Five Below Inc (FIVE) 2014 Q1 法說會逐字稿

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

Thank you, Operator. Good afternoon, everyone, and thanks for joining us today for Five Below's first quarter 2014 financial results conference call. On today's call are Tom Vellios, Co-Founder, President and Chief Executive Officer, and Ken Bull, Chief Financial Officer, Secretary and Treasurer. After management has made their formal remarks, we will open the call to questions.

I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and Five Below's SEC filings. The forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward-looking statements.

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

Thank you, Farah. Good afternoon and thanks, everyone, for joining us today. As always, I will review highlights of our first quarter performance and Ken will discuss our financial performance and guidance before we open up the call for your questions.

We're very pleased with our Q1 performance that came in ahead of our guidance. When we last spoke to you at the end of March, we issued Q1 guidance against a backdrop of weather that was still more of a headwind than a tailwind. That, with the shifted Easter from March to April of this year, had affected our compatibility. But as Easter shopping kicked off, once again our customers made Five Below a destination for their seasonal shopping needs, as their response was strong to our compelling offering of trend right merchandise and exceptional values. The result was above guidance sales of $126 million, or a 32 % increase over Q1 LY.

We opened 19 stores in Q1, including 5 on the last weekend of the quarter. Since the end of Q1, we've opened 7 stores to date and 8 more stores will open this Friday in Houston, this a new market for Five Below. With these openings, we will have completed more than half of our 62 planned openings for 2014. We are very excited about the potential in Houston, a market we believe will accommodate many more stores as we continue to densify. With our stores in Dallas, Austin, and now Houston, we will have a total of 25 stores in Texas, a state we entered less than a year ago that we believe has the potential to support 100-plus Five Below stores over time. And while it's still early, we feel great about what we are seeing out of those Texas stores.

New stores are the engine of growth for Five Below. The continued consistency and strength in performance of our new stores is the most exciting aspect of the Five Below story, as we see this consistent store performance in both existing and new markets, as we export Five Below across the country. In new markets, customers get introduced to our brand for the first time, but we see them embracing us with the same level of enthusiasm as customers in our existing markets. We saw this again in Q1 with our entry into the Tennessee market, where we opened 5 stores in Q1.

As we continue to densify in existing markets, including the opening of stores in Pennsylvania, Ohio, Michigan, and Illinois this past quarter, our new stores continue to generate consistently strong performance, as the customers in these markets often have some level of familiarity with Five Below already. I want to take a moment and commend our team for a very impressive job in executing our new store openings.

Q1 marks our 32nd consecutive quarter of positive comps. Our comp store sales of 6.2% for the quarter were fueled by a very strong Easter selling across many of our category worlds, including seasonal. Given the late Easter this year, we saw high-volume pre-Easter weeks taking place in April, with somewhat of a pullback in the post-Easter selling period. This is not unusual for our business, as our customers take a pause after shopping as heavily into a holiday. We've reflected this, as well as our outlook for the important months of June and July when schools are out, in our 2Q guidance that Ken will go over shortly.

This solid sales performance was accompanied by a 30% increase in adjusted operating profit and adjusted EPS of $0.07, even as we continue to invest in the many areas of the business that you've heard me discuss on previous calls; namely, infrastructure, systems, and most important of all, talent.

Five Below was founded 12 years ago. We spent the first decade proving a concept, its portability, and the consistency of its performance. For the next decade, as we take this amazing business we have today and effectively scale it to harness its full potential, we will be proactive and aggressive in making foundational investments, constantly assessing the growing needs of the Company and anticipating where future needs may arise.

We spoke to you about the need of increased East Coast distribution capacity on our Q4 call, and we anticipate that will happen in the second half of next year. Implementation of an upgraded ERP system will begin towards the end of next year and into 2016. And we will also continue to add talent at the leadership level, including the President position for which, as you know, we have a search underway.

So our priorities are unchanged from what we spoke to you a little over two months ago and we are hard at work executing against them. We are focused on maximizing the potential of our current business, while also placing equal importance on building the road map and foundation for our future. And while we are pleased with our Q1 performance, the bulk of the year lies ahead and I believe we are well-positioned to execute against the goals we've set for ourselves. At this point, I would like to turn over the call to Ken to review financial results and provide outlook in more detail. Ken?

Thanks, Tom, and good afternoon, everyone. I will begin my remarks with a review of our first quarter results and then discuss our outlook for the second quarter of and FY14.

Our sales in the first quarter of 2014 were $126 million, up 31.8% from the $95.6 million reported in the first quarter of 2013. We ended the quarter with 323 stores, an increase of 65 net new stores, or 25.2% versus the 258 stores at the end of the first quarter of 2013. Comparable store sales increased by 6.2% for the first quarter of FY14, as compared to a 4.2% comp increase in the first quarter of 2013. This comp increase was largely driven by transactions. Strong Easter selling drove the comp upside relative to our expectations.

Gross profit increased 28.9%, to $38.9 million from the $30.2 million reported in the first quarter of FY13. Gross margin decreased by 70 basis points to 30.9%, driven primarily by the expected deleverage of buying costs, reflecting the increased merchandising headcount as a result of the talent additions in 2013 and early 2014.

As a percentage of sales, SG&A for the first quarter of FY14 decreased to 26.7% from 28.3% reported in the first quarter of FY13, due to lower stock compensation related to the founders' transaction, as well as leverage on corporate expenses. As a reminder, this was the last quarter that we will have stock compensation related to the founders' transaction item as an adjustment on our income statements.

Excluding the costs of the founders' transaction in both periods, adjusted SG&A was $32.8 million in the first quarter of 2014, or 26% of sales, as compared to $25.5 million, or 26.7% of sales, for the first quarter of last year, as we saw leverage on our corporate expenses as compared to the prior-year period. This was offset in part by higher pre opening expenses, based on the 46 new stores that will be opened in the first half of FY14 versus 33 new stores opened in the first half of 2013.

Our GAAP operating income was $5.3 million for the first quarter of 2014. Excluding the cost of the founders' transaction in both periods, adjusted operating income for the first quarter of 2014 was $6.1 million, which was a 30.1% increase from last year's adjusted operating income of $4.7 million. As a percentage of sales, adjusted operating margin was 4.9%, compared to 4.9% for the same period last year.

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

Before I discuss net income, I want to point out that for the quarter-to-date period, I will be referring to adjusted net income and EPS that excludes the impact of the founders' transaction in both periods. When I refer to EPS, it is EPS based on adjusted net income using an adjusted diluted weighted average shares calculation for the period. A reconciliation of GAAP net income and net income per share to these adjusted numbers on an adjusted weighted share basis can be found in the financial tables included in our earnings press release issued today.

The adjusted diluted weighted average shares outstanding assumes, among other things, the impact of all unvested and vested restricted stock as of the of the beginning of the period. As a result of the factors I just described, adjusted net income for the first quarter of FY14 was $3.6 million, or $0.07 per share, as compared to $2.5 million, or $0.05 per share, in the first quarter last year.

We ended the first quarter of FY14 with $17.8 million in cash and cash equivalents, availability of $20 million under our revolving credit facility and no debt, as we repaid the remaining $19.5 million of principal on the term loan during the quarter. Inventory at the end of the first quarter of FY14 was $98.6 million, as compared to $75.3 million at the end of the first quarter of FY13. Ending total inventory on a per store basis increased 4.5% year-over-year.

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

For the full fiscal year 2014, sales are expected to be in the range of $675 million to $681 million, with the comparable store sales increase of 4%. This compares to net sales of $535.4 million for FY13, representing a growth rate range of 26% to 27%. We continue to expect to open 62 new stores in 2014 and to end the year with a store count of 366, as compared to our 2013 ending store count of 304.

We are reiterating our full-year earnings guidance that we provided back in March. We expect relatively flat gross and operating margins for the full year. While we did deliver $0.01 of EPS upside in Q1, we also have incremental investments we are making on the people side of the business that will be offset in future quarters. GAAP net income is expected to be in the range of $46.6 million to $48.2 million, with GAAP diluted earnings per share of $0.85 to $0.88. Adjusted net income is expected to be in the range of $47.1 million to $48.7 million, or approximately a 28% to 32% increase over FY13, with adjusted earnings per share expected to be $0.86 to $0.89.

And as Tom noted, we are particularly proud of our ability to deliver this level of earnings growth as we continue to make all of the critical investments in talent, systems and infrastructure. And as I mentioned last quarter, given we have repaid all of our debt, we expect net interest expense in 2014, including the write-off of deferred financing fees, to be in the $400,000 range, with the majority of this expense occurring during the first quarter.

With respect to CapEx, we still plan to spend approximately $35 million in FY14. And as I mentioned last quarter, our capital expenditures will be for opening of 62 new stores and investing in existing stores. In addition, we will be making improvements to our distribution centers, including the continued fit out of Olive Branch. We will also incur initial spend for the planned expansion of our Northeast distribution facility that we expect to take place towards the second half of 2015 or early in 2016. And we will continue to invest in corporate infrastructure and systems upgrades.

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

Thank you, Ken. So in closing, we're pleased with a very solid start to 2014. Our new stores continue to demonstrate a consistently strong performance across markets, as do our comp stores. With our merchandising focus and discipline, we continue to delight our customers. Our emphasis remains on executing and execution against a very attractive store growth opportunity that lies ahead of us.

The goal for us, and what we think will drive the success of this business for our customers and our shareholders, is to ensure we keep pushing ourselves on product, people, and systems. I truly believe we need to be relentless about constantly reinvigorating a product assortment that serves to drive traffic to our stores. We need to constantly assess our human capital needs and add the necessary talent, both in leadership, as well as across layers of the organization. And finally, we need to continue to invest in systems to become even more nimble and further enhance our ability to respond to customer demand.

I want to thank you for your support. And at this point, Operator, we're ready for the questions.

Thank you.

(Operator Instructions)

John Heinbockel, Guggenheim Securities.

Hello, guys. It's actually Steve Forbes on for John today. With 48 of the 62 locations already announced for this year, can you discuss how far along you are with the 2015 expansion program? And with that, would you anticipate any major new market entry, or just a few smaller ones?

Well, as you know, we won't provided specific guidance, including new markets, until further down the road. I think it's fair to say that, as you've been hearing in the past, we feel great about where we are with our 2014 class of stores, having opened more than half already. And we have made terrific progress against the class of 2015. We have no concerns, at this point, on our ability to deliver on 2015, from what we see so far and where we stand. All looks good.

Okay. And with seasonal merchandise, from our perspective, the contact looks -- the content looks as good as it has in a while. So just in general, how do you feel about it versus prior seasons and how do you feel about the seasonal inventory levels?

Well, I think for me personally to say that I feel great would mean that I'm settling, so to speak. But all joking aside, we feel great about the product where we are. The customer's responding very favorably, obviously. And I think from an inventory standpoint of view, as Ken mentioned, if you look at where our inventories came in last quarter, including Q4 performance, et cetera, we are in a very, very good position, inventory-wise. We are comfortable with the quality of our inventory. And while we did see a bit of a pullback, as we mentioned, immediately after Easter, I'm confident and believe that we are very well-positioned for the all-important June and July summer months, which, just again to remind people, these are very important months for us. Schools are out. Kids come in to our stores. We do a lot of our Q2 business in those two months.

All right. Thanks, guys.

Chuck Grom, Sterne Agee.

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

Thank you.

First on the gross margins, they were down just a touch more than we had expected. But at the same time, it looks like your inventory growth is much more aligned with your sales growth. So I know you mentioned the talent additions, but can you touch a little bit on the different drivers of the gross margin decline in the quarter and if there was any impact from clearing out of inventory and the ramp-up of the Olive Branch DC?

Yes. I think it says -- we mentioned really that key driver in the gross margin delever that we saw in Q1 was the additional investment in the buying personnel that came on late in 2013 and into '14. That was really the key driver there. Again, we feel good about our inventory position, in terms of where that is. I think we mentioned, as part of our Q4 call, we had felt that we captured the majority of any issues related to Q4 and mark downs back in 2013, so that really wasn't an issue for us in Q1.

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

Well, you're right. I think when you look at the productivity calculations for Q1, they're very healthy. As Tom mentioned, we're really pleased with the performance, the early performance of the 2014 stores. And again, just to emphasize the word early. It still is early there. We've got 62 stores that we're going to be opening up this year. Obviously, a mix of stores. But at this point, we feel very good about the performance that we've seen. But again, we still have a ways to go for the rest of the year.

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

Well, I'd typically give you an analogy around that question, but I won't. I'll just answer the question. Look, I think the best way to put it is this way. The thesis around Five Below remains intact, our ability to execute our new stores consistently, both on performance and bottom and top line, performance in existing markets and new markets is something that we've done consistently. I think it's imperative that we don't get carried away. There's plenty of opportunity. I think we've said it in the past, potential of this company could be 2,000-plus stores across the nation.

What is important and what I believe has driven the success to date that we've had is our ability to execute at a high level. And that being said, I think it's important that we stay focused. And when you look at our top line and bottom line returns that we have in growth, we're in a really terrific spot. I don't think we need to be pushing ourselves to get that to even a higher level.

We're sitting on a model today that has a payback of way less than two years. You have a top line in the range of model of about 1.6 to 1.7, and we've beaten that constantly over the last few years. I think it's important to just continue to excite our customer, to deliver properly for our customer, both in new and existing stores.

And our goal, and my focus for the organization, is to make sure that we continue to delight our customers across both new and existing stores, while serving our shareholders with a consistent rate of return. Bottom line, that comes first. And this idea of trying to really push the growth rate is not something that we pay much attention to. As a matter of fact, we could have a 20% unit growth this year. At some point down the road, it may be less, it may be more. We'll see.

But we will make those decisions as we look ahead and we will communicate accordingly. Right now, our goal for the foreseeable future is to continue to deliver in the same consistent fashion, to the extent that we can, that we've done in the past.

Okay. That's great. Congrats again.

Thank you.

Dan Binder, Jefferies.

Good afternoon. Nice job on the quarter, given the early weather challenges. My question is also -- I have two questions, one about real estate. And as you've gone back into some of these markets where you are already fairly dense and you've added more stores, have you recalibrated your real estate model to get a bigger output on that 2,000 store goal?

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

Sure. Let me just take the real estate side and then I'll turn it to Ken. Nothing's really changed in our real estate strategy. Backfilling existing states, including -- we are still opening stores in Pennsylvania. It was the first state that we opened our first store. I think we've said in the past, while we may see some level of cannibalization -- which by the way, it's all in our numbers -- it's nothing material, at this stage.

What we do see is that the response in those stores is actually quite amazing. It's no different than new markets. And the level of performance in the stores -- it's not that we're giving anything up -- the performance is at the same level. The customers, if anything, know us, so awareness maybe kicks in even a bit sooner than maybe in new markets.

But no change in our real estate strategy. We'll continue to densify, and there's still stores for us to build in all of our existing states. Sometimes availability is the only factor that keeps us from actually densifying even more so, because certainly, as I'm sure you know, densifying is by far the best place to put your stores first, if you had the ability to do so, because you can leverage part of your expense structure in existing markets.

And then, Dan, on your question around gross margin and the merchandising talent investment, we really started making that in the middle of last year. So we're going to be lapping that towards the end of the second quarter. So not as much of an impact in the back half of the year at all. And then if you look at it on a full-year basis, there's going to be some other slight puts and takes in cost of goods sold and gross margin which will be getting us to that, what we expect to be a relatively flattish gross margin year-over-year.

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

Yes. As we mentioned, we reiterated the guidance there for the full year. And relative to the DC, yes, it's relatively flat year-on-year, if you look at a full-year basis.

Great. Thank you.

By the way, just a comment on the DC. If you look at that new DC that we have, total store count today is up here by about a third. It's also about a third of its capacity. Maybe a little -- right? So total capacity in that DC today, we're probably operating at about a 30% to 33% of total capacity. So in any new distribution center you're going to go to, as we continue to add stores, we'll be able to leverage not only occupancy, but, as important, some of the freight that we incur by shipping to places like Texas.

Additionally, when you first go into a new DC, you typically won't see the level of productivity in the early stages of taking over the facility that you would in the existing facility. So as we get further along, certainly as we add more stores and as the team down there gets up to speed, certainly I think we'll see some, hopefully some benefit at some point.

Paul Trussell, Deutsche Bank.

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

Thank you.

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

Sure. I think part of the strength, we've said this in the past, part of the strength of the Five Below concept is the category worlds and the ability of the customer to shift from world to world around need. What's interesting for us and when you look at our businesses, some businesses tend to be pretty constant. Some of the worlds that fared really well around the Easter shopping may not necessarily be the same worlds that do well in Q2.

Certainly in Q2, we expect summer weather is obviously in our favor. The spring/summer outdoor beach/pool business is a very important business for us. I believe we are well-positioned for that. And that should be one that we would look to really to see some good performance out of, in particular, coming out of Q2.

Great. Thanks. And in terms of, you've always talked about your new store classes and how they've opened up around where the Company average has been. Is that something you're still seeing, given some of the entries into the new markets, or has it Improved?

We're still seeing this, that's really again for a company whose growth engine is new stores, and when you consider just how much runway this company still has ahead, we really feel pretty bullish about the opportunity that's ahead of us, because we see that consistency of performance in the new markets that we've been seeing in the past recent classes.

Great. Thanks.

You're welcome.

Christian Buss, Credit Suisse.

As a follow-up to that question, could you talk a little bit about store performance by geography and what you're seeing in some of the newest geographies that you've been in?

Yes. I think we've spoken about this before, and it's remained pretty consistent in terms of the performance of stores in general and new stores, really across the board. So whether we're looking at it by region, whether we're looking at it by class and we're looking at comps and things like that, we're still seeing relatively consistent performance across the board with overall store performance.

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

It's a very important position for us. Search is underway. We're certainly getting a lot of interest. But I think what's important for us is not to rush. What's important for us is to make sure that we do the best job we can to find the best candidate for the role. At the point that we're ready to announce anything, we will definitely put it out to all of you. At this point, not much more to say.

All right. Great. Thank you very much and best of luck.

Matt Nemer, Wells Fargo Securities.

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

Well, I think, as Tom noted, it's not unusual for us to see that after significant shopping from the customer in a holiday like Easter for us, which is important. From a timing standpoint, I don't know if we need to talk about the time of all that, but it's pretty natural for us. And we're seeing that again, given the late Easter and the timing this year versus last year. So that was one of the things that we consider when we give our guidance. And I think Tom mentioned that also, we also always take that into consideration in terms of what we see to date.

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

Yes. I think from a merch margin perspective, it's been similar to what we've seen in the past and what we've spoken about, again, not to expect significant improvements or changes in merch margin. That's what we saw again. And actually as a follow-up to Tom's point regarding the DC, again, having the new Olive Branch distribution center online there, things that we see there in terms of the freight that we still continue to ramp up and utilize, so there was a slight challenges there on the DC line. But really I just want to make sure everyone understands, the real, the driver was the investment in merchandising personnel. The other areas were really some smaller puts and takes.

Okay. That's helpful. And then one last one. You mentioned reinvesting some of the upside this quarter into incremental people investments over the next few quarters. And Tom, you'd mentioned in your remarks your intention to invest in people. Just wondering where you're focused over the next few quarters. Is it more on the merchant side, planning, distribution, et cetera?

I think it's sort of all of the above. But really, I think as we look at leadership in general, both top and across some of the categories, I think it's not as much in merchandising for the foreseeable future, because I think we've made quite a bit of an investment already in that organization. We're looking at, obviously, some of the other areas that you mentioned, as well as leadership.

Okay. Great. Thanks. Great quarter.

Thank you.

Jeremy Hamblin, Dougherty and Company.

Good afternoon, guys, and thanks for taking my question. I wanted to follow-up on the new unit growth in the first half of the year, which I think is 46 new units versus 32 last year. And Ken, I think you spoke a little bit about the pre-opening expenses associated with that. Could you quantify that 14 unit difference, how much in additional costs that you're likely to see with that this year versus last year?

Yes. From a timing standpoint, I think, just again, in the first half of the year, you're going to see that impact on pre-opening expenses and we saw that in Q1. So the benefits we saw in leveraging of corporate expenses on the sales, they were offset in part by the pre-opening expenses. Don't really want to get into specifics in terms of basis points here or there, but suffice it to say that the first half of the year, we'll have more of those pre-opening expenses year-over-year, based on the number of stores that we're opening this year versus last year. Because if you remember, last year we had the Texas market opening, which came in the back half of the year. And this year, we're going to have the majority of store openings in the first half.

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

That's a reasonable assumption.

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

Well, I think if -- to the best of my recollection from last year, I think we had a little bit of rain and some weather. But we also saw, again, once kids get out of school for us, it was interesting that maybe some of the other categories I recall mentioning on our conference calls that while one category didn't fare well, in that case, seasonal, we fared quite well in some of the others which offset the miss in seasonal. And depending how weather goes this year, I think it could go in a different direction.

What's important to note for us is we have a great connection with our customers. Our customers love to shop our stores. It's been over and over again they've told us that. But they also will shift from category to category. So I don't think it's come in to buy seasonal and they're not going to buy everything else. If we have great weather, I think you're probably can expect the seasonal business to fare quite well, because I think we're positioned well.

As for the moves and the adjustments, to us, what you see in our stores is, again, this constant drive that we have to excite and delight our customers and to move product around within the stores more than anything else. And I think you will continue to see more of that. But that is what Five Below is all about. That is why the investment in talent. That is why the investment in training, et cetera, to continue to push the envelope, as we have in the past, going back to where the Company was when we first started and where it is today, its product offering, its disciplines, its inventory disciplines, its presentation in stores. It's changed a lot and will continue to do so. We only have one goal, drive traffic by delighting our customers. And we will do that through great product, great in-store experience, and all our product at $1.00 to $5.00.

Thanks for taking my question, guys.

You're welcome.

Jennifer Davis, Buckingham Research Group.

Congratulations on a very good start to the year.

Thank you.

Most of my questions have been answered, but I guess I have a couple of clarifications. I think in the second quarter this year, it looks like you said you're opening 27 new stores versus 18 last year. So I was wondering if you could kind of guide us maybe, or give us a little color around the EPS impact from those additional 9 stores just in terms of the higher pre-opening rents and pre-opening expenses?

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

Okay. All right. So to a lesser extent than we saw in the first quarter?

Correct.

Okay. And then, this might be just rounding, but it looks like you raised full-year revenue guidance, but you maintained your full-year comp guidance. Is that just rounding, or are new stores opening stronger than you had originally planned?

Really, on an overall basis, it probably is rounding. But it's embedded more in the new stores than any additional or incremental performance we saw coming out of Q1.

All right. Great. Thanks and best of luck. The larger summer presentation you guys were able to pull together really looks good. So congratulations.

Great. Thank you.

Did you shop?

I did.

Okay. That's what I want to hear.

I always do.

Shoot me a photo next time.

Will do.

Okay. Thank you.

Stephen Grambling, Goldman Sachs.

Good afternoon. Thanks for taking the questions. One is a little bit longer term, as we think about the EPS algorithm that you've laid out. You just basically announced a number of investments, the ERP, new DC. As we look out over the next year -- I realize it's still early -- should we be assuming that that will be a year, FY15 they'll be below the historical algorithm, albeit temporary?

Steve, the algorithm you're speaking to is what?

I guess --

The operating margin?

I'm just talking about EPS growth rates. And op margin, I guess, would be within that.

Yes. Again, we haven't done a lot of work going out looking too far, so I wouldn't get too far ahead on this. And again, the timing may shift on some of these things. As you know, we tend to be conservative, especially in terms of what we're going to tell everyone for where our spend's going to be. But at this stage of the game, I wouldn't see any material changes in what -- up against our longer-term growth rates that we've spoken about, that we still should be within those ranges in the near-term years, even with those investments that we've mentioned today.

I guess on the new DC, is there any reason why that would have a different impact than the current DC that you recently opened?

The only thing I could see there, again, Tom mentioned this before, the new DC in Olive Branch, we're ramping up utilization. An expanded Northeast facility, wherever that may be, that would come on with many more stores right out of the gate. So they might be a little bit of a difference there in terms of what we're seeing coming out of a brand-new distribution center that was ramping up versus a DC that's going to be taking on some stores in existing markets right out of the gate.

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

To drive store visits?

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

Well, certainly, I think there's actually two parts of the question. But before I get to that question on digital, let me just add a comment to the distribution. And I think it's important for both our customers, but as important for investors, not to get caught sometimes into the quarter or the month or what happens at the beginning, and just look at the facility that we're looking to build or to have in the Northeast. We currently have a facility that's 400,000 square feet. It handles roughly, I think, 200-plus stores.

So what we want to do, given our ability to densify existing markets, is really build a much bigger facility there to handle not only all the new stores that we can put into this market, but also some of the higher volumes that some of these stores tend to have. And while we may feel a bit of a pain for a period of time, whether that's six months or a year, the opportunity, the longer-term opportunity of these decisions to leverage our ability -- think of the freight benefit alone long-term that we could have when we have a full-blown facility that could maybe handle, I don't know, 2X the store count that we have today.

So some of these decisions we're making and the investments that we're making, I think it's important that we see them as true and real benefits to our return and to our investors' benefit on a longer-term basis and not try and get too caught up in some of these one-off quarterly hits, 10 basis points here, 10 basis points there, et cetera. So we are very excited, if nothing else, about the opportunity to put a larger facility in the Northeast, for a lot of good reasons, to benefit both the top line and the bottom line of those stores.

Now back to the digital. There's really two sides to that equation. One is, how do we continue to leverage social media? That's our customer. That's our sweet spot. And we're doing a lot. And hopefully at some point, we get to either see some of you folks or visit some of you folks or on a conference maybe we can get into it in more detail. But I can tell you, we are starting to spend both time and resource around that through our marketing efforts, because we need to really be like best-in-class on social media and that side. It's the best way to communicate with our customers, and we're not going to win the war or the battle if we continue to see a long-term future of using circulars, for lack of a better term, to drive traffic to our stores.

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

All right. Well, thanks for all the color and best of luck the rest of the year.

Really appreciate it. Thank you.

Michael Lasser, UBS Investment Bank.

Good evening. Thanks a lot for taking my question. My first question is on the step-down that you talked about in the wake of Easter. Was the change in the cadence of business greater than you typically have seen? And is that because store volumes are just getting to maybe more mature levels and so the business is becoming more volatile? And then I have a follow-up.

Time will tell. Our thinking, from what we see and when we look at past holidays, our feeling is we are a terrific destination for Easter. And we saw it even more so with the solid performance that we had in Q1. Kids are out of school, moms shop, et cetera, et cetera. We had a very strong performance around Easter. And following Easter, we saw a bit of a lull and a pullback in our business. We believe that's indicative of the customer having shopped and almost taking a break, for lack of a better term, from our stores.

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

I think you're right. I think it was pretty typical of what we've seen from a volume standpoint post a later Easter that we looked at. So yes, nothing unusual.

Okay. My second question is, there's a lot of focus on the third quarter and how you're going to anniversary the contribution you got from rubber band bracelets last year. So A, are you planning anything in particular as you confront that more difficult comparison from product contribution? And B, are you planning for positive comps in both quarters in the second half of the year? Thank you.

We plan on making sure that we have the right product for the customer for a quarter that actually is not that big. If you look at Q1, Q3, they feel the same to us, from an impact standpoint of view. I think for us, getting the categories right, getting the product right is priority number one. Trying to offset and to jump through hoops to do a lot of extra initiatives, particularly in a quarter like Q3, which is not a big quarter for us, to offset a nice trend that we had last year, I just don't think it's in our makeup.

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

This year, as long as we are well-positioned across the category worlds, we'll give you our guidance for Q3 after we see where Q2 comes in and what the trend looks like. But nothing special that we are planning to do specifically to offset the rubber band trend from last year.

Okay. And so the investment community and the market prepare, as we get here nine days from now, it wouldn't be surprising if you do plan for a flattish comp or something that's below a little bit of what you might see outside of the other three quarters, just in light of that. But to your point, as far as the full year earnings contribution, it's far from meaningful to the full year?

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

Yes.

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

Thank you.

Patrick McKeever, MKM Partners.

Thank you. So just getting back a little bit to the question about social media and digital and whatnot, my question is on advertising. And it sounds like, Tom, you're saying that you get more bang for the buck from what you're doing with social media versus the flyers, which you continue to do. Just wondering if that, in fact, is the case and what the thought might be there going forward.

Also, how are you approaching advertising around new store openings, including the Houston store openings? And will there be some incremental advertising expense in the second quarter because of that? Is that in guidance or is that not a factor, on a year-over-year basis?

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

Going back to your question on social media. No question about it, it's an area that we have to continue to both invest and get good or even better at. Still today though, unfortunately, for traditional retail, I wouldn't necessarily say you get a better bang for the buck as you connect with your consumer, much more direct and the feedback is almost instantaneous. So we still need some of these circulars, unfortunately, for the foreseeable future, particularly around key events to be able to present our offering of -- particularly as we go into key seasons. That being said, again, and more to come, I think the area of social media for us is one that we are starting to invest in, again, all in our numbers, of it has to be our way forward, given the audience that we are serving.

It's helping us even in some cases, just so you know, just a small anecdotal comment to make on that, we're starting to even use that as a platform for us to make our merchants to make decisions around product, which is amazing, and to get instant feedback. So some great things going on in the Company on that front that not only I think over time help the top line through response, but really help us get some terrific feedback. You have a very loyal customer around product decisions and assortment content.

Okay. Great. Thank you very much.

Thank you.

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

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

Ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.