Five Below Inc (FIVE) 2016 Q3 法說會逐字稿

Good day, and welcome to the Five Below third-quarter earnings conference call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Christiane Pelz. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thanks for joining us today for Five Below's third-quarter 2016 financial results conference. On today's call are Joel Anderson, President and Chief Executive Officer; and Ken Bull, Chief Financial Officer and Treasurer. After management has made their formal remarks, we will open the call to questions.

I need to remind you that certain comments made during this call may constitute forward-looking statements, and are made pursuant to, and within the meaning of, the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and Five Below's SEC filings.

The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements. If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our website at FiveBelow.com. I will now turn the call over to Joel.

Thank you, Christiane, and thanks everyone for joining us for our third-quarter earnings call. We are pleased that we delivered Q3 earnings per share of $0.10, at the high-end of our guidance range, and a 25% increase versus Q3 last year. Total sales grew 18% to nearly $200 million, with new stores continuing to deliver strong performance.

During the quarter, we opened 26 new stores, including seven new stores in the state of Texas, which now has as many as our home state of Pennsylvania. Additionally, we entered the state of Minnesota, which is our 31st state. As I mentioned on our last call, in September, we hit an important milestone, opening our 500th store, just outside of Allentown, Pennsylvania. We ended the quarter with 517 total stores, an increase of 19% versus Q3 last year, and the class of 2016 is generating very strong productivity, as you can see reflected in our sales performance.

In the first week of November, which was Q4, we opened two more stores in the Philly Metro area. While this is one of our oldest markets, it still has opportunity for further densification. We have now completed our 2016 new store plans.

Moving to comps, as we noted last quarter our plan assumed a sequential deceleration in our Q3 comp performance, as we anniversaried a very strong 4A comp driven by strong licenses like Shopkins and Minions, and other trend items such as selfie sticks. In addition to being up against this challenging comparison, we were impacted by the uncertainty and consumer distraction leading up to the election. This hurt us in October and early November, but the good news is we have seen business improve post-election and I feel good about our Q4 and full-year outlook.

On the merchandising front, while licenses and trends were less pronounced for us in Q3, many of those we have previously mentioned continued to contribute to our results. And in addition to those, the team continues to create a fresh, fun and exciting assortment, all at incredible values for the Five Below customer. In Q3, room was a strong world for us, with several decor items, and we saw strength across our tech assortment.

Moving to our digital and marketing strategies, on the digital side, we were pleased with the Q3 launch of our e-commerce site. Our customers have enjoyed the convenience of having access to Five Below's value online.

As previously mentioned, we launched with a very limited assortment, and they are now focused on adding SKUs and features, and working to ensure our first holiday online go smoothly. As I have said several times, we have and will continue to approach e-commerce with pace and diligence.

With regards to marketing, as you know, we are constantly testing and learning with new campaigns and calls to action that utilize different channels, as we strive to be more relevant and effective with our marketing messages. In Q3, we tested several promotions to understand the potential future impact, and you should expect to see us continue to test promotions and marketing channels as we work to optimize our mix.

As I have previously discussed, one of our tests and learned successes over the past couple of years has been TV in Q4, which is a good segue into our holiday positioning for this year. We are now one month into the fourth quarter, and I feel good about our start.

Our new TV ad campaign just started running over the past two weeks, and we've already seen the customer begin to respond. We believe TV will play a very important role for us in Q4, as evidenced by the results of our two successful Q4 TV tests in 2015 and 2014, which we believe have shown TV is a proven and important Q4 traffic driver for us.

In Q4 this year, we look forward to connecting with more customers, and further building our brand awareness through the expanded reach of our TV campaign. Our ad is being shown in roughly 40% of the chain, versus 25% last year.

With respect to Q4 merchandise, our merchants and product development team have created a very strong and compelling holiday assortment. As you saw on our Black Friday ad, this assortment included items at incredible value, like a Bluetooth wrap headset, a sewing machine, amazing pillows and blankets for $5 or below. These are just a few examples of how our increasing scale provides the Five Below value proposition for our customer. We have also assembled a great collection of emoji-related products, all price from $1 to $5.

In addition to executing our merchandising and marketing, our other long-term strategic priorities remain intact. Key among these priorities remains new store growth.

I cannot emphasize enough the attractiveness of the opportunities we continue to see in regards to store growth. It remains our number one priority, as we are only a quarter of the way to our 2000-plus store potential. In fact, the class of 2016 is currently tracking to be our strongest class ever.

It is important to remember that 85% of our top line growth continues to come from new store growth, and this remains one of the core drivers of our planned 20% annual sales growth until 2020. The team has been working on our 2017 class, including our entry into California, and we expect to open our initial wave of stores in Southern California in the first half of the year. We will update you further on our 2017 store growth plans on the fourth-quarter call.

Let me conclude by saying with the election behind us, we are pleased with the more positive business trends that we are seeing, and we believe this provides nice momentum heading into the big holiday weeks in December. We believe that we are well-positioned for our customers, with a compelling assortment of gifts and stocking stuffers at extraordinary values, all of which are being highlighted in our Q4 marketing campaign.

We have seen how TV has worked for us during the holiday quarter, and we are excited to feature Five Below as the destination for incredible holiday deals. Given our year-to-date financial performance, and our confidence in our holiday outlook, we are raising the low end and reiterating the high end of our sales and earnings guidance for 2016. For 2016, I also want to reiterate our long-term goals of 20% top line growth and 20% net income growth until 2020.

And with that, I will turn it over to Ken. Ken?

Thanks, Joel and good afternoon, everyone. I will begin my remarks with a review of our third-quarter results, and then discuss our outlook for the fourth quarter and the full-year. Our sales in the third quarter of 2016 were $199.5 million, up 17.6%, from $169.7 million reported in the third quarter of 2015.

We ended the quarter with 517 stores, an increase of 83 net new stores, or 19%, versus the 434 stores at the end of the third quarter of 2015. Comparable sales decreased by 2/10% for the third quarter of FY16, as compared to a 4.8% comp increase in the third quarter of 2015. This comp decrease was driven primarily by a decrease in comp transactions.

Gross profit increased 21.3% to $64 million, from the $52.8 million reported in the third quarter of FY15. Gross margin increased by approximately 100 basis points to 32.1%, due primarily to lower freight rate and leverage from our new distribution center that we opened in the second quarter of 2015.

As a percentage of sales, SG&A for the third quarter of FY16 increased approximately 80 basis points to 27.8% from 27% in the third quarter of FY15, due primarily to leverage, deleverage of fixed expenses associated with the lower comp, as well as costs related to our e-commerce launch and 2017 entry into California. Our operating income increased 23.4% to $8.6 million or 4.3% of sales, from $7 million or 4.1% of sales in the third quarter last year. Our effective tax rate for the third quarter of 2016 was 37.4%, compared to 38.2% in the third quarter of 2015.

Net income increased 25.6% to $5.4 million or $0.10 per diluted share from $4.3 million or $0.08 per diluted share last year. We ended the third quarter of FY16 with $63 million in cash, cash equivalents, and short-term investments, and no debt. Inventory at the end of the third quarter was $228.2 million as compared to $213.6 million at the end of the third quarter last year.

Average per store inventory at the end of the third quarter of FY16 decreased approximately 10%, as compared to the end of the third quarter of last year. This decrease was driven by the timing of domestic receipts, and lower in-transit inventory, due to lower penetration of direct imported goods. We expect lower penetration of direct imported goods in Q4 as well, and we expect to end the year relatively flat to our import penetration last year of approximately 33%.

Now, I would like to turn to our guidance. For the fourth quarter ending January 28, 2017, sales are expected to be between $391 million to $397 million, with five net new stores, and we are forecasting a Q4 comp sales increase of 2% to 3%. Net income is expected to be in the range of $49.2 million to $50.6 million, with diluted earnings per share for the fourth quarter of FY16 expected to be $0.89 to $0.92.

For the full year 2016, we are raising the low end and reiterating the high end of our previously provided sales and earnings outlook. Sales are expected to increase 21% and net income is expected to increase 24% to 26%. Our forecasted sales range is $1.003 billion to $1.009 billion, with a comparable store sales increase of 2.3% to 2.7%.

In 2016, we expect to end the year with a store count of 522, an increase of approximately 19% as compared to our 2015 ending store count of 437. For the full year, we continue to expect operating margins to be up slightly versus 2015, driven by improvement in gross margin, with modest deleverage and SG&A. As a reminder, our guidance takes into consideration benefits from our 2015 investments, as well as costs associated with our launch of e-commerce, and our 2017 entry into California.

We continue to expect a full-year effective tax rate of approximately 37.5%, and net income is expected to be in the range of $71.3 million to $72.7 million, with diluted earnings per share in the range of $1.29 to $1.32. With respect to CapEx, we plan to spend in total approximately $38 million in 2016, reflecting the opening of 85 net new stores, investing in distribution centers and corporate infrastructure, including systems.

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

Thank you, Ken. So in summary, we are very pleased to have delivered EPS at the high end of our guidance range in Q3. We built on our track record of strong new store performance, expanding operating margins and increased earnings per share by 25% in the quarter, despite being up against a strong third quarter last year.

With the election behind us and the improvements we have seen in post-election business trends, we feel good about our Q4 and full-year outlook. As you know, the upcoming holiday weeks are the most important for us at Five Below, and our teams have been preparing all year and are ready for them. We have a fantastic assortment of products at incredible values and a compelling holiday TV campaign that will touch 40% of our store base.

We will be driving home the message to new and existing customers alike, that Five Below is the destination for their stocking stuffers and gifting needs for this holiday season. I also want to stop and thank all of our associates for their hard work throughout this year.

And with that, I will turn it over to the operator for questions. Operator?

(Operator Instructions)

John Heinbockel, Guggenheim Securities.

So, Joel, obviously you are going to broaden out the TV effort this year. What are the thoughts in terms of frequency of impressions? Are you going to advertise or market more frequently? And then if you look at your e-mail database this year versus last year, how does that look? And will the frequency of touches in that mode, will that increase significantly from a year ago?

Thanks, John. No surprise, we are going to expand it. I think I alluded to in Q2, that as far as TV goes for Q4, we're really past the test and learn phase, and we're now in the roll-out days for it. We look at TV market by market, and when we reach a penetration that we feel has enough density of stores, then we can start to bring TV to that market. So obviously this year we are taking it up, as I shared with you in my prepared remarks from 25% to 40%.

You should also expect us to slightly dial up the frequency, that will not be the same necessarily market by market, but overall it should be higher than it was last year. And then the e-mail database is definitely higher than last year. Our store teams do a great job of interacting with customers, gathering e-mails, and we continue to build that e-mail database. I would expect the relative frequency to be pretty much in line with where it was last year, although it might have a little bit different cadence.

Okay, thank you.

Michael Lasser, UBS.

It is Michael Goldsmith on for Michael Lasser. Your fourth-quarter guidance implies an acceleration of sales trends. We gives you confidence that the comp can get back to that low single-digit range that you been at in the past? And did you see anything in the past several weeks that support this? And also, can you frame how trends have improved post the election?

Yes. Obviously, the two big things that give us confidence is the election was a one-time event, and we clearly have seen a difference in our customer trends pre-election versus post-election. So that largely puts the election ring fence around the October timeframe in early November, and we've seen it improve since then.

And then secondly to the question I was just answering, to John, a second ago, we are expanding TV. TV has proven to be very successful for us to expand our reach.

And the third one I would add is, I think the product looks amazing this year. Michael and the merchant team, I remember last year was Michael's first year with us. Now he is in the second year.

We have much more tenure amongst our merchants, and so the product assortment just gets better and better. So really I would point to those three things, and obviously you can tell by our guidance that we believe business has improved.

Thanks so much and good luck in the fourth quarter.

[Shaun Kraft], Barclays.

Can you discuss Black Friday weekend and how it compared to your expectations, and also last year?

Well, as you know, we try not to break out the quarter and certainly not get into the days, but we've got one month behind us in the fourth quarter, and as I said, we feel good about how the quarter started out for us. When you look at the whole period of Black Friday, we felt very comfortable with the sales we saw during that time period, and as we head into December here, it sets us up for a good fourth quarter.

Thanks, Joel.

Paul Trussell, Deutsche Bank.

Certainly a lot of focus on the 4Q guide, And I think part of the reason is just, if you could maybe help us better understand what happened in the third quarter? You listed a number of headwinds on the product front, as well as the election.

But most of that was known. So maybe you can walk us through where the miss was versus your outlook in 3Q? And how we should therefore think about what you said for 4Q in the up 2% to 3%?

Certainly it was largely around the election. We also had the hurricane, there was the Halloween shift, but I think when we gave guidance last time, we didn't forecast the election impact to be as great as it was, and clearly when we looked at the quarter, it was really October where we saw the biggest deceleration from what we had previously planned. Ken, anything to add?

No, I think you hit it. And other piece is just again, Paul, in our guidance, we had obviously assumed the deceleration in comps for the entire quarter, and to Joel's point, we saw that impact of the election late in the quarter and some other things later in the quarter, a smaller impact around the hurricane and Halloween shift.

Thank you.

Edward Kelly, Credit Suisse.

So just a quick follow-up on Q4, I guess. As we think about what you seen so far within the quarter, is it safe to say that you're within that 2% to 3% range at this point? And you mentioned that the product looks amazing for the fourth quarter. I was hoping, could you provide some insight around the merchandising this holiday, what you are excited about? More specifically there's been some concern just about licensing, lapping some of the license product this quarter this as well. Any color that you could provide to help us get a better sense as to how you are going to have another good holiday season?

To start with the product I'd go back to what I reiterated in some of my prepared comments, you look at the Black Friday ad that we just completed, Bluetooth wrap headphones for $5 is amazing, a sewing machine $5. You will see in this weekend's ad half the front page all around the theme of Bluetooth, so just a great example as this brand continues to get bigger, our scale and buying power get stronger, and we continue to while the customer with new items, new product, and starting with what we saw with Black Friday and then continuing with what we've got planned for this weekend and all the other weekends is going to really wow the customer.

You have to put that together with TV. And we really found a nice combination here of, as Michael and the team sources and delivers amazing product, our marketers led by David, are putting together great ads that are in weekly and we are bringing that to life on TV. Probably if you talk about trends, trends in our business change every year.

Probably the trend that's emerging the most this year is emoji. When you walk in our store now, and there is 16 to 19 feet of emoji-related product. Last year that wasn't there, six months ago that wasn't there.

So this business continues to ebb and flow and some worlds are big one year, and a different world in another year. Really as we go into Q4 here, our tech business is doing well, and trends like emoji-related products are doing great. Those would be probably the two biggest callouts I'd give for you to give us confidence in how we have guided for Q4 here.

Thank you.

Dan Binder, Jefferies.

I had a question on ticket. Wondered if you give a little bit of color on how ticket looked in the quarter? And to the extent that obviously the store has got a relatively narrow price range, I'm just curious when you look at the composition of $1 items versus $5 items, year-over-year, do you see a bigger mix of the higher ticket items for Q4 versus last year, and where -- what do you see in the performance at the different price levels?

Thanks, Dan. On the price levels, and Ken can add some more color on ticket, year-over-year we're relatively flat with what was $5 percent this year is the same as last year, and $1 is the same relative to last year, as well. And Ken, anything else?

Dan, the components of comp within Q3, I think we mentioned transactions was obviously the key driver in the decrease in comp transactions in Q3, which obviously implies, given where we landed, an increase in average ticket on an overall basis in Q3.

Great. Thank you.

Alvin can sub-sea own, Citi.

Thanks for taking my question. Just a follow-up on the comp trend. You mentioned November post-election.

Just curious what gives you confidence that will hold, more so to the extent that you think that was a pull forward of demand, rather than just pent-up demand? And the follow-up to that is, do you have any general observations on the consumer? I think many have been affected by healthcare and rent expenses, so just curious your take on that?

I'm not sure we're big enough to be foreshadowing the overall consumer of the United States. I think our customers always gravitated to Five Below both in good times and bad times, and so clearly, I would tell you that consumer has probably been more discerning than ever.

Five Below is a place that they look to for value, and certainly as we get into Q4 here, the great stocking stuffers, gift giving, and as I alluded to in some of the earlier questions, our product looks better than it ever has since I got here, and we're adding TV in, and we continue to differentiate the experience that our customer experiences in the store. Our customer satisfaction scores are the highest they've ever been. And I think you couple all those together, Alvin, it really leads to the confidence we have coming in here at the start of December.

Got it and further do you have confidence this wasn't just a pull forward in demand and just pent-up demand after the election?

Yes. It's only been a couple weeks since the election, and clearly we need more time to really answer that question. But we haven't seen any signs that it was just pent-up demand pull forward. We have just really noticed a shift in our trends from pre-election. And all the things I just alluded to you are more tailwinds for us than headwinds. Clearly, if I am wrong and it was, then things will go back, but we haven't seen any sign to allude to that.

Great. Thank you very much.

Vincent Sinisi, Morgan Stanley.

Just to go back, unless I might have missed it before to Ed's question, just to clarify, did you say whether or not you are currently in the fourth-quarter comp range today? And also just on the holiday, when you're seeing the expanded and still early in the season results from the TV ads, any further thoughts on the make up of ad mediums and spend for more of a longer-term basis? That would be great.

No, I didn't say, and nor have I ever said as we give guidance for the quarters, we give you the guidance for the overall quarter, and how we shake it up. We look at shifts in holidays, we look at shifts in days. But as we look at our plan, we are on plan for the month of November, and we put that plan altogether and it leads us to a guidance range that we gave you.

And I think you look at the history of the last two years here, that Ken and I have been together, we have come within the range every quarter of our sales, and have been at the top end or above on our earnings. So I think there is good consistency there.

And how we think about the business, and I think it's important we deliver this business quarter by quarter if not year by year. And really not focus week by week. And the second part of your question?

Yes, Joel, just on what you are seeing with the expanded TV ads, and if there is any thought at this point to how your advertising budget and mediums might change as we go forward?

We'll certainly, next year, give you a broad outlook on the plans for 2017. So we really don't want to speculate too much on that, other than say as I said a number of times, we're continuing to build out our mix of marketing, so that there's a balance between digital and circulars.

You go back a year and a half ago, and we pulled back too far on the circulars, and I think we are pretty forthright in that and said we needed to add some of those back. So we get into the all important fourth quarter, we believe summer, we believe Easter, those are really important times for Five Below and circular plays a role. I think you will continue to see us grow digital, while maintaining a balance with our paper circulars, as we have done in the past.

That's helpful. Great. Thanks very much, good luck.

Alan Rifkin, BTIG.

Joel, in trying to gauge the effectiveness of TV advertising upon your revenues, can you talk about how the stores that are now in their third year of the TV compared to the stores that TV test first last year, versus the stores where TV tests for the first time were added this year. How did those sales trends between those three classes of stores differ?

Alan, I can't comment on the third year because it hasn't happened yet, so that will be something we will have to look at next year, or after the quarter is done. I will share with you that our TV markets last year that were in the second year performed nicely, nearly as nice as our TV the markets that were in the first year. So we don't have any third-year looks at it yet. We will know that as we finish up the quarter. At least for the one and two year markets, we were pleased with the results.

But for the stores where the TV test was first started in 2014 outperforming at least the stores where the TV test was first commenced in 2015?

If you're looking at the two years combined, yes.

Okay.

And I can't speculate on 2016 yet. We still haven't got it yet.

Sure, okay. Thank you.

Brad Thomas, KeyBanc Capital Markets.

I wanted to follow up on e-commerce. I know that it still feels like the top of the first inning here, but Joel, especially considering your background, I was wondering if you would give us your latest thoughts on the role that e-commerce may play for Five Below in the years ahead?

We're really pleased with our first start in e-commerce. As I shared on the last call, we opened with a very soft launch, a few hundred SKUs. The team did a great job getting it out the door quickly, was not a huge drag on the bottom line at all, which is what you should continue to expect and see from us on this. We've been working hard this quarter to really expand the assortment, expand some of the features we offer, and you should expect to see us to continue to do that into 2017.

Having said all of that, we believe e-commerce will work for us long term. It's another great channel for our customers to communicate with us, for them to do research, to engage with the brand. And candidly, to expose the brand to other customers that may not know us in the markets we are in. But at the same time, with the price points we are at, our strategy will continue to remain largely focused on convenience, bulk opportunities, we are fortunately in a position where our current business model works, and our new store performance continues to be really strong, and so we can go at e-commerce with pace and diligence.

That's very helpful. Thanks so much.

Stephen Tanal, Goldman Sachs.

I guess one thing I just wanted to touch on, relative to the guidance, obviously the total sales dollars are at the low end, comps below, but net income even slightly above the high end. Relative to the way you are planning the quarter, what might have helped in your favor? And I wonder if gross margin may be part of that, but if you could talk to that and give us a flavor for whether that might continue as I think about that? Thanks.

As you probably noticed from our guidance that we put forward for Q3, we had expected relatively flat operating margins, and we did slightly better than that. Again as we've said in the past, we expect to see slight leverage around that 3% comp, and I wouldn't expect to see leverage on a flat comp. But what we saw there, you saw the deleverage in SG&A, which was expected, but that was more than offset by some freight leverage, given the favorable freight rate comparisons that we had year-over-year in Q3. And we did have some DC leverage again, up against the initial ramp-up of the new distribution center last year.

Got it, okay, so maybe freight was a bit better than you thought, and is that shipping rate related, probably more so than fuel obviously, unless I'm wrong, and do you think that can continue there for a little while here, or what is your sense of how that will all play out?

You're right, the freight piece was more around the rate. Given that we're substantially more contracted this year than we were last year, it's really more of a one-quarter impact for us that I see. So as we move into Q4, I wouldn't expect to see similar type of leverage in those freight rates year over year.

Got it. Okay. Thanks a lot.

Kelly Halsor, Buckingham Research Group.

This often is actually John here hopping on for Kelly. I was helping you could speak a little bit more on the friends and family event? If memory serves, it was in late October. Was that in response more towards the slow traffic headwinds that you saw, or is that something we should see going forward annually, biannually? Any help would be great, thanks.

I might have alluded to this a little bit in my prepared remarks, when I said you should continue to see us, as it relates to marketing doing several test and learn studies to really continue to figure out how we best we can stay on top of mind with our customers, build our awareness up. And so the friends and family was one of the tests we did this year.

You've seen us test TV for two, three years now. We've certainly got it figured out in Q4, we're still testing in Q2. And I think it's just one of many ways in which we continue to reach out from a marketing perspective, both digitally as well as with our circulars, to stay top of mind and drive traffic to our stores.

Okay, fair enough.

At this point it's not something that we planned and you should expect to see quarterly or something from us.

Excellent. Thanks.

Scot Ciccarelli, RBC Capital Markets.

Ken, I wanted to clarify some of the margin comments you referenced. So are you not expecting gross margins to expand on a year-over-year basis in 4Q?

Yes for the fourth quarter, again, Scot, we normally don't guide down to the gross margin level. I think what we've spoken about in the past, and we could continue to see, is some leverage on the distribution center as we continue to move forward there. Aside from that, really nothing else we see there from a gross margin perspective.

But you should get the DC leverage but not the freight benefit?

Correct.

Okay and secondly, did your guidance include an increase in labor costs related to DoL overtime rules? Or are there any changes on that front in delay mode given the recent development there?

Our guidance does include that, we had said back in the last call, we only have one member of Management that's salaried in our stores, and so the change wasn't a large material impact for us regarding the FLSA.

Got you. Okay. Thanks a lot.

Jeremy Hamblin, Dougherty & Company.

Congratulations on really good execution, despite the soft comp. Just a follow-up on the friends and family, given the timing that was run last weekend of the quarter, I think on October 22, was the timing on that tough, because the election was really heating up at that point? Do you feel like you got the most out of it that you could have? And the second part of the question is what did it contribute to the comp in the quarter?

It was not material in terms of comp contribution, whatsoever. And we still, we just candidly had a hard time moving footsteps into our store in the back half of the quarter there, and that's why I've shared with all of you a number of times on the call here that post-election we've seen a shift in consumer behavior since then.

And then, as it relates to friends and family specifically, we have always around the October timeframe done promotions that relates to our birthday, as we anniversary that every year in mid-October. But this was a unique October, and it's nice that it was one time and now that is behind us and we are focused on December and delivering Q4 for us.

Great. And then just another question, a little bit related to the labor. In general, there's been a lot of discussion about the overtime work rules, but as it relates to you and you typically pay a little bit above minimum wage, as the economy has improved, as employment has gotten a little bit tighter, how are you seeing that labor market as we head into 2017?

Are you finding that you're getting the people that you need, how is turnover relative to what it has been historically? As that getting a little bit tougher? Is that going to be a line item, that store payroll as we head into next year, is a little bit tougher to leverage?

It's a great question, Jeremy, and you were alluding to two things. Are you asking about minimum wage, or are you asking about FLSA?

I think just wage pressure in general.

I would agree with you, that as the market gets tighter, that we will continue to see wage pressure. We have always done a great job of paying slightly above where it's at, but there has been a lot of pressure on wages, there is a lot of states moving up in minimum wages next year. And as we give guidance for next year, we will certainly push all that in every thing we've done just as we've done this year. But it is a line that we are watching and staying abreast of. Ken, anything to add?

Yes, to your point, it is something we stay on top of. Obviously the key for us is getting the best talent out there and being competitive, and we continue to be that way. But if you look at the minimum wage increases that we know at this stage of the game, and you look at them longer-term, I think we have said it before, probably about $0.01 impact on us, what we know right now in 2017.

Okay, and have you seen any noticeable difference in trend on turnover rates?

It's been relatively flat year-over-year from a turnover perspective. Five Below is a fun place to work, and we still continue to attract associates that come work there. We have largely a part-time workforce, and we will continue to watch that, but so far, I haven't seen any change in trend.

Great. Thanks for taking the questions and best of luck for a good holiday season.

Thanks very much. You are asking a lot about wage and stuff, and I'll tell you going into the holiday season and 100% of our stores are, we have zero vacancies at the GM level. I think that's just a great sign that we are still able to attract great talent, and we go into the season fully staffed. Thanks, Jeremy.

Patrick McKeever, MKM Partners.

Joel, you mentioned the 2016 class of stores was the best class ever, and I was just wondering if you could just share some specifics there in terms of volume and returns relative to the model?

Yes. I think it's too early to -- we have to get through the holiday here, to put the specifics around the model and that. But as we are going into the holiday, this class has performed at the highest we've seen of any other class at this point going into it. Obviously, if that continues to go through the holiday, then we will have delivered our strongest class to date.

I think the bigger reason I shared that comment with all of you is, we can get fixated on the comps and I think you're going to continue to see volatility in comps from quarter to quarter, but we control 85% of our growth annually, and it's coming in the form of new stores. And so therefore, it's important that we continue to share with all of you how we are doing with new stores, and the class of 2016 is proving out to be no exception to what we've seen for the last many, many years. But certainly as we get to holiday, we will have more clarity on that.

And then, just let's say the two weeks before Christmas, which are your busiest days. I know the stores tend to be really jammed, long lines, you probably lose some customers that don't want to wait. Is there any different plan this year versus last year in terms of dealing with those super high-volume days?

Yes I'm expecting you, Patrick and everyone on this call to come work at the stores for us. We will take all the help we can get.

We've got a great plan. All joking aside, we get to huddle up every October with all our general managers, and put a game plan in place for this year. Those last two weeks are the busiest, and we do our best to process as many customers as possible.

We are doing some new things this year to improve our efficiency, and I think we have spent several days with all of the GMs, and them huddling up with their associates, on how to execute those plans. Our stores are better prepared this year than they were last year, and they are better last year than the year before. So it's a fun time in our stores. It's busy and crazy in there, but we just got to process our guests as quickly as we can, and I think the plan we have in place is a really good one.

Great. Thank you.

It appears there are no further questions at this time. I will now turn the call back to Joel Anderson for any additional or closing remarks.

Thank you, operator, and thanks, everybody for joining us today. I wish you all happy holidays. We've got a great plan in place, and we look forward to speaking with you again on our fourth-quarter call. So we will talk to you in 2017 and thanks for continuing to support Five Below. Thanks, everybody.

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation.