Good day and welcome to the Five Below Third Quarter 2021 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Christiane Pelz, Vice President of Investor Relations and Treasury. Please go ahead.

Thank you, Gary. Good afternoon, everyone, and thanks for joining us today for Five Below's Third Quarter 2021 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 want to remind you that certain comments made during this call may be forward-looking statements and are made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. These forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ significantly from these statements. The risks and uncertainties are outlined in the release and our SEC filings. The forward-looking statements made today are as of the date of this call and we do not have an obligation to update them. If you do not have a copy of today's press release, you can get 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 2021 earnings call. Before I discuss the specifics of our third quarter, I want to share my appreciation for the many teams throughout our organization that produced such phenomenal results which far surpassed our expectations and set records for Five Below. In a period where the global supply chain environment continues to be very difficult, our teams were proactive and nimble sourcing cool, trend-right products while working diligently to ensure merchandise got to our stores and onto shelves in a timely manner. I'm proud of the team's execution, hard work, and agility which they have consistently demonstrated throughout this extremely challenging and complex year. I'm also grateful to the hundreds of vendors whose partnership and collaboration continues to help fuel our success. As you will hear, when I discuss the underlying drivers of our third quarter financial results, our performance also demonstrates the inherent flexibility of our model and the universal appeal of Five Below. We offer incredible WOW products at outstanding value with an amazing shopping experience that resonates positively with our customers. Now on to the results; total sales in the third quarter grew 27% over last year to $608 million or $131 million higher than last year's third quarter. Comparable sales increased 14.8%, driven by transactions and it was our highest comp of any quarter since going public. We also achieved the highest average store sales for our third quarter in our history. Operating profit grew 75% leading to earnings per share of $0.43. New store growth and performance continued to be strong in the third quarter. We opened 52 new stores across 24 states, bringing our new store openings to 154 at the end of the third quarter. The new stores are located in diverse areas across the country, ranging from established markets such as the Philly metro market to new states like New Mexico which we entered in September. Five of these new stores made our top 25 summer or fall grand openings including the 17 stores we have opened in the fourth quarter; our new store program for 2021 is now complete, bringing us to 170 net new stores for a total chain store count of 1,190 stores in 40 states. During the third quarter, we continued to make progress against our strategic initiatives of product, experience, and supply chain. On product, as you know, it all starts with delivering our customers value and an assortment of those got to have trend-right products in a fun, safe, treasure-hunt shopping environment. That is who we are and what we do and you saw that reflected in our Q3 results. The ability of our teams to recognize trends and capitalize on them quickly is a key distinguishing characteristic and strength of our model. This is the WOW that makes Five Below content so unique. We were very pleased with the broad-based performance across our world and especially the outperformance in the Sports Room, Candy, and Create Worlds. The merchants work closely with our vendors to source some incredible products and I want to again thank them for being such great partners. To that end, sensory trend which we mentioned on our last earnings call, continued throughout Q3. In addition, the poppers and fidget toys renewed interest in squishmallows emerge as teens and tweens collected them in all new shapes and sizes. Our merchandise and supply chain teams quickly source fresh merchandise, which was particularly impressive given the global supply chain environment, and our store and marketing teams had some fun coming up with compelling social media and in-store campaigns to feature them. During the quarter, as expected back-to-school and Halloween returned to more normalized seasons with backpacks and stationery items, including art supplies, in demand, along with Candy for Halloween. In addition, gaming kept growing as a trend, and we are really excited to continue to offer an exclusive line of gaming products under the Bugha brand. As a reminder, last year, we entered into a collaboration with Bugha the 2019 Fortnite World Cup Champion to bring affordable gaming products to the masses; the line continues to expand and represents great quality and incredible value while reinforcing Five Below's position as a destination for teens and tweens. Turning to our second strategic initiative, experience. We continue to innovate both in-store and digitally to enhance the customer experience. In store, our go-forward prototype with Five Beyond sections in the back of the store is in about 30% of our stores. The seasonal Five Beyond WOW featured back-to-school items during the third quarter such as a study-from-home desk and a studio ring light, both for only $10 which are two great examples of the incredible WOW and value we are delivering. We also mentioned how assisted checkout or ACO, as we call it, has really helped with the customers' experience as throughput is much higher than our traditional checkout. We added over 100 ACOs this quarter, bringing our store count with ACO to approximately 60% of the chain. Also new to the checkout experience is the addition of Venmo and PayPal as payment options which are now available in all our stores. Another enhancement to the experience for our customers is the Instacart partnership that we rolled out over the summer. We are attracting new customers and getting positive feedback on the experience of shopping Five Below in this manner. We believe that this service is a value-add to our customers especially during the busy holiday season and is even more beneficial after the e-commerce shipping cutoff. On the digital experience, we continue to grow our e-commerce operations. We are excited to have opened our third fulfillment center which is located within our Arizona ship center and we shipped our first e-commerce order from there in September. Having this additional fulfillment capability will greatly enhance our efficiency, speed, and ability to meet the high demand during the fourth quarter, especially for our customers in the Western states. We are attracting new customers to fivebelow.com through both our digital marketing and Five Below in-store experience while also growing repeat customer visits. Our digital marketing brings to life the fun and value that Five Below is all about. For our third strategic priority, supply chain, we continue to proactively manage the ever-changing environment while growing our distribution network. This has been a challenging year for supply chain as you certainly know but I am extremely proud of how well the teams have managed through it. From securing additional container capacity to adding our own truck fleet at our ship centers and implementing transloading, the team has done an outstanding job thinking outside the box and being proactive and nimble. As of today, we have received the vast majority of our holiday inventory and believe we're in a strong position to deliver our customers a great assortment of gifts, stocking stuffers, and more. This year, having the Arizona ship center open, we will drive additional efficiencies in getting products to our stores and we expect the opening of the Indiana ship center next year to further enhance supply chain capabilities. Now, I'd like to turn to the all-important holiday season. We are pleased with the strong start to Q4, including the Black Friday weekend. This is our 20th holiday season since Five Below was founded in 2002. And while today, we now offer more than stocking stuffers for the holidays, what has not changed is a customer promise of WOW and value, which I hope you will experience firsthand when you shop our stores and online. Our teams have worked hard throughout the year and combined with the investments we have made in key strategic areas, we believe we are well positioned to meet demand while providing customers a safe and exciting shopping experience. You may have seen our press release highlighting seasonal and holiday gift ideas, ranging from tech items for gamers to Disney character toys and pet products. We also have WOW holiday products like a 4-foot Christmas Tree and decor, matching pajamas, bottoms, and slippers, including for the family pet and tech items such as a selfie kit to help customers with their social media presence, all for $5 or less. We have been communicating our holiday campaign largely through digital content which reaches nearly every market. In addition, we were thrilled to recently be featured on two nationally syndicated TV shows, The Balancing Act with Montel Williams and The Ellen Show. For The Ellen Show, we formed a partnership to provide support for several kids and their families. Tomorrow, we'll begin the 12 days of Christmas with Ellen, so be sure to watch. In addition, our Five Beyond WOW Wall for the holiday features merchandise in all stores with extreme value gifts like a $12 telescope and a 6-foot basketball hoop for $25. This is the third holiday with the WOW wall, and we are very pleased with the results thus far. We believe that having these higher-value items helps our customers with their holiday shopping as we become more of a one-stop shop for holiday gifting. With the combination of front gifts, stocking stuffers, and the new Five Beyond products, along with more stores featuring assisted checkout registers as well as our enhanced distribution capabilities, e-commerce and Instacart, we are prepared to give our customers an amazing shopping experience this holiday. So in summary, it was an outstanding third quarter as we continue to grow the Five Below brand, expand our footprint, and delight our customers while also navigating the challenges of the current supply chain environment and preparing for the all-important holiday season. We believe a key driver of our success is our customer mindset. We think back from the customer, and everything we do drives our associates to operate and plan with the customer at the top of the list. Flexibility, innovation, and operating discipline are also hallmarks of Five Below, which have served us well, especially in the last several quarters. We remain laser-focused on providing extreme value for our customers and consistently executing our growth strategies while we build for the future with 2,500-plus stores. With that, I will turn it to Ken to provide more details on the financials.

Thanks, Joel, and good afternoon, everyone. I will begin my remarks with a review of our third quarter results and then provide guidance for the fourth quarter and the full year. As Joel mentioned, we were very pleased with our third quarter results. Our sales for the third quarter of 2021 increased 27.5% to $607.6 million from $476.6 million reported in the third quarter of 2020. These results exceeded our expectations, driven by multiple strong product trends which we believe drove traffic and new customers to our stores. We opened 52 new stores across 24 states in the third quarter compared to 36 new stores opened in the third quarter last year. We ended the quarter with 1,173 stores, an increase of approximately 15% versus 1,018 stores at the end of the third quarter of 2020. As Joel mentioned, we were very pleased with the performance of our new stores with five stores making the top 25 grand openings for summer and fall. Comparable sales increased by 14.8%, driven by an increase in comp transactions of 14.3% and a comp ticket increase of 0.5%. Versus the pre-pandemic third quarter of 2019, average ticket was up 25% and average transactions were down 4% which is consistent with the results since we reopened the chain last year. Gross profit for the third quarter of 2021 was $202.4 million versus $151.1 million in the third quarter of 2020. Gross margin increased by approximately 160 basis points to 33.3%, driven primarily by occupancy leverage on the strong sales results which more than offset higher inbound freight costs. Also contributing to the increase in gross margin was lower distribution labor and store freight expense, primarily due to the shift of our receipts and flow of inventory to stores from Q3 into Q4. This distribution benefit is expected to reverse in the fourth quarter. As a percentage of sales, SG&A for the third quarter of 2021 decreased approximately 30 basis points to 26.3%. SG&A expenses as a percent of sales were lower than last year, driven primarily by fixed cost leverage, offset in part by higher incentive compensation. With the sales beat, we were able to generate leverage of 30 basis points versus our expectation when we provided guidance for SG&A to delever by approximately 100 basis points on the lower expected sales. As a result, operating income increased 75.1% to $42.4 million versus $24.2 million in the third quarter of 2020 with operating margins expanding 190 basis points over last year's third quarter. Below the operating income line, we recorded a charge of approximately $9.7 million related to the write-down of an equity investment. Our effective tax rate for the third quarter of 2021 was 24%, compared to 13.4% in the third quarter of 2020. Our tax rate last year was favorably impacted by the benefits of discrete items related to the impact of the CARES Act and share-based accounting. Net income for the third quarter of 2021 was $24.2 million versus net income of $20.4 million last year. Earnings per diluted share for the third quarter was $0.43 compared to last year's earnings per diluted share of $0.36. We ended the third quarter with $311 million in cash, cash equivalents, and investments and no debt, including nothing outstanding on our $225 million line of credit. Inventory at the end of the third quarter was $521 million as compared to $430 million at the end of the third quarter last year. Average inventory on a per store basis increased approximately 5% versus the third quarter last year as certain receipts shifted into the fourth quarter. While a level of uncertainty related to the ongoing supply chain disruption from COVID remains, we believe we are in a good position to meet the holiday demand from an inventory perspective. As of today, most of our holiday product has been received at our ship centers, with the remainder arriving in time to stock our store shelves for the last-minute holiday rush. Now on to guidance for the fourth quarter. We will compare our guidance to last year as our stores were fully reopened for the entire fourth quarter of 2020. For any full-year commentary, we will continue to compare to fiscal 2019 due to the disruption in store closures in the first half of 2020 caused by COVID. We are very pleased with the start to the fourth quarter. Based on our current trajectory, we expect fourth quarter sales to be in a range of $985 million to $1.005 billion with a comparable sales increase in a range of 2% to 4% versus the record fourth quarter comparable sales increase of 13.8% last year. Comparable sales for the 9-week holiday period are expected to be stronger than the total fourth quarter comp, given we are anniversarying extraordinary January sales last year which were driven by stimulus checks. The record sales results last year generated significant leverage on fixed costs. Additionally, last year, we reduced marketing expenses and store hours which drove further operating margin improvement. Given these dynamics last year, we expect operating margin to delever by approximately 125 basis points in the fourth quarter this year, with the majority to occur within SG&A as store expenses and marketing are expected to be higher. We expect gross margin in the fourth quarter to delever slightly versus last year as some of the costs associated with the handling of delayed inventory receipts shifted from the third quarter into the fourth quarter. While we are experiencing higher freight costs resulting from supply chain disruption, in the fourth quarter, we expect to partially offset these through efficiencies and leveraging our scale. Our effective tax rate for the fourth quarter is planned at approximately 25%, which excludes the impact of share-based accounting or any share repurchases. As you know, our practice is to update the tax rate outlook quarterly with actual results when we report earnings. Net income is expected to be in the range of $133 million to $140 million with diluted earnings per share expected to be in the range of $2.36 to $2.48. For the full fiscal year of 2021, we expect sales in the range of $2.84 billion to $2.86 billion, which is an approximate 54% increase over fiscal 2019 and represents an approximate 24% 2-year compound annual growth rate. We now expect operating margin for fiscal 2021 to reach a record 13%, or leverage of over 120 basis points versus fiscal 2019. Net income is expected to be in the range of $272 million to $279 million with diluted earnings per share of $4.82 to $4.94, which, at the midpoint, is a 56% increase over fiscal 2019 and a 25% 2-year compound annual growth rate. We are planning to spend approximately $310 million in gross capital expenditures, excluding the impact of tenant allowances. This reflects our new ship center in Arizona and construction of a new ship center in Indiana, opening new stores, executing remodels, and investing in systems and infrastructure. In conclusion, we had an exceptional third quarter and are off to a very good start for the fourth quarter. Our merchants and overall operations continue to proactively pivot and respond as customers adjust their preferences and behaviors and as macro events unfold. We are confident that we are prepared to provide our customers an amazing shopping experience for the holidays. And with that, I will turn it over to the operator to begin the Q&A portion of the call.

Our first question comes from Matthew Boss with JPMorgan. Please go ahead.

Thanks, and congrats on another great quarter, guys.

Hey, thanks, Matt. Appreciate it.

So Joel, on the first quarter 2020 call, I remember you cited moving your model to offense. So six quarters later, you've clearly done that successfully. I guess two questions. When you look across the world, where do you see from here opportunity to further accelerate market share? And then second, on the new customer acquisition, do you believe you've sustainably broadened your customer base as we exit the crisis?

Thanks, Matt. That's a great question. I truly appreciate the idea of playing offense, which is something we discuss internally every week. In response to your question, I want to highlight two areas where I believe we can continue to grow. One is in technology, particularly in gaming, which I mentioned in my prepared remarks and is an area where we are expanding. The second area isn't so much a specific world but rather relates to trends. I'm pleased to say that we have improved our ability to identify trends and quickly bring them to market, much better than we did even during the spinner trend in 2017, which we were among the first to adopt. Examples like poppers, squish toys, and sensory items are all areas where we are leading in getting these products into our stores for our customers. Additionally, we've been focused on new customer acquisition, where we are investing resources. We now have tokenization across our entire fleet, which allows us to track and understand customer interactions on a more individual level rather than just measuring transaction counts to see if we're attracting new customers. This presents a great opportunity. In terms of accelerating market share, for Five Below, it's primarily about driving growth. We have several levers that contribute to our momentum. A few key ones include new stores, which remain a vital growth driver, as shown by the 170 we've completed this year. We'll discuss our plans for next year at ICR in January, but you shouldn't expect our growth in new stores to slow down. We've continued to innovate, launching two new prototypes over the last four years: one in 2017 and another, the Five Beyond prototype, in 2020. Our brand awareness is on the rise, and as we've noted previously, we are committed to reinvesting in our product to maintain quality and freshness for our customers. Now that we have reached a certain scale, we can introduce new licenses, exclusives, collaborations, and ventures. So, to summarize, it's all about playing offense and growing market share. I hope this gives you a good overview.

Great color. Best of luck.

Hey, thanks, Matt. Appreciate it.

The next question is from Paul Lejuez with Citi. Please go ahead.

Hey, thanks, guys. I'm curious if you can talk about the performance of the stores that have the Five Beyond assortment in it just relative to the rest of the chain? And then just a follow-up on Matt's question. I am kind of curious if anecdotally you think that if your existing customer are buying some of the higher-priced product or if you are attracting a new customer because of the deals that you're able to offer at those higher price points?

Yes. Thanks, Paul. Look, on the first one about the performance of Five Beyond, it's a question you should ask me again after we get through the holidays. Five Beyond has largely been in our new stores. And now a few of those starts are starting to turn new, and I'm talking about the Five Beyond prototype. We do have Five Beyond at holiday in the entire chain. And from last year's holiday, Ken help me on the exact figures and we'll certainly have them all for you for this holiday, but any transaction that had Five Beyond in it was about double, right?

Double, non-WOW Wall transaction.

Customers who purchase items from our Five Beyond section tend to spend more. Additionally, with the implementation of tokenization, we will gain insights into whether customers like Joel and Paul are new or existing shoppers at Five Below. This initiative will begin in the fourth quarter, allowing us to monitor customer behavior and identify new patrons. While we conduct marketing surveys each quarter to gauge new customer attraction, which depends on self-reporting, this approach will provide us with concrete customer data. I hope that clarifies your question, Paul.

Yes, you bet. Thank you. Good luck.

Thank you.

The next question is from John Heinbockel with Guggenheim Partners. Please go ahead.

Hello everyone. I have two quick points to make. First, the demand looks strong. Regarding the increase in marketing and store hours, do you believe this will help drive additional demand and is this included in the 2% to 4% range? It's worth noting that this isn't necessary. Secondly, when considering customer spending, how far along are you in utilizing the loyalty program to provide more personalized offers to your customers?

Yes, the demand in the third quarter was significant. As we head into the fourth quarter, we're looking at a comp of two to four percent on top of last year's nearly 15 percent comp. Additionally, we anticipate that the holiday comp will be higher since we're comparing against last year's January stimulus. Overall, we feel optimistic about that aspect. Regarding the share of wallet, there hasn't been much change year-over-year in terms of hours. The key next step for us was implementing tokenization before we could consider a loyalty program. With the distractions of COVID and supply chain issues, we had to focus on stabilizing the business. Now that some of those macro challenges have eased, we can begin to refocus on that program. However, it's important to note that while we are in a strong position due to our unique shopping experience and exceptional value, I don't expect the loyalty program to launch next year, but we will start to prioritize it again moving forward.

Thank you.

You bet, John. Thanks.

The next question is from Simeon Gutman with Morgan Stanley. Please go ahead.

Hi, everyone. Great quarter. I have some questions for Ken. Can you clarify how much the change in timing of receipts from Q3 to Q4 affected the gross margin? Was this impact anticipated, or did it arise from supply chain issues? Additionally, could you elaborate on the effects of freight costs compared to your expectations? Lastly, if sales exceed expectations in the fourth quarter as you've indicated, should we expect an improvement in gross margin due to these higher costs and also in the SG&A expenses? I just want to confirm that.

Thanks, Simeon. There are about 15 questions in there, but I'll start with your first one about the supply chain and the changes, particularly the movement of inventory from Q3 into Q4. This was unexpected when we provided guidance at the beginning of Q3. As the quarter progressed, we saw a shift of inventory from the end of Q3 to Q4. However, we feel confident about our inventory position heading into the holiday season; it arrived earlier in Q4, and we have most of it with us now to support sales for Q4. In terms of the scale of this shift, it mirrors what happened in Q3. We had around 160 basis points of gross margin leverage in Q3, with about a third attributed to reduced distribution expenses that will shift to Q4. Regarding your question about outperformance versus our guidance, I don't see anything that would prevent us from achieving flow-through if our sales exceed expectations. In other words, I don't anticipate any factors related to higher sales that would lead to increased expenses; therefore, we should see flow-through.

Thank you. Appreciate it.

The next question is from Michael Lasser with UBS. Please go ahead.

Good evening. Thanks a lot for taking my question. Joel, you're going to be on pace to have average store volume in the $2.4 million range this year. If you had to guess, how much of that volume do you think came from stimulus? How much came from trends? And is this a reasonable base from which you can grow over the next 12 to 24 months on a same-store basis?

Yes, Matt, I would link this back to your question about playing offense. It relates to what we discussed regarding driving growth. If you consider the four or five aspects I mentioned—new stores, Five Beyond, ongoing innovation, increased brand awareness, and reinvesting in our products—we believe these elements are still in their early stages. As we develop these five growth drivers, there’s no reason why our average store number shouldn't keep increasing. Not too long ago, our average store number was between 1.6 and 1.8 when I joined, while the average for comparable stores is now over 2.5. Therefore, those five drivers are key to raising our average store volume. In short, we do believe we can continue to grow that. However, it won't be a smooth process every quarter. There will be times when we face challenges against trends. But just as we successfully attracted new customers with spinners, allowing us to positively adapt, this quarter demonstrates that. We are up against a double-digit comparable quarter, yet we've managed to achieve double-digit comps for two consecutive years. So, while it won't be without its bumps, we are still at the very beginning of improving our average store sales performance.

Thank you and good luck with the rest of the holiday.

Hey, thanks, Michael. You too. Stay warm.

The next question is from Chuck Grom with Gordon Haskett. Please go ahead.

Hey, thanks. Great quarter. My question is on self-checkout. I just wondering if you could speak to how it's helping from a labor perspective? How it's helping from a sales throughput perspective, particularly during the months of November and then also from a customer engagement perspective?

Yes. It's a great question, Chuck. And obviously, the fact that we added 100 more in Q3 when we only opened 52 new stores. Look, I think that we always knew it would have a labor component to it but it's really the efficiency for the customers in Q4 specifically where the benefit is. And look, many of you that have been following us for a long time, we've talked about the lines we have in our stores at Q4. And I think last year was a huge unlock for us that ACO really honestly eliminates those lines and that's probably adds to the satisfaction level that the customers have and it certainly helps us on the labor side because we kind of always have open nine registers. Now look, we call it ACO for a reason, assisted self-checkout because, look, there are some customers that just want help checking out and we lean in hard to help them. It's really easy. We're not a grocery store where the items are in a basket. And I think what we landed on is really the answer for Five Below and you should expect to see us continue to grow the percentage of stores that have ACO.

Great, thank you.

Hey, thanks, Chuck.

The next question is from Karen Short with Barclays. Please go ahead.

Hi, thanks very much and great quarter.

Thank you, Karen.

I just want to ask a little bit about freight. Can you just give me some color in terms of where you're contracted even through 2023? And then maybe some color on what the '22 contracted rate is versus '21 and what the '23 rate is versus '22? And I guess the follow-on to that is, what would that mean generally for pricing architecture in terms of raising prices, obviously, in light of the recent announcement of another competitor raising prices across the board?

I appreciate your question, Karen. For competitive reasons, I can’t share specifics about the rates. However, I can say that we are not involved in the spot market, which represents a very small fraction of our freight. Our teams have consistently been proactive in securing rates, and we locked in this year's rates even before the start of 2021. The most significant change we've made is committing to lock in rates for multiple years. While rates are increasing, we believe what we are hearing from the industry indicates that we are paying considerably less than others. Additionally, growing rapidly provides us leverage—carriers need to be cautious about excluding us because, eventually, the market will stabilize, and they will want us as a customer. They've been reliable partners, fulfilling their commitments. We're receiving the freight we anticipated, and even though it hasn’t been easy, it has been a productive year despite the challenging circumstances. I hope this gives you a clearer picture of our freight situation.

Yes, Karen, I mentioned during our second quarter call that we had anticipated the effect of freight costs to be modest, only in the tens of basis points, due to various measures we are implementing, including locking in rates and extending our long-term contracts to secure favorable prices given our scale. Additionally, we are exploring improvements within our operations, like enhancing truck fleet efficiency and optimizing pallet usage. Furthermore, we recently opened a new distribution center in Arizona and have another one set to launch in Indiana next year. This will help reduce the distance goods need to travel to our stores, which, while not classified as inbound freight, does impact our overall freight costs and will allow us to manage our expenses more effectively as these centers are positioned closer to our stores.

Great, thank you.

Thanks, Karen.

The next question is from Brian Nagel with Oppenheimer. Please go ahead.

Hi, good afternoon. Congrats on the great quarter.

Thanks, Brian.

I have a question regarding the beginning of the holiday season, specifically Black Friday. Based on your comments, it seems you were quite satisfied with your store performance on Black Friday. However, we are hearing from various other sources that Black Friday sales in retail were generally underwhelming. This leads me to consider the Five Below business model, which traditionally relied on traffic from other retailers. It appears that Five Below is now creating its own traffic, potentially outpacing that of other retailers. My second question is regarding the upbeat remarks you made at the beginning of the fourth quarter and the guidance for a 2% to 4% comparable store sales growth, which suggests a potential decline from your Q3 performance.

Yes. Thanks, Brian. Regarding Black Friday, we were very pleased. I can’t comment on other retailers, but it ties back to what I discussed with Matt about the different strategies we have to drive growth. Specifically, we had squishmallows available early Friday morning, which helped attract traffic. However, that’s just one day. Overall, we're satisfied with the start of the fourth quarter, which addresses your second question. It's challenging to gauge this quarter given the comparisons we will face in January. As Ken mentioned earlier, we expect the crucial nine weeks to exceed the two to four percent guidance we provided. Last year, we experienced approximately 10% growth during those nine weeks and finished the quarter around 14%. This illustrates the significant effect that stimulus had, and we’ll navigate through that in January. If the headwinds are not as severe as anticipated, then the figures will be better. Lastly, there’s a lot of speculation about pull forward, and it remains to be seen in the next four weeks how much of that we’re facing. If the pull forward isn’t as significant and we continue to drive our own traffic, we might be positively surprised by the quarter. Having an average two-year stack of nine percent annually, equating to an 18% two-year stack, is impressive for our fourth quarter. Also, looking at dollar growth rather than percentages, our growth in Q4 over 2019 is projected to be about $300,000 on an average store basis, and the guidance indicates about $75,000. Therefore, while both quarters in dollar terms are similar, the percentages differ because they are based on much larger numbers. I hope this clarifies our perspective on the quarter.

Very helpful, I appreciate it. Thank you.

The next question is from Edward Kelly with Wells Fargo. Please go ahead.

Hi everyone, good afternoon. I wanted to follow up on the Q4 gross margin. Based on the guidance, it seems the margin will likely be 100 to 150 basis points lower than the typical Q4 gross margin when reflecting on historical data. I believe about one-third of that is due to the shift. Is the remainder related to increased freight pressure? Additionally, considering 2022, though it's still early, I'm interested in your thoughts on the sustainability of the margin at the current year's level and the factors influencing it.

Thanks, Ed. Regarding Q4, we anticipate about 125 basis points of reduction in total operating margin. Most of this will come from SG&A, with a small portion affecting gross margin due to changes in inventory receipts and new distribution center handling costs. This is the main factor for Q4's performance and the distinction between gross margin and SG&A in terms of the reduction. Looking ahead to our operating margin percentages, we'll address this in detail during our fourth-quarter call and provide guidance for next year. There will be some factors to consider for next year, including freight costs that we've mentioned recently, which could impact the early quarters. However, we want to focus on getting through the holiday season first before analyzing next year in depth during our fourth-quarter call.

Just give us a little more time on that, Ed.

Okay, sounds good.

Yes, thank you.

The next question is from Scott Mushkin with R5 Capital. Please go ahead.

Thank you for taking my question. It's been relatively easy so far, but stepping back to review the impressive results you just shared, it seems that many other companies are facing challenges with labor, freight, and significant inventory issues. There's also a competitor adjusting their pricing strategy. What sets Five Below apart from these other companies that are somewhat similar to yours, if you had to summarize?

I appreciate the easy question, Scott. I might repeat myself a bit, but I've mentioned before that successful retailers today need to offer either a unique shopping experience or operate in the value segment. I believe we provide both to attract customers. There isn't another national retailer focused specifically on teens, tweens, and kids after Toys 'R' Us closed three years ago. We deliver an excellent shopping experience centered on value, which is crucial. Additionally, as long as I'm here, we will continue investing in our future. This includes remodeling stores, updating our prototype, and driving innovation. As mentioned earlier, all these elements create a cohesive offering that customers are recognizing. We've evolved significantly; just five years ago, our total sales were $1 billion for the year, and now we forecast achieving that in a single quarter. We're reaching a tipping point that brings advantages, especially against supply chain challenges, allowing us to reinvest in products and other positive factors. In summary, when you combine all of this, it highlights our distinct advantage.

From my perspective, many larger companies are facing significantly more challenges than yours. Clearly, you are performing at a higher level, so congratulations to the team.

I appreciate that. Thank you for all those listening in, I'm sure they appreciate your comments on that. And we pride ourselves on people. We spend a lot of time talking about culture. And I think it really has made a difference. We've seen very low turnover in the last two years. So that continuity also helps as we continue to execute at a very high level but appreciate the kind words, Scott, and hopefully, that gives you some insight into how we see the business.

The next question is from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead.

Thanks. I'll add my congratulations. I wanted to ask a couple of questions here on Five Beyond. I think you mentioned you're at 30% of your stores today with the dedicated section. I wanted to get a sense for your time frame that you would expect to complete that in all stores? And then secondly is, can you give us a sense at this point in time on the AUV lift that you get on the stores that have Five Beyond versus the rest of the chain?

Thank you, Jeremy. I appreciate the opportunity to discuss Five Beyond. It's an area where we plan to provide a more detailed update next year on our progress and the timeline for expanding it throughout the chain. We're very optimistic about Five Beyond, which is currently present in about 30% of our stores. By the end of next year, we anticipate it will be in roughly half of the stores. We've received a lot of customer feedback as we transitioned from a defensive strategy to a more proactive approach. A few years ago, we referred to it as Ten Below, which focused solely on raising prices, whereas now we're committed to delivering real value. Therefore, we won't be rapidly expanding Five Beyond in our non-Five Beyond prototype stores. It’s important to our customers that we keep it distinct from our main business. For those who have visited both types of stores, we have occasionally featured Five Beyond at specific times of the year, like during the holidays, but typically we will only include it in prototypes or remodeled stores if we can place it appropriately in the back. I hope that provides some clarity. Jeremy, we will offer further insights into our long-term plans during our fourth-quarter call.

All right, thank you.

Thank you.

Excuse me. The next question is from Anthony Chukumba with Loop Capital Markets. Please go ahead.

Thank you for taking my questions, and congratulations. I wanted to get more details on the write-down of the equity investments. I don't mean to be overly critical, as it was clearly a great quarter, but I would like some additional information on that, including the after-tax impact, because it could be argued that excluding that would have resulted in an even greater consensus beat.

Yes. No, look, it's a good question. And as we look at all our investments and with the pandemic and some that just weren't performing at that rate, that's what drove the noncash write-down. And it largely is behind us, and we will look forward going forward but it's all noncash below the line there. I don't know, Ken, anything to add on that?

Yes, Anthony, you asked about the tax aspect. Given the nature of the write-down, it did not result in a typical tax benefit from deductibility. Therefore, the amount that was written down is above taxes, and that full amount flows through to EPS.

Got it, that's helpful. Thank you.

You bet, thanks. Thanks, Anthony.

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

Thank you, operator, and thank you, everyone, for joining us today. I'll just stand by telling and reinforcing a lot that was said on the call, this was truly an exceptional quarter for Five Below from both a results perspective as well as, honestly, making progress against our strategic priorities. We will continue to listen to our customers as we source fresh, unbelievable, and new products at extreme value. And we believe that will deliver an incredible holiday for us. I want to finish by also saying we have really pride ourselves in what we're doing to get back to the communities through our annual Toys for Tots fundraiser, as an example, we're expecting to raise over $2 million this year. So, an important part of who we are and what we stand for. And so on that note, look, I wish you all a safe, happy, and healthy holiday season and encourage you to shop Five Below. We'll look forward to speaking with you all again in 2022 at the ICR Conference. Thank you and have a great night.

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