Five Below Inc (FIVE) 2013 Q4 法說會逐字稿

Good day and welcome to the Five Below Fourth Quarter Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, I'd like to turn the conference over to Farah Soi of ICR. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thanks for joining us today for Five Below's fourth quarter and fiscal year in 2013 financial results conference call. On today's call are Tom Vellios, Cofounder and Chief Executive Officer, and Ken Bull, Chief Financial Officer, Secretary, and Treasurer.

After Management has made their formal remarks, we will open the call to questions. I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended.

Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and Five Below's SEC filings. The forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward-looking statements.

Finally, we may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available in our press release issued today. If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our website at www.fivebelow.com. I will now turn the call over to Five Below's cofounder and Chief Executive Officer, Tom Vellios.

Thank you, Farah, and thanks, everyone, for joining us today for our year-end call. I'll go over Q4 and fiscal 2013 highlights and our plans for 2014. Ken will then discuss the financial results and guidance in more detail before we open up the call to your questions. I'll begin with Q4.

As we communicated to you in early January with our post-holiday Q4 guidance update, adverse weather conditions across the majority of our store footprint, during the most important pre-Christmas shopping weeks of the year, was a meaningful headwind for us. Given the shortened holiday selling season and the importance of pre-Christmas selling period, this was a shortfall we simply did not make up.

With that being said, we are pleased to end the quarter with improving trends that enabled us to deliver sales and EPS performance ahead of our revised guidance. January did see adverse weather in certain markets, but on an overall basis, the percent of our comp store days that were impacted by weather in the month of January was significantly less than it was in December.

When weather was not as severe, our traffic was up as customers visited our stores and responded favorably to our merchandise offering. The end result was Q4 sales of $212 million, up 22% from last year with a comp of 0.3% and adjusted EPS of $0.47. Given the Q4 comp shortfall versus our original 4% guidance, same-store inventory ended at a level higher than we would like, but we were aggressive in addressing non-go-forward inventory.

So while gross margins were impacted by these actions, we feel good about the overall quality and mix of our inventory and we are well-positioned for the spring and summer selling seasons. Hopefully, you know by now, that we set very high standards for our sales here at Five Below. Weather notwithstanding, our team is always focused on doing better.

We are driven to deliver better product for our customers at better values on a consistent basis. We have a unique business and a significant growth opportunity. Our focus in 2014 is on continuing to strengthen the building blocks of our foundation and to make the necessary investments to take our business to the next level.

For fiscal 2013, we delivered top line growth of 28% and EPS growth of 33%. We ended the year with 304 stores, up from 244 stores at the end of 2012. Our new stores are the key growth driver for our business and generate extremely strong returns with payback periods of less than one year.

We are very pleased with the performance of the class of 2013, which came on the heels of a very strong performance from the class of 2012. We see the strength in new store performance across both new and existing markets. Our new markets in 2013 were Dallas and Austin, which followed Atlanta, St. Louis, and out state Michigan in 2012.

We're excited to announce that we just entered a new market in 2014 with our Tennessee stores that opened just last week. Five Below now operates stores in 20 states; six of which included markets that we entered with great success over the last three years.

The performance of our new stores continues to validate what we've always believed about our concept: that it has universal appeal and our merchandise offering, store environment, and value proposition resonate well with both new and existing customers alike. Comps in 2013 were 4%, driven by transactions. We saw solid performance across many worlds and classifications, including the loom and rubber band sales, particularly in the back half of the year.

From a regional standpoint of view, in 2013, outside of weather-driven differences in sales performance, we saw relative consistency in performance by both geography and vintage. Strong new store performance combined with the 4% full-year comp drove annual adjusted operating income of 23% and adjusted EPS growth up over 33%, even as we made investments in infrastructure that included our second distribution center in Olive Branch, Mississippi, the ongoing investment in people and talent development, a new merchandise allocation system, the first phase of an HIRS implementation, and IT infrastructure upgrades to our security and network capabilities. By the way, I should mention that Q4 was a true test for our new distribution center in Olive Branch and I am pleased to say operations there ran smoothly.

With 2013 behind us, we are firmly focused on 2014 and excited about the many opportunities we see this year and beyond for Five Below. For 2014, we plan to deliver a 20% store growth with 62 new store openings this year. Leases for 60 of those new stores have already been signed.

Planned openings this year include new markets like Houston, as we continue to build out Texas after great success with our 2013 entry into Dallas and Austin, as well as the recent openings in the state of Tennessee. We will also continue to backfill existing markets like Metro New York area. As in past years, the majority of our 2014 openings will be in existing markets.

I should also mention that work towards our 2015 class is well underway. As we've done in the past, we continue to look out over the next few years and determine which areas of the business might benefit from investments, as we strive to ensure that our foundation is solid and capable of supporting the tremendous growth that lies ahead for our Company.

Merchandising is a key competency of ours and we continue to make the necessary investments in personnel, training, and systems to ensure that our promise to our customers of newness, excitement, and value is one we continue to deliver against. Last year, we again increased headcount across merchandising, planning, allocation and product development functions.

While this is important today, it becomes even more critical as we execute our growth plans over the next three to five years. We will continue to strengthen our capabilities in these areas as we scale the business.

To that, we have recently made two key hires at the GMM level. We will organize our merchandising teams under them and they will report to Jeff Moore, our EVP of Merchandising. This will allow for dedicated expertise and narrower focus that enables us to continue to be nimble, maintain a disciplined control over inventory, and fulfill our promise to our customer to deliver trend-right, high-quality products at $5 and below.

We're also adding additional talent and segment responsibility across our eight category worlds. This will narrow the span of control of many of our seasoned category leaders and capitalize on their unique expertise and experience. These merchandising organization enhancements and investments build upon the product development initiative of 2013 and when combined with the new allocation system we have in place and other merchandising system improvements, will position us to continue to successfully scale the business, enhancing our visibility and facilitating faster decision-making as we identify and quickly react to business trends.

In 2013, we spent $26 million in capital expenditures; the majority of which went towards new store build-out, investments in existing stores, our second [DC], as well as investments in systems and IT infrastructure. For 2014, our CapEx will be $35 million. Capital will be invested in new stores, distribution, and upgrades to our ERP system, which we expect to implement over the next 18 to 24 months and ongoing investments in the overall IT and systems (inaudible).

Through a combination of our ongoing investments in people and systems, we will be even more nimble and flexible. This will provide us with ample room to shift and respond to changing trends and customer needs, resulting in even better store presentations and customer experience, further strengthening our competitive advantage as we continue to scale the business.

I mentioned briefly in the last call that we are also starting our distribution footprint as it relates to our current store base and planned openings over the next few years. Given our concentration in the mid-Atlantic and Northeast regions of the country and the additional opportunities to densify in this region in the years ahead, we will need additional East Coast distribution capacity. Our stores in this region, some of which, by the way, are over 10 years old now, continue to comp and they do so with higher volumes given their location and their age.

When you combine this with the very attractive store growth opportunity that still remains for us in this region, increased distribution capacity is going to be necessary in the next year or two to service the comp store and new store growth we expect in these markets in the coming years. We expect to address this need for additional East Coast distribution capacity through either an expansion of our current facility or with a significantly larger new facility.

We expect this to take place towards the second half of 2015 or early in 2016. With most of the Easter selling season ahead of us, we feel great about our positioning and our store sets. There is an abundance of great product that we will be bringing to the store this year as we look forward to continuing to deliver excitement to our customers with fresh, trend-right merchandise and great value.

With that, I will turn the call over to Ken to go over the financial results and outlook in more detail. Ken?

Thanks, Tom, and good afternoon, everyone. I will begin my remarks with a review of our fourth quarter and fiscal year results and then discuss our outlook for fiscal 2014. As a reminder, the fourth quarter of 2013 was a 13-week quarter and fiscal 2013 was a 52-week year, as compared to the fourth quarter of 2012, which was a 14-week quarter and fiscal 2012 which was a 53-week year.

The impact of the extra week to 2012 was $5 million of additional sales and less than $0.01 of EPS. Our sales in the fourth quarter of 2013 were $212 million, up 22.1% from the $173.6 million reported in the fourth quarter of 2012. Excluding the impact of the 53rd week, sales for the fourth quarter of fiscal 2013 increased approximately 26%. We ended the year with 304 stores, an increase of 60 net new stores or 24.6% versus the 244 stores at the end of 2012.

As Tom mentioned, we continue to be very pleased with the performance of our new stores, with the class of 2013 on track to exceed our new store model expectations, including the important new market of Texas, which has delivered strong performance in line with the rest of the class of 2013. Comparable store sales, which are stated on the 13-week basis, increased by 0.3% for the fourth quarter as compared to 4.4% increase in the fourth quarter of last year.

After a weather impacted holiday season, comp trends improved in January, enabling us to deliver results slightly ahead of our revised guidance provided in early January. Gross profit increased 18.3% in the fourth quarter to $84.2 million from the $71.1 million reported in the fourth quarter of fiscal 2012. Gross margin decreased by 127 basis points to 39.7%, driven by lower merchandise margins and the deleverage of fixed costs like occupancy and distribution associated with the lower than planned comp.

As a percentage of sales, SG&A for the fourth quarter of fiscal 2013 decreased to 20.7% from 21.9% reported in the fourth quarter of fiscal 2012, due primarily to lower incentive compensation expense, as we fell short of plan in Q4. Excluding $1 million in expenses related to a secondary offering that occurred in Q4 2012, as well as the founder stock compensation expense in both periods, adjusted SG&A was $42.3 million in the fourth quarter of 2013 or 20% of sales as compared to $35.6 million or 20.5% of sales for the fourth quarter of last year.

GAAP operating income was $40.3 million for the fourth quarter of 2013. On adjusted basis, operating income was $41.9 million; an increase of 17.7% from adjusted operating income in the fourth quarter of 2012. As a percentage of sales, adjusted operating margin was 19.7% compared to 20.5% for the same period last year.

Our effective tax rate for the fourth quarter of 2013 was 38% compared to 41.2% in the fourth quarter of 2012, with the decrease due to lower effective state tax rates resulting from our business restructuring. Before I discuss net income, I want to point out that for the quarter-to-date and year-to-date periods, I will be referring to adjusted net income and EPS that excludes the impact of the founders' transaction in both periods and costs associated with our secondary offering in Q4 2012.

When I refer to EPS, it is EPS based on adjusted net income using an adjusted diluted weighted average shares calculation for the period. A reconciliation of GAAP net income and net income per share to these adjusted numbers on an adjusted weighted share basis can be found in the financial tables included in our earnings press release issued today.

The adjusted diluted weighted average shares outstanding assumes, among other things, the IPO transaction and the conversion of our preferred stock took place at the beginning of fiscal 2012. As a result of the factors I just described, adjusted net income for the fourth quarter of 2013 was $25.8 million or $0.47 per share based on 54.6 million adjusted diluted weighted average common shares outstanding, as compared to $21.4 million or $0.39 per share based on 54.4 million adjusted diluted weighted average common shares outstanding in the fourth quarter of last year.

This represents a 20.6% increase in adjusted net income over the fourth quarter of 2012. For fiscal 2013 which was a 52-week year as compared to a 53-week year in 2012, total net sales increased by 27.8% to $535.4 million. Comparable sales stores increased 4% on a 52-week basis as compared to a 7.1% comp store sales increase in fiscal 2012. GAAP operating income was $53.7 million.

Excluding the impact of the founders' transaction and costs associated with our secondary offering in both periods, adjusted operating income increased by 22.9% to $60.8 million, while adjusted operating margin decreased 40 basis points to 11.4% from 11.8% in 2012. This decline was due to the deleverage associated with the addition of our second distribution center in Olive Branch, Mississippi.

Adjusted net income increased by 34.4% to $36.9 million or $0.68 per share based on 54.5 million adjusted diluted weighted average common shares outstanding versus $27.4 million in adjusted net income or $0.51 per share based on 54.2 million adjusted diluted weighted average common shares outstanding in fiscal 2012. We ended the year with $50.2 million in cash and cash equivalents on our balance sheet, $19.5 million in outstanding borrowings under our term loan, and full availability under our $20 million revolver facility.

Subsequent to the end of fiscal 2013, we paid off our term loan in full. Inventory at year-end was $89.4 million as compared to $60.8 million at the end of 2012. As Tom noted, we feel good about the quality of our year-end inventory after having taken the necessary actions to write-down excess and slow-moving merchandise prior to the and of Q4. Ending total inventory on a per-store basis increased 17.9% year-over-year.

Half of this per-store increased relates to imported merchandise where we have increased our penetration and where we saw a timing shift due to the earlier Chinese New Year. The year-over-year increase was also impacted by the comp shortfall in Q4.

Now, I would like to turn to our outlook. For the first quarter ending May 3, 2014, net sales are expected to be between $120 million and $122 million, assuming a 3% to 4% comparable store sales increase and the opening of approximately 14 new stores.

GAAP earnings per share is expected to be $0.04 to $0.05 and adjusted earnings per share is expected to be $0.05 to $0.06. Our first quarter guidance assumes a less than 100 basis point decline in adjusted operating margin, due primarily to the increase in headcount on the merchandising side as a result of the talent investments we made in 2013 and thus far in 2014 that Tom spoke to and this shows up in our gross margin line.

Also on the gross margin line, I would like to note that, while we expect slight leverage on distribution expense year-over-year in Q1, the magnitude is small as we continue to ramp the new facility and fill in the surrounding markets with stores. Also impacting adjusted operating margin is higher SG&A expense for depreciation on our Olive Branch distribution center assets put into service in Q2 of fiscal 2013.

For the full fiscal year 2014, sales are expected to be in the range of $672 million to $678 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 25.5% to 26.6%.

We expect open 62 new stores in 2014 with approximately 75% of these openings planned for the first half of the year. As a result, we expect to end fiscal 2014 with a store count of 366 as compared to our 2013 ending store count of 304.

GAAP net income is expected to be in the range of $46.4 million to $48 million with GAAP diluted earnings per share of $0.85 to $0.88. Adjusted net income is expected to be in the range of $46.9 million to $48.5 million or approximately 27% to 32% increase over fiscal 2013 with adjusted earnings per share expected to be $0.86 to $0.89.

Embedded in our fiscal 2014 outlook is an expectation for adjusted operating margins to be flat to up slightly. While we expect improved gross margins for the full-year, we anticipate a slight deleveraging in adjusted SG&A, due to compensation that relates to anticipated new hires.

In addition, given we repaid the entire $19.5 million in outstanding borrowings under our term loan facility subsequent to the end of Q4, we expect net interest in 2014, including the write-off of deferred financing fees, to be in the $400,000 range with the majority of this expense occurring in Q1. With respect to CapEx, we plan to spend approximately $35 million in capital expenditures in fiscal 2014.

We will be constructing and opening 62 new stores and investing in existing stores. In addition, we will be making improvements to our distribution centers, including the continued fit out of Olive Branch. We will also incur initial spend for the planned expansion of our Northeast distribution facility that we expect to take place towards the second half of 2015 or early in 2016. We will continue to invest in corporate infrastructure and systems upgrades, as Tom mentioned.

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

Thank you, Ken. In closing, a lot's been accomplished in 2013, including the consistency in strength of our new store openings, the great editions we've made to the team, and the investments we have made in our distribution infrastructure and systems. With 62 planned openings for 2014, we look forward to another year of strong new store growth and performance.

Our business is unique and the future growth opportunity is significant. Our constantly improving merchandise capabilities and our ongoing investment in people, technology, and infrastructure will enable us to continue to fulfill our promise to our customers to deliver trend-right products at great values in a fun and differentiated shopping environment.

We will do so with our characteristic discipline as we continue to realize the exceptional store growth opportunity that exist for Five Below. Thank you for your support and at this point, I'd like to turn it over to the operator and we'll be taking your questions.

(Operator Instructions) John Heinbockel, Guggenheim Securities.

Tom, let me start with the new merchandising organization. What do you think are the two of three things where that will be most impactful, particularly what the customer might see in the store, differently than they do today?

I think, John, what's enabled us to deliver the results that we have today, we believe, is the constant investment that we've been making to people, particularly in merchandising, since inception. As the business is scaling and it's growing and you look at the number of stores that we're adding, the eight category worlds that we have, the opportunity within each of those as we scale and as the business is getting bigger, what we are realizing is there's so much potential if only we have the resources in place to really be able to manage it properly and to capitalized on all that's out there.

I think you can expect that as the team falls in place and as everybody gets acclimated to how we do things at Five Below, that we will be able to really harness opportunities within each of the worlds and each of the classifications. It's conceivable that you will be able to see, not only improvements, but newness and excitement as we look ahead across every one of the categories; not to mention the fact that there are many opportunities, obviously, which not to discuss at this point in maybe categories or classifications that maybe aren't even in the store today that we want to be always be looking at.

The follow-up to that is one of my favorite questions: what you just described, what does that mean for store size? Because if you're talking about maybe more items per world and maybe more worlds, do we gravitate higher over time in terms of size?

That's a great question. What has and what continues to drive repeat customers to our stores and why we believe that our growth continues to be driven by transaction and traffic is the ability to constantly engage the customer through the newness aspect of our model. New product all the time, get it in front of the customers, make it a place for the customer to visit over and over again.

I'm more inclined to say how do we continue to make the box that has served us so well since 2006 and as we look forward by continuing to challenge and raise the bar of every one of the thousands of SKUs that's in the store. I think that will make us a much better Company.

Could the size, at some point down the road be considered? Absolutely. No plans for the foreseeable future. We have plenty of opportunity to invigorate all that is in the store already.

Okay, thank you.

Dan Binder, Jefferies Group.

My question was just around your -- what's in the guidance given sort of the unusual things that we're up against in Q4? Then lapping, I think you outlined the of the color around the lapping of DC expense from last year. I'm just curious, within your guidance, are you making an assumption that Q4 is considerably better or above average in the coming year, given what we face?

Dan, I think you can see from our guidance, we came out with a three to four comp for Q1 and a four comp for the full-year. I think as you navigate through the quarters, as you know based on our performance last year in Q3 and then the performance in Q4, I think it will be safe to say that the 4% comp is for the full-year. Q3, we would probably expect to be slightly below that and Q4 above that.

Okay. I noticed that the store growth is right on target with the 20% that you outlined when you went public, although you've been growing it a bit faster than that in recent years. I'm just curious, is that a pretty solid number or do you think there could be some upside to that if you find some additional opportunities?

We certainly wouldn't pass on an opportunity if it became available, if we felt it was the right decision. But I think it's important to note we feel really good about the range of a number. Because if you look at the existing stores and to come in with 62 new stores, we feel good about that number.

We think that lends itself to what we need or where we need to be in order to continue to deliver the top line and bottom line growth that has been really consistent over the years. I would say that's a good number. Again barring some unforeseen opportunity that may become available, which we would always consider.

Just to reiterate, again, the class is basically done so we feel very good about 2014 and we are already on our way to working other 2015 classes for us.

Great, thank you.

Michael Lasser, UBS.

First, on the cadence of the quarter and into the first quarter, should we infer that based on your guidance of 3% to 4% and how you've talked about the business and guided us in the past that you've seen some of the improvement in January continue into the current quarter, despite weather continuing to be pretty nasty?

I'll probably have the same answer as I think we've had in the past. We really would not want to get into actual results quarter to date, but I think it's fair to say that -- I would say two things one, it's been pretty consistent that when the weather's favorable, the response by our customer has been strong and very consistent.

What's also true is that when weather severely impacts our stores, we've see in the opposite. By the way, I should mention that January had some tough weather, February and especially the early part of February, had some even tougher weather. As we've done in the past, I think we look at where we are.

We need to also remind everyone that Easter, there is a shift at Easter, so the majority of the Easter selling is still ahead of us. We make assumptions around that and we came up with our guidance of 3% to 4%.

That's helpful. The other question I had is on the new store productivity. Maybe this relates to the timing of the new store openings, but it looks like to get into your sales number for the year, we're going to have to assume close to nearly 100% new store productivity. Is there something that you're expecting, either about the new market or those stores that have yet to fall into the comp base, that will be driving such a high level of productivity? Thanks.

Michael, you're right. The productivity assumed in the guidance we're providing is in that 100% range. It always depends year-on-year in terms of the mix of those stores. If we have stores in, I think as Tom mentioned, some of the higher Metro areas and the more dense areas that have a higher productivity. But you're correct in that assumption in terms of the productivity implied in our guidance.

Okay. Thank you very much and good luck with the year.

Thank you. There are some stores, as Ken mentioned, in the mix, we should note that, for the class of 2014, that we consider to be more urban, higher-volume stores. When you average those into higher class, obviously that moves the meter a bit.

Christian Buss, Credit Suisse.

Congratulations on the nice recovery in the quarter. I was wondering if you could talk a little bit about the product classifications that had some challenges coming out of the holiday period and how you feel about those now? If you could talk a little bit about what changes you made there?

Sure. I think the great thing about Five Below is that we have eight category worlds and even better is that within those worlds, we probably have an inordinate amount of departments and classifications. I think it's the flexibility and the ability to shift from one underperforming to one overperforming that has given us, I believe, the consistency and performance and the consistency in response from our customers over the years.

We'll always have classes and departments that overperform and underperform and that was the case for Q4 of this past year. However, I think, as I've said in the past, I think we set certain guidelines and plans and expectations internally around each of the departments and the worlds. It was within some of those areas that we weren't as pleased, maybe, with some of the results.

I wouldn't quite say that they were totally underperforming worlds, but I think we have opportunity in some of them and in specific, I think it's fair to say that we see a fair amount of opportunity around our beauty category and parts of our fashion accessory business and we're excited to capitalize on them.

That's helpful. Could you talk about your expectations for merchandise margins going forward? You mentioned in the early part of the call that you had some inventories that you weren't quite happy with the levels of. How should we think about the development of your [merch] margins in light of that over the course of the quarter and the year?

We've said in the past, Christian, not to look for significant improvements and our overall merch margins and I think that's going to remain the same for us as we go into 2014. We've taken into consideration in our guidance any -- we spoke about the end of year inventory that we feel good about, the overall quality, that we've taken the appropriate markdowns and reserves.

If any of those are going into the beginning of 2014, that's been taken into consideration in our guidance. But on an overall basis, I wouldn't expect to see significant movement in the merch margins.

That's very helpful. Thank you very much and best of luck.

Paul Trussell, Deutsche Bank.

On the merchandise and again, I know you don't like to give much color on category performance, but just to follow up, is there any detail that you can provide regarding the categories that you've seen bounce back here in the first quarter, whether it's St. Patrick's Day T-shirts or funky fingernail polish? Just any color at all would be helpful on how we should think about the categories that are resonating the most with your customers?

Yes, I think, Paul, it's a really good question. I think we've always been careful about getting into a lot of category-specific results, trends, or performance. I will tell you this, though, when we looked at the trend, and as we look at the trends that we saw in January and the improvement, I think it's fair to say it was primarily across the board and it was more of a weather issue that held us back when it did, more than individual categories.

Again, to reiterate, I think it's important to note, it's not that we categories that we are very concerned about or worried about. I believe that, as we set plans and expectations internally, I think we have some opportunity in some of the categories that we believe should have performed a little bit better. In what we see in our trends today, it's pretty consistent amongst the categories.

Stores on a long-term basis, you outlined on the near-term, you still expect to see 20% square footage growth as a reasonable estimate for us to assume. But just looking out longer-term, do you still remain comfortable with the 2,000 store outline? Has what you've seen in moving to new markets maybe ticked that target up a bit? Any color just on long-term growth prospects would be helpful.

I think we feel just as confident and strong today about the opportunity that lies ahead in store growth as ever. If anything, as we continue to densify markets, we really feel very bullish about the future of store growth for Five Below. The key for us and the number of stores that we are opening and are planning to open, what's important for us is deliver consistent performance to make sure that our customer gets to experience the store, the environment, the product, and the people in true Five Below fashion.

While the team at Five Below here, if they had to tomorrow, I know they could open a lot more stores in any given year. What's important to us is that we execute well and for that matter, I think we'll continue to be real careful as to how many stores we put in each of the classes going forward. But very bullish on the opportunity, long-term opportunity for store growth.

Thank you.

Charles Grom, Sterne Agee.

When you take a look at 2013 comp, could you remind us what the drag was from the new distribution center down in Mississippi and also what the one-time public company costs that you incurred in the front half of the year were going to be? Just trying to get a sense for what you're cycling?

Sure, Ken?

Yes, in 2013, on a full-year basis, the DC drag, I think we spoke about before, we had anticipated about 50 basis points. It came in slightly higher than that based on the underperformance in Q4. The public company costs we actually lapped in I guess it was Q3 of 2013.

Okay, so it evens out?

Correct.

Okay, great. I know historically there's been essentially no real comp waterfall because your new stores open up at essentially 100% productivity, but I'm wondering when you look at the class of 2013 and you look at the overall comp of 4%, how do the stores that opened up say two years ago look versus stores four, six, eight years ago? Are they all consistently roughly 4%?

Yes, Chuck, we're still saying that same consistency across those various vintages. The one thing I'll say, and I think Tom mentioned this in his section, we did see, for the 2012 class that came on and started comping late in 2014, they were impacted by the Q4 weather. Except for that class and the regions related to that class, we still saw consistency even amongst the older vintages of stores.

Okay. What are your thoughts currently around developing an e-commerce platform to complement the stores? It seems like with your customer base being younger, that would be a nice way to attract more customers, build brand loyalty, allow the customers to do their due diligence. I'm just kind of wondering what's holding you back from building more of an internet platform? Thanks.

That's a great question. We believe there's a terrific opportunity to create an e-commerce platform for Five Below. It's something that we've talked about, continue to talk about it, it's constantly under review. We have such an opportunity and are pleased to date, as we've look at our business and as we look at it for the foreseeable future, we have such an opportunity to build out new stores.

We have a model that you have such low investment, you have a payback of less than a year, great returns and we're still in the infancy of growth on the brick side of the business. It was a decision that I think we made as a Company to focus around store growth first and foremost.

At some point, no question about it, I think we will look at that and we truly believe that there's a viable and exciting opportunity to supplement and complement and support the brick side of the business. But for the foreseeable future, we're sticking with stores.

Great. Good luck, thank you.

Jennifer Davis, Buckingham Research Group.

Congratulations on really bucking the trends or the broader retail trends in the fourth quarter and sounds like so far in the first quarter. You've said that your comps are driven by transactions. I was wondering if you have, even just anecdotally, any sense of, in your older stores, how much traffic or how many transactions are being driven by new customers and how much is by your repeat customer?

We don't really have any visibility to that aside from just the mere fact that the older vintages of stores continue to comp in line with the rest of the chain. That may imply, obviously, that there could be in increase in frequency versus new customers there, but we don't have any specific data to be able to support that.

Okay, all right. Is there kind of a limit on how many stores you would feel comfortable opening in a year? As your base gets larger, that 20% is going to be a little more difficult to get to.

It's something we talk about all the time. We want to make sure that the number of stores we open we're able to merchandise properly, to support properly, and to staff properly. It's important that we export the culture. I know we feel really good about the number of stores.

When we look at 50, 60 plus or minus range, we've been able to do that consistently and we feel very comfortable about that and around that number, We continue to look at it and we'll, at some point, figure out -- I think there will come a point in time that the 20% number may be just too high of a number and may not be necessary to have it out there, but we haven't hit that point in time, yet.

All right. Thanks and best of luck.

Matt Nemer, Wells Fargo.

First, can you talk to the gross margin pressure in the fourth quarter related to markdowns, just so that we can kind of model that out for the current year? How much did the merchandise talent acquisitions impact gross margin this year as a consistent quarter or will it be a little lumpy?

Your first question around the merch margins in Q4, really, that was a piece of the gross margin decline that we talked about. Just thinking about it, it was probably about a little less than one-third of the total of that gross margin decline if that helps and the other piece being the deleverage on the fixed components of occupancy in the DC. You mentioned Q1 and the drag for the new merchandise talent, that should just be, from what we can see right now, really in Q1 from how we're viewing it.

Okay, great. Secondly, from an inventory standpoint, can you give us a sense of how much inventory you may have packed away from the holiday season that you're planning to redeploy next year? Is some of that in the inventory growth numbers that we have?

Yes, there's a small amount in that year-end inventory. Again, at the end of the season, we do this every year, we've been doing it for a long time and we're pretty disciplined behind it, we take a hard look at that remaining inventory and really make that decision as to whether it's inventory we want to carry forward and we feel good about selling. If not, we're going to move on it.

We employ that same discipline at the end of the fourth quarter. Again, we probably have a little bit slightly higher than we've had in the past, but I think the key there is we feel good about the inventory and it's quality inventory that we can sell.

A point to add to that, if part of the inventory that carried forward is actually great inventory that we would go out and buy again into Q1 and Q2. The advantage may be to Q4, the pure seasonal product aside, a lot of our product is actually product that carries forward into Q1, so I think that actually serves us well. Unfortunately, we did have to take a lot of markdowns product and our markdowns were primarily limited to some of the seasonal product which we did not want to carry forward and lumps that we simply felt had to go away.

Okay, that's helpful. Lastly, the ERP system upgrade that you mentioned that's on the horizon, is that primarily something that is sort of on the back end or will it impact anything that's customer facing, such as CRM or maybe the initial building blocks for e-comm or an omni-channel model?

Yes, our ERP system is really our kind of main engine in our operating system, so it's really on the back end that will impact and nothing really front-facing to the customer.

Okay, great. Thanks, guys.

Patrick McKeever, MKM Partners.

I know, as a prior analyst mentioned, that you don't like to talk too much about specific products or categories or specific trends, but you did call out the rubber band loom as a factor in the back half of last year and it got a fair bit of airtime on the third quarter call.

My question is, what kind of impact did that have on the back half of the year comp and could you just remind us when that came into play as a meaningful factor on yourself? What's the current status of that particular item? Thanks.

Yes I'll give you some of the history on that and if Tom wants to jump on after that. If you recall, back in the third quarter of 2013 is when our rubber band sales began, so nothing really in Q2 and prior. Then as we moved into Q4, we had the loom that we introduced in the beginning of the quarter, along with rubber band sales.

I think one of the things we spoke about on one of our calls was that we did see a different impact in terms of a trend item like that on Q3 versus the Q4, given that we felt there was more of an incremental impact to sales in Q3 and then as we went into Q4, because of the different type of shopping that takes place with our customer that it was more of a substitution-type item.

From of penetration standpoint, on an overall basis, it was relatively consistent from Q3 to Q4, but I will tell you, though, that going into Q4, when we had the loom, that's a $5 item, obviously higher-priced then the rubber bands, so we did see that increase our total sales related to the looms related to the rubber band items and the rubber band items themselves drop off a little bit as we went through Q4.

I think it's fair to say rubber band sales very strong in Q3 drove not only top line sales, but we believe affected traffic to an extent. Rubber bands leveled off actually quite a bit as we got into Q4, everybody was in the business. The loom did very well. I would also tell you, though, that while the loom did very well, the craft category didn't do as well.

I think this is maybe what Ken was alluding to, we're very pleased with the sales on the loom, but certainly it did eat away at some of the sales of the category that it resides in. So I think there was a bit about gift giving substitution that goes on, I think, when you get into Q4. With where we are today, there's still some residual selling, particularly on the rubber bands, but nowhere near, I think, what the excitement there was back in Q3.

From a quarterly modeling standpoint, when does the founders' transaction expense, when does that go away? Does that go through the first half of fiscal 2014? How should we think about that?

On an adjusted basis, that's excluding any of our -- in the numbers, when we speak about it on an adjusted basis, there's a small amount remaining in Q1 of this year.

Okay. Thanks very much.

Jeremy Hamblin, Dougherty & Company.

Great job. Forgive me if I missed this from before, but can you talk a little bit about the impact in Q1 on the change in Easter and whether or not that changes the timing of your advertising in Q1 and/or into Q2?

Easter is three weeks later this year versus last year and because of that shift, there's obviously a change in the timing of our marketing and when we drop our ads. Keep in mind the full effect of Easter selling is still in the first full quarter, so there's no shift from a quarterly basis; just really as you go between those months of March and April.

Okay, because I thought that you had maybe done an extra promotion last year in the beginning of Q2 because of having an earlier Easter.

I believe you're right that it shifted up from the prior year, but not for this year. It would be relatively consistent year-over-year in terms of marketing spend on the quarter.

Okay. In terms of looking at the new stores that you're getting and thinking about the lease terms that you're getting, obviously, you guys are a huge traffic driver in the centers that you are located in. Are you starting to get any improvement in the terms from landlords that you're working with? Obviously, they're probably seeking you out more. Is there any color you can add on your lease terms that you're seeing?

I think we feel good where we are from an occupancy standpoint of view. I think for us, the decision that we made, particularly as more and more landlords, I think you're correct, I think people do seek us out. We are a great tenant for most of them, if not all of them. But I think when we made the decision to make sure that we offer the best real estate first and foremost.

Presence is important, co-tenancy is important for us, and at times, I think what it's given us, if anything, I think we feel good about the occupancy expense, but we feel even better about our ability to see great real estate, as we have over the last few years, as we see as we go forward, to really positioned the stores to have great performance.

Because if we have great sites, great co-tenancy, and great visibility, chances are those stores will perform and we try not to play, necessarily, always the occupancy game. These are long-term plays for us and we want to make sure the stores give us great performance and results. Positioning is actually more important.

Just a follow-up to that question, then, as you talked about longer-term maybe at some point, 20% clearly won't be the number on a square footage growth, is it really -- obviously, you've said that you can do more than what you're currently doing but you want to get these best locations. Is that the limitation at some point in the future? Is it more about finding locations that are going to work for you as opposed to simply just cranking out the numbers?

If you look at real estate and development over the last few years, particularly as you go back into that 2008, 2009 and since, there simply hasn't been as much new development. Many of our sites, obviously, come from existing space. So until development really takes almost a new phase of growth, there's always that challenge of are there are enough opportunities out there for us to build all the stores that we have to?

I will tell you that, as we've seen for the last few years and as we see that class of 2014 and the early reads on our class of 2015, given the markets that we're in, given the universal appeal across geography and socioeconomic profile of this concept, I think those are the driving factors and the appeal that we have both to the broad range of customers and to landlord.

I believe that will serve us very well for the foreseeable future and as a result, I really don't see or have a concern around our ability to deliver the store count in the foreseeable future.

Great. Thanks for taking my questions.

This does conclude our question and answer session. I will turn the call back to our moderators for closing remarks.

Thanks, everyone, for joining us and look forward to our call at the end of Q1. Let's pray for some --

Thank you. This does conclude today's conference call. Thank you, again, for your participation and have a wonderful day.