Good day and welcome to the of Five Below fourth quarter and fiscal year 2018 earnings conference call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Christiane Pelz, Vice President of Investor Relations. Please go ahead.

Thank you, Gary. Good afternoon everyone and thank you for joining us today for Five Below's fourth quarter and fiscal year 2018 financial results conference call. On today's call are Joel Anderson, President and Chief Executive Officer, and Ken Bull, Chief Financial Officer and Treasurer. After management has made their formal remarks, we will open the call to questions. I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and Five Below's SEC filings. The forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward-looking statements. If you do not have a copy of today’s press release, you may obtain one by visiting the Investor Relations page of our website at fivebelow.com. As a reminder, the fourth quarter and fiscal year of 2017 included an extra week, the 53rd week, this extra week added $15.7 million to sales, approximately $3 million to operating income and approximately $0.03 to diluted earnings per share. This extra week caused the calendar shift in fiscal 2018 which resulted in additional sales in the first and second quarters, which were largely reversed in the third and fourth quarters. I will now turn the call over to Joel.

Thank you, Christiane, and thanks everyone for joining us for our fourth quarter and year-end earnings call. I will review the highlights of the quarter and fiscal year as well as discuss thoughts on 2019 before handing it over to Ken to discuss our financials and guidance, and then we will open up the call for questions. We delivered another quarter of very strong performance. This was up against last year’s outstanding fourth quarter which was one of our best fourth quarters since going public. Sales increased 23% on a 13-week basis to 603 million, driven by solid results from our new stores and a comp of 4.4%. Earnings per share grew to $1.59 or growth of 35% on a 13-week basis. These results capped a terrific year for Five Below, in which, annual sales grew 23.5% on a 52-week basis to 1.56 billion, driven by new store unit growth of 20% and a comp sales increase of 3.9%. This was our 13th consecutive year of positive comps. The better than expected results and momentum created throughout the year allowed us to raise our original guidance and solidly comped the comp, following our spinner driven 2017. For 2018, operating margins finished at 12%, even after making tax reform-related investments, while net income and earnings per share grew over 45% on a 52-week basis benefiting from the strong operating results as well as reduction in taxes over 2017. These results were driven by strong and consistent performance from our new stores which remain our most significant growth opportunity as well as the main driver of our [2020, through] [ph] 2020 vision. During the quarter, we opened five net new stores for a total of 125 net new stores in 2018. We ended the year with 750 stores which represents less than…

Thanks Joel and afternoon everyone. I will begin my remarks with a review of our fourth quarter and fiscal 2018 results and then discuss our outlook for the first quarter of fiscal 2019. Our sales in the fourth quarter of 2018 were $602.7 million, up 19.4% over the fourth quarter of 2017 or up 23.2% on a 13-week basis. Sales for the quarter were negatively impacted by the calendar shift by approximately $6 million, which was considered in our guidance. We opened five net new stores in the quarter and ended the quarter with 750 stores, an increase of 125 net new stores over 2017 or 20% unit growth. As Joel mentioned, we are very pleased with our 2018 new store openings which are on track to be another record class. Comparable sales increased 4.4% for the fourth quarter of 2018, driven by 2.3% increase in comp average ticket and a 2.1% increase in comp transactions. This compares to a 5.9% comp increase in the fourth quarter of 2017. Q4 gross profit of $244 million increased 17.6%. Gross margin finished at 40.5%, de- leveraging by approximately 60 basis points, primarily due to the outperformance of toys and games sales, which included lower margin opportunity buys. Q4 SG&A as a percentage of sales de-leveraged approximately 60 basis points to 21.2%. Tax reform related investments primarily in store wages and marketing were offset in part by leverage of other corporate expenses. Operating income of $116.5 million, increased 12.6% or 16% on a 13-week basis. Operating margin decreased approximately 120 basis points to 19.3% of sales driven by the factors I just described. Our effective tax rate for the fourth quarter of 2018 was 24.4% compared to 35.2% in the fourth quarter of 2017. The decrease in the effective tax rate was driven…

Yeah. Thanks, Ken. As you can tell from the Q1 guidance Ken just shared, we expect to continue our strong momentum from 2018 into 2019. 2018 was an amazing year for Five Below. Our teams accomplished a lot throughout the organization and I want to thank all of our associates for their hard work and dedication. Thank you for making Five Below so special for our customers. We have delivered several years of double digit revenue and earnings growth and we look forward to building on this track record in 2019 and the years to come. We’re working on many exciting initiatives and product opportunities in 2019 to drive sales, bring more efficiencies to our business and create an even better customer and associate experience. Said another way, innovation is alive and well throughout Five Below. I am energized to lead this great company and excited about the prospects for 2019. We had a lot to share with you today about the success of 2018 and the many initiatives we expect to accomplish in 2019. Before I turn the call back over to the operator for questions, let me remind you that we are short on time, and to please limit yourself to only one question so we can get through everyone. Operator?

[Operator Instructions] Our first question today comes from Matthew Boss with JPMorgan.

Thanks and congrats on the nice quarter, guys.

Hey, thanks, Matt.

So I guess a couple of things. What's the embedded assumption for merchandise margins this year, flowing through the gross margins, any headwinds to consider on that line? And what's the comp needed to leverage occupancy within the gross margin this year?

Yeah. Matt, with respect to the merch margin, I mean, similar to what we spoken about before, any benefit that we would see there coming from scale or otherwise, we will reinvest back into the product itself. So our assumptions again are that merch margins will be relatively flat, included in terms of in 2019. And then with occupancy, obviously, that depends quarter to quarter. But we would expect to get some type of leverage on occupancy on a 3% comp, as we've said before on an annual basis, as we've seen in the recent past, and we expect at least at this point that at a 3% comp, we start to hit that tipping point for leverage.

The next question comes from Vincent Sinisi with Morgan Stanley.

Hey, terrific. Thanks guys for taking my question and congrats to a strong end to the year here and Ken, appreciate the color on some of the 19 quarterly cadence there. So let's just, maybe for my question, let's just stick on obviously the core stories here, with some of the newer initiatives, can you just, on the remodel, give us a sense for kind of average or remind us kind of just average cost and kind of maybe some color on the yield you're getting. And then specifically, with some of those front end tests that you mentioned, is that just the case that it wouldn't go into all remodels just because of the physical stores or anything else there.

Vince, I'll take the first one around the cost of the remodel. As you know, we spent the last year or so really perfecting that process. And we continue to do that as we move through this program. But on average, at least at this point, we would expect that the cost of a remodel to be less than what we've invested into a new store at this point. And in terms of return, that could depend obviously on the lift we get from the remodel itself, but it's obviously a return that's meaningful enough for us to be able to go forward with this formal program.

Yeah, it's running about half, Vincent. And I would say, on the second part, as far as the front end experience, obviously, while we've got the store tore up for a remodel, it just makes sense to incorporate the front end experience at the same time. And that's why I said in my prepared remarks, largely, every one of our remodels will include that for those that haven't seen one of the new remodels this year.

The next question comes from Michael Lasser with UBS.

Joel, can you clarify your comment about continuation of trends from 4Q that are driving sales? Does that mean that your comp you're seeing thus far quarter to date is the same that you saw in the fourth quarter or are you talking about product specific trends? And as part of that, can you also opine on how you think a later Easter will impact your sales for the first quarter. Is that a net benefit to you?

Yeah. Obviously, my comments were relative to the guidance we gave you of 3 to 4 for the fourth -- for the first quarter is a continuation of the -- about 4.5 comp we saw in fourth quarter last year. But we are continuing to see several of the products we saw in Q4 that I highlighted in my prepared remarks still being strong in Q1. And, it's our core worlds that are really driving the business. I think we called out four worlds this year. And then as far as the cadence for Easter, it's always hard to say, weather always plays a factor in the first quarter, but generally speaking, you would usually think that a later Easter is a benefit over an earlier Easter, but at the same time, as we continue to become more and more nationwide, that smoothes out the weather aspect of it.

The next question comes from Karen Short with Barclays.

I just had one clarification and then a question. So, I guess what was, what you tried to advertise widely was obviously the impact or negative impacts on the DC opening in terms of the EPS impact, but what wasn't necessarily known was the lease, the 20 basis point impact from lease accounting. So I kind of get, if 20 basis points is about $0.05 to EPS for the year, which gets me to what I think would be a normalized range of like $3.05 to $3.12 in EPS, so I guess the first question is, is that the right way to think about it? And then I guess the bigger picture question I had is just kind of within traffic, I guess any sense to the mix of repeat customers versus new customers, just given all the initiatives that you have in place?

Sure. Thanks, Karen, I'll take the first one. As you know, we always try to be as transparent as we can around kind of the puts and takes, especially within the guidance. And I think the way you're looking at it is accurate around the drag related to the distribution center, weighted a little bit heavier as I mentioned in Q1 and earlier, maybe a little bit more in Q2 also, but on a full year basis, we see about 20 basis points of a drag related to the new DC and by the way, that's really related to depreciation down in SG&A. And then your comment around the impact of lease accounting, I believe that's accurate also, 20 basis point impact for the year, evenly from a dollar perspective, as you go through the quarters, but again on an annual basis, about a 20 basis point drag, which translates to about $0.05 in EPS.

Yeah. I was just trying to get to it, because that's more of a normalized 19% to 22% EPS growth rates, that's why I was kind of asking it.

Yeah.

And traffic was, in fourth quarter, about 50% of the comp and obviously trends are, as we've said many times, are always good for Five Below, the latest trend being, with the closure of Toys "R" Us last year, a lot of new toy customers out there searching for new destination. And so, between that and many of the initiatives I called out, we expect traffic to continue to be strong.

Is there any sense of new versus repeat customers?

Without having our own credit card and without having a loyalty program, it's really hard for us to measure that specifically, but every survey we do continues to show that, we're continuing to attract several new customers. So we're real pleased with the ratio of new customers that we’re seeing.

The next question comes from Jeremy Hamblin with Dougherty & Company.

Thanks, guys. Congrats on the strong results for the year and Q4. Wanted to ask some questions actually about the potential loyalty program, I know that you've been working on this and thinking through the mechanics. Can you give us a little bit more color on how this potentially gets implemented here in 2019?

Yeah, let me just clarify that. I thought what I said on the last call was, we wouldn't start working on the loyalty program until we completed the POS system. And that is the case, we really spent no time on loyalty in ’18. And then I think as you can tell by my prepared remarks today, we got several great new initiatives coming into fruition here and we're pushing full steam ahead on beginning to implement many of those, which we think will be great for driving new customers, improving traffic in our stores. And then as far as specifically loyalty goes, you don't expect to see a loyalty test in ’19, we’ll begin to work on the strategy in ‘19 and what we think it might look like, but that's more of something in 2020 and beyond, as far as customer facing goes.

The next question comes from John Heinbockel with Guggenheim Securities.

So guys, two related things. If you think about marketing spend for the year, right, the idea that that would grow in line with sales and how many, what percent of the base do you think you reached in the fourth quarter? And then any update on brand awareness that you might have done in the last, three, four, five months?

Yeah. You're absolutely right, John. Marketing spend is relatively flat year-over-year on a rate basis. Obviously with our huge growth, the absolute dollars are up significantly. And in one form or another, we pretty much touched the entire store base in the holiday season. I called out TV specifically, that particular element is about 50%. But, with all the other marketing initiatives we got out there, we're touching everybody, whether it's through digital efforts or TV or something else. And then as far as brand awareness goes, John, we're doing that once a year now. And so our last -- last one we did was in late first quarter of ‘18. And the awareness number was about 61%, up from 58 the year before, and we'll be back in the market later this quarter again. So I think as we jump back on the call in June, we’ll be able to give you an update on where that trended this year, but I don't have any new update.

The next question comes from Judah Frommer with Credit Suisse.

Thanks for taking the question. So maybe back to inventory and tying in the 10 and below concept, you mentioned that you fully offset any margin impact from 10% tariffs, is there a potential to benefit if those tariffs are rolled back over time? And are you internally as focused as you were, say, six months ago, on price points above $5? Or has kind of the planning around that died down a bit?

Well, let me just clarify, as a reminder, for everybody on the call. We started working on the 10 below concept or just while concept long before tariffs ever was on anyone's mind. So that was really an offensive strategy of how do we bring extreme value at higher price points to our customers? So, it really had nothing to do with the tariffs. I might have made some comments in some of my other prepared remarks that we will mitigate tariffs any way possible up to and including raising prices. But, at this point in time, what we've forecasted in our guidance is that, tariffs would remain at the 10%. I think it's anybody's guess whether it's going to go up or down, but what we forecasted is it being, remaining at the 10%. Should it go down? I think that'd be on a case by case basis. But, remember a lot of our inventories already flowing are in our buildings. And all of that is already booked at the plus 10%. So any of that large benefit would be 2020 and beyond.

The next question comes from Edward Kelly with Wells Fargo.

Hey, guys, Anthony Bonadio on for Ed. Thanks for taking our question. I just wanted to dig on toys a little bit. Can you help us understand the magnitude of the impact on Q4 and last year overall? And then looking forward, do you see sustained benefit over the next few quarters? Or putting this another way, could we see a halo effect similar to the one from spinners?

Yeah, I guess, it's really hard to tease that one out exactly. Anthony, just as we had the challenge, teasing it out when we had the spinner craze. But I guess one way to think about it, prior to giving Q4 guidance, the implied guidance was probably 150 basis points lower than when we guided 3 to 4. And so you can assume that increasing guidance that we gave for Q4 largely assumed or largely was due to the emergence of the toy trend because clearly at the beginning of the year, we didn't expect Toys "R" Us to go completely out of business. So, you back into there and it's probably in that 100 to 150 basis points range was the toy impact. And then, we've said several times, the outperformance was largely due to toys, so you can add 40 basis points to that. So, it's probably somewhere between 100 to 150 basis points. And then, as far as will it continue, look, we have no reason to think it wouldn't. Every time, we've had a trend, new customers are exposed to Five Below. They like what they see and they continue to come back and clearly our marketing team is doing many surveys out there right now and every indication we've gotten is, they had a great experience over the holiday, new customers got exposed to us and they'll be back shopping in 2019. So, it's -- there's no reason to believe it won't perform just like the spinners did last -- in ’17.

The next question comes from Brian Nagel with Oppenheimer.

[Technical Difficulty] question, maybe a little bit longer term in nature, but we talked a little bit in the prepared comments about, I know it's a small test at this point with the products up to $10. Again, and recognized it's small, but to the extent that this continues, so you push forward with this effort, would you entail some type of significant remarketing campaign or just be the product, category within the store shelves can do quietly and really no changing to the overall marketing?

Yeah, I mean, look to answer that question Brian, at this early stage would probably be pure speculation on my part. I think you got to like in it more to, as we roll TV out, starting in ‘14, as we started on the new remodel or excuse me the new concept, two years ago, started on the remodel, the similar cadence that we take at Five Below every time is, we go with pace and diligence. And if it takes us a couple of years to figure this out, we'll take a couple of years. And that was the case with remodels till we got it right. The case with the new concept, we figured that one out in about a year and then we flipped it into all new stores starting in 2017. And so I guess the, what I’d leave you with Brian, it's rest assured we're going to get this right. We're going to do it with the right rigor. I announced in my remarks, we're going to add about 20 stores this year. And, I think it could go in every direction you indicated and many others besides that, but I think the main point is we're innovating. We've got a lot of new initiatives in the pipeline. And, we're really excited about the growth prospects that rest ahead and up to and including, testing products above $5.

The next question comes from Anthony Chukumba with Loop Capital.

Thanks for taking my question and congrats on a great quarter. As you said, a lot of really good information. I just had a quick follow-up question. In terms of the customer loyalty program or the potential customer loyalty program, just to be clear, one of the precursors to starting that or being able to roll that program was putting in the new point of sale system. So now that you have a new point of sale system, that could potentially allow you to roll the customer loyalty program, I just wanted to be clear about that.

Yeah, you're absolutely right. And I just was trying to clarify from the earlier call from Jeremy -- a question from Jeremy is, we weren't working on the loyalty program last year, we were concentrating on getting POS out and several other initiatives. What you should expect is, we'll start working on the strategy and what it should be. But our current plans aren't for that to be customer facing in 2019.

The next question comes from Chris Prykull with Goldman Sachs.

Just had a quick follow up to Brian's question earlier. I know it's really early, so you might not have an answer, but I see the integrated, the $10 items online, any initial takeaways from doing so? And then if you can't answer that, just on the front end renovations, the self checkout and impulse items. What are you thinking in terms of any OpEx savings from the self checkout or sales lift from adding more impulse items.

Yeah. The $10 test online is really new. We're talking weeks, not even months. So very, very early to even begin to speculate on that. I think the bigger takeaway on the front end, reimagine front end experience is just, it's just another example of how we continue to innovate in the store. The first and most important goal of that initiative is to improve the customer experience. We hear from several of you that there's times when there's lines. This is a great way to reduce lines, immediately always have seven to nine checkouts open at any given time. And so you got a faster checkout, it allows us to have more engagement with our associates, with the customer. And then as far as the products in their larger product set, we're already inside our store in other parts. So, look, we continue to innovate and we're really excited. I hope you all get out and see one of the reimagine stores with the new front end.

The next question comes from Michael Montani with Evercore ISI.

Hey, guys. Good evening and thanks for taking the question. Just wanted to ask on the tariff front, if we were to see a more draconian scenario with the 25% tariff, would you all be comfortable saying that you could mitigate most of that impact now? And just related to that, could you remind us what's the direct import percent and then indirect import percent from China, given some of the work you've done on sourcing?

Yeah, look, it's really early for me to speculate on this one. I mean, the tariff thing has been all over the map. It's constantly changing. I think what we should take away is, we may not be able to mitigate it immediately. But we will mitigate it up to and including, making price changes if we have to for areas that we can't mitigate. But, in addition to China, what, we source product from Honduras, from India, from South America, and many other countries. So, our overall reliance on China is not exclusive. And, over time, if it stays at 25% -- goes to 25%, we’ll certainly look at shifting even more product to other countries, but as for right now, we based the forecast and our guidance, all of it on staying basically at the 10%.

The next question comes from Scot Ciccarelli with RBC Capital Markets.

I guess, it's kind of a financial question regarding the first quarter. You did provide 10 some, the full year impact to the DC and the lease accounting, but can you quantify the impact of those factors and the legacies for 1Q that's driving the 175 basis points, just so we can understand the cadence of those effects a little bit better?

Sure. Around Q1, you're asking right?

Exactly, exactly.

Yeah. I mentioned about 175 basis points of expected de-leverage in Q1, that's split between gross margin and SG&A like 20% in gross margin and about 80% of that in SG&A. I mentioned the impact from the new distribution center and those pre-opening costs, those would be up in cost of goods sold and then the remaining portion of the non-anniversary of the tax reinvestments around wages and the new lease accounting impact, that would be the portion that’s in SG&A in Q1.

I guess I was asking regarding buckets, labor is X, that the DC is Y.

Yeah. Well, I think at this stage, I think we feel comfortable just giving you the breakdown inside of cost of goods sold and SG&A, kind of that 20-80 breakdown in terms of a percentage.

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

Thank you, operator and thanks everyone for joining us today. We look forward to speaking with you again on our first quarter call in early June. Thanks and have a great evening.

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