think about kind of flowing it in, lot of the items were pretty similar throughout the season. So the idea here, you'll kind of rotate that out and have fresher product closer to Christmas, number one. And then, two, how is Michael thinking about next year, right in terms of demand, and how you want to plan and flow product in, particularly spring and summer.

John, Five Below is a great example of, the first question I answered, Matt, about playing offense. And, if you go back to last year, John, you followed it nicely with us. We were -- it was really opportunistic buys, we really broke the $5 price out of playing defense, largely driven by the tariffs. And we turned it into an offense and we've turned it into some incredible value. And wow, for our customers. And the feedback we've been getting is just been very positive. And I think what you're seeing now is Michael and the merchandising team, switching from opportunistic, one-time buys, to plan, strategic specific buys. And so you're right on about the number of items, you're right on the flow. Last year was pretty much one and done. But as this holiday season goes through, you're continuing to see new items come in. And that's a great example of us being planned out and using our scale to our advantage, so it's really worked out well. As for next year, we're still planning that together. But follow the trend, it's going to get bigger. And [indiscernible] the seasons then we have in the past. Thanks, John.

And our next question will come from Scot Ciccarelli with RBC Capital Markets. Please go ahead.

Hey, guys, Scot Ciccarelli. So inventory levels, obviously got better time during the quarter, but still down quite a bit on a per store basis. Do you think inventories were a drag at all in your third quarter results? And as you guys talk to your vendors, you have any inventory availability concerns that you kind of through the -- let's call it the next couple of months here?

Yes. If they were a drag, the 12.8 comp would be something that I don't know that I'd ever call it, 12.8 comp, a drag due to inventory. Now, look, seriously, Scot, you got to remember, we went through the closure in the first half of the year, like everybody did, canceled hundreds of millions of dollars of inventory. But if you go back to my opening remarks, I couldn't be more proud of the team at Five Below. They got the orders back placed. In fact, we buy place more relevant items and what we had ordered initially. And we were back in stock. And so, while we're chasing it and it's flowing, it is coming right from our DCs and right onto the stores and onto the floor. So I don't think inventory impacted the quarter at all, but it was certainly hand to mouth. And Ken, anything to add?

Yes. And Scot, I'll just add to that, too. You probably heard in our prepared remarks. The real driver of that average door inventory year-over-year was the pull forward last year at the end of Q3 of tariff related items. And as I look forward into -- at the end of Q4, we made some similar moves last year also. So I would expect it to continue to be down and when we fast forward to the end of the year. But that was really the key driver of that negative ratio.

Inventory is in a good shape. Thanks, Scott.

And our next question will come from Karen Short with Barclays. Please go ahead.

Hi, thanks very much. I just had a couple of housekeeping and then a bigger picture. First of all, how many stores do you actually have with Five Beyond right now? And then, second, with respect to your relationship with Instacart, can you just talk about the pricing infrastructure with respect to the markup? And then, the bigger picture question is, you've always said that, your co-anchors drive 50% of traffic. I'm wondering where that stands today and how you're thinking about real estate going forward given the changes in the retail landscape?

Yes. Thanks, Karen. Ken, if you know the exact number on Five Beyond stores?

It's about 150 stores, yes.

Instacart pricing works similar to everybody else that's on their platform, if a customer is a member, and they spend over $35, there's no charge to them. And, we like every other retailer, pay a fee on every order to Instacart. And its reasonable fee that is in line with what everyone else is paying. And then in terms of co-anchors, Karen, we haven't measured again, that statistics since the pandemic started. But clearly, if anything, our connection to landlords and vibrant strip centers is more important than ever. And our brand awareness, we know continues to grow. And, we've got a strong balance sheet, I called out the great job the finance team has done. And so, we're in a great place to drive more and more traffic than we ever have before. Landlords love us, we drive young and youthful traffic, and we pay our bills. And I think we'll be more discerning as we continue to build out new stores. But what won't change is, we're committed to A centers, we're committed to being in strip and power, not mall-based. And, but we love all anchors that drive traffic, I just can't tell you whether the mix has changed or not. But that's something we'll certainly look at next year. Thanks, Karen.

And our next question will come from Brian Nagel with Oppenheimer. Please go ahead.

Great quarter. So wanted to ask, I may ask that last question in a little bit different way. But, look, as we've studied the Five Below, unique Five Below model, you have said often that its, you capitalize upon the traffic of your neighbors. So clearly with these results in Q3, and then what you are talking about here to the Q4. At the same time, we're hearing about so much weaker traffic to other retailers who is out there across the board amid the pandemic. What's changed that dynamic? And are there specific initiatives you've taken here to really become more of your own traffic driver than you have been in the past?

Yes, it's a great question, Brian. And I think those that have been following us for a long time and maybe I've been repetitive, or maybe I haven't been vocal enough. But, at the end of the day, we've been investing in people systems and infrastructure, which translates into, better merchants, better distribution centers, the products getting stronger, we're playing offense, the experience of the store continues to grow. And every one of those little tweaks, Brian continues to add up over and over and over into, Five Below slowly becoming the destination. And so, as we continue to get better at that, we become the first stop instead of the secondary stop. And, somebody asked earlier, and as I said, we don't have a loyalty card, so it's hard to put our finger around that. But we, anecdotally, and as we do research -- our marketing research after the fact that -- a customer continuing to tell us that, it's been a great experience in the store, they love the product, the value has been amazing. And I think as we grow Five Beyond as an example, we grow gaming, it's just going to be more and more reasons through that traffic to get better. And so, it's still important to us that we'd be in a strong vibrant center is good, as you know, we like to think we are, we know, our strong centers perform better than our weak centers. But what we're slowly seeing as this organization gets more mature, better scale, we become kind of the driver of the traffic. So hopefully that answers your question and how we think about. Thanks, Brian.

And our next question will come from David Bellinger with Wolfe Research. Please go ahead.

So you mentioned last quarter some of the volatility in category trends, some upwards of 30% comps or others were turning negative. So did you see that wide disparity sort of even out throughout the Q3 period and also in the start to Q4 but you seeing strength in the same three worlds you called out this quarter or have you seen some type of change in the complexion in sales trends.

David, it's a great question. And that disparity I talked about in the last quarter continued into Q3 and we expect it to continue into Q4. In fact, that's why, I don't know that enough people really understand how powerful this model is around these eight worlds. And we simply flex in and out, depending on what's trending and what's not trending. I mean, clearly party right now is just not trending. It's negative comping. Is that a bad thing? Well, it is, if that's your only business. It is if our merchants don't change and Michael does a great job of, if you look at our store, our party -- we've shrunk our party area. But we're growing some of these other worlds we talked about, I mean gaming is trending, tees are trending, our room world, as people are nesting and are at home, that's really important that we've grown in that area, blankets and pillows and photo plants and that type of thing. So it's as wide as it was in Q2, and we expect that to continue in Q4 here. Thanks, David.

And our next question will come from Paul Trussell with Deutsche Bank. Please go ahead.

Good afternoon and great quarter. Just to follow up on the real estate commentary from earlier, you did open a number of doors this quarter, maybe just a little bit more color on what you've seen from this year's class of stores. What's happening in new market? And just any, early color, or a way that we should be thinking about store openings and real estate availability into next year. And then, lastly, you did give some color on digital spend, maybe just touch on how that looks on a year-over-year basis. And just curious to the extent that you're thinking about more permanently walking away from circulars.

Yes. Thanks, Paul. Look, I'll tell you, I honestly couldn't be more pleased without these -- the class of 2020 is performing. When you consider that, we opened with shorter hours, we really had no grand opening campaigns, doesn't make sense to invite people in a pandemic to generate a crowd. I personally was in our Denver market. And like, it was shocking to see new customers finding us immediately as we opened. We've done great in Las Vegas. We're in Northern California, Sacramento. And I think what it -- at the end of the day, if I put some color commentary around it, it just is another great example of how the brand awareness is growing. And what used to take us five to seven years to get in a run rate we enjoy is happening much sooner. So despite shorter hours and less marketing, we are still seeing great new store productivity from the stores and so. And then, on a digital spend, it's less about the change year-over-year, and it's more about -- it's just a great example of us being relevant and shifting. And so, quite simply, I don't expect us to go back into print circulars. Even if you compare us last year to this year, we shrunk significantly the amount of TV markets, but we grew as I shared, over 90% of our stores are getting digital. And it's just another great example of us being nimble, quick and pivoting fast to how the customer is -- where the customers eyeballs are, and right now the eyeballs are not in paper. Think about our own personal habits. Everybody's binge watching and Netflix and like and that's where we put our advertising dollars. So we're still spending money in advertising. We feel good about the amount there. It's just in different vehicles to get a better use of it. Thanks, Paul.

And our next question will come from Edward Kelly with Wells Fargo. Please go ahead.

Obviously, a great quarter. I wanted to ask you about is, this is a hard question because you don't even have real guidance for Q4 but as we look out into next year consensus numbers on the EBIT margin are below what you would normally do. Right in '19, you did [11a] [ph], and in '18 you did 12 even. Is there anything you think that would prevent you from getting back to that type of number next year? And then, just the follow up, did you give tax rates for Q4? I don't think I heard it.

Yes. Thanks, Ed. On the EBIT margin, again, we'd like to try to get through this year and get through the holiday season. And then, we'll give that guidance at the end of the year, as we talk about 2021. But we would expect just off the top of would expect to be much more normalized and in terms of what you called out, and what we've seen in the past. And then, with regards to the second part of your questions, around taxes. Yes, that you can see there, there is some fluctuation there. And our tax rates, obviously, with what we called out earlier in the year, and then this past quarter in Q3, around share based accounting and the impact of the CARES Act and NOL carrybacks and things like that. So I would expect at this point for Q4, it probably would be more normalized in terms of what we've seen historically. So in and around that 24% range for Q4. And then, you could probably do the math on that for the full year.

But yes, I think looking out, Ken, there's nothing that would expect our model to change from more normalized.

Yes, to get back to those levels that we saw historically, yes.

And our next question will come from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead.

Congrats on the strong results in the store. Fantastic. I wanted to first just clarify your response to, I think Chuck's question on future store operating hours. And as you think about the model going forward, is it possible that you might consider having any of these COVID operating hours as we get kind of through the COVID mess moving forward? So just want to clarification there. But my other question is actually, regarding tariffs. I know, the incoming administration has made some comments that they don't initially plan to change any of the tariffs and goods from China. But I wanted to get a sense of, what percent of your goods today originate in China? And if the tariffs are lowered or removed, would you expect to give the savings back to the consumer? You've raised prices, obviously, on tech world, especially. But is there any potential benefit, earnings power, or is that going back to the consumer?

Yes, Jeremy, it's good question on tariffs. And, look, we heard the comments this morning, too. And I think it's a little early for us to speculate on what that means. But I will tell you, and we said it last year, when we were putting the tariffs, if they went away, would you roll the prices back? And I think we have not only we have broken the $5 price point; I think we've actually found something in our development of Five Beyond that is way more beyond this tariff thing. In fact, it has nothing to do with tariffs and the customer loves the value. And I think it's going to allow us to continue to migrate to be more center of the plate, if you will, instead of being the stocking stuffer and what I mean by the main gift, right? So but, if there is some, call window from the tariffs rollback, we'll deal with it appropriately. But our first reaction is always to deliver value to the customer. So most important thing we do. But we also, give Michael back, so he can reinvest in product. So I think it's less about rolling prices back. And it's more about adding new features and benefits so that we can continue to stay relevant and deliver incredible value. And as for future operating hours. Look, I think our assumptions we're working from, as the vaccine is real, I think things will slowly change in '21 for the good. And, if there's a period of time post-holiday that -- until that's widely dispersed that we're operating on shorter hours, we'll do that. But I think certainly by holiday at '21, we'd be back in a more normalized pattern for holiday hours. Thanks, Jeremy.

And our next question will come from Michael Lasser with UBS. Please go ahead. Michael Lasser, your line is open.

I guess we'll go to the next one.

And our next question will come from Michael Montani with Evercore ISI. Please go ahead.

I wanted to ask first off on the transaction count, if you could give a sense of, if that's starting to stabilize, meaning getting closer to flat or kind of still double digits similar to last quarter. And then, I just had a follow up on COVID costs and wage inflation.

Yes. So Michael, thanks for the question. I'll take up first one on the transaction account. You probably heard us in the prepared remarks say that the transaction comps, although still negative did improve during Q3 versus what we saw in Q2. And we have seen some slight improvement as we've moved into the fourth quarter, we still have ways to go, obviously, from a sales perspective as we go to the holiday season. But we have seen improvement with the comp transactions, although still negative and sometimes getting close to flat. But again, improvement as we've worked through the year here from Q2 all the way through to Q4.

Okay, great. And then, just on the cost front, I guess, first off, if there's anything I missed that you could share on COVID costs that you incurred during the quarter, and how to think about that maybe moving forward? And then, secondly was, on the wage inflation front, you've had multiple competitors kind of talking about that. And just wanted to get a sense of, number one, what you are experiencing today in terms of wage inflation? And then, number two, just the continued ability to kind of bring out efficiencies to offset that, if it does persist?

Yes, Michael, a lot of questions there. And we got a lot in the queue. Let me just take the COVID costs one, and we're going to have to move to the next one, and we can spend future time on wage that would take a long time. But look, we're managing through the COVID costs. I think we would expect to see them to continue to moderate as we move through the quarters. And, it can you called out some of the impacts on gross margin, but continue to…

Yes. So still seeing some of those and we saw some in Q3, but definitely materially less than what we saw, obviously, going back to Q1 and Q2.

And our next question will come from John Zolidis with Quo Vadis Capital. Please go ahead.

Very simply, [Technical Difficulty] long-term earnings model either positively, or negatively? And if so, what are the biggest subsidiaries subscribing the outlet? Thanks.

Hey, John, you were hard to hear. But I think you were asking if the pandemic has changed our…

Long-term earnings model.

Look, I think the pandemic at its core, the way we approached it is, like we do with everything, we play offense and we pivot. And we say, how do we stay relevant in this new trend. And this is probably the biggest trend we've seen since I've been here that required us to really pivot our merchandising assortment. And like we did with Spinners, a few years ago, Michael and the merchant team reacted as fast as they could, to get out of certain goods and into new goods, we got a great partnership of a big group of supplier community. And they've just really supported us throughout this whole thing. So if anything -- I think it's one allowed us to realize we can pivot quicker. It certainly also forced us to look at every expense. And the teams, led by a finance group, really helped us, look at how we could operate more efficiently. And those are all things that will really carry forward, John as we continue to grow this business and make the experience even better than before. So, it's made us a better company as a whole. Thanks, John.

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

Thank you, operator. And thank you everyone for joining us today. Clearly this was an amazing quarter for Five Below. And I'm truly blessed to work with such a great team. Again, want to thank our Wild Crew and all our vendors for being there for us. And honestly, for our customers for letting us be there for them. We will continue to listen to our customers and source awesome trend right products at amazing value, which we believe is just what they want and need to make the holiday special. As you and your loved ones get ready for the holidays, we wish you a safe and happy healthy holiday season. Before just speaking with all of you again in 2021, I certainly hope you'll shop Five Below this holiday, you'll find some amazing value for you and your families. Thanks again. Have a great evening. And we'll see in '21 Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.