You should read the following discussion together with "Selected Financial and Other Data," and the financial statements and related notes included in our prospectus, as amended, filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933, as amended on July 19, 2012, which we refer to as the "Prospectus" and the financial statements and related notes as of and for the thirteen and twenty-six weeks ended July 28, 2012 included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The statements in this discussion regarding expectations of our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described below in "Special Note Regarding Forward-Looking Statements" and in Part II. Item 1A. "Risk Factors". Our actual results may differ materially from those contained in or implied by any forward-looking statements.

We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31 of the following year. References to "fiscal year 2012" or "fiscal 2012" refer to the fiscal year ended February 2, 2013 and references to "fiscal year 2011" or "fiscal 2011" refer to the fiscal year ended January 28, 2012. The quarters and year-to-date periods ended July 28, 2012 and July 30, 2011, respectively, each contain 13 and 26 weeks. Historical results are not necessarily indicative of the results to be expected for any future period and results for any interim period may not necessarily be indicative of the results that may be expected for a full year.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or present facts or conditions, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the introduction of new merchandise, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or the negative of these terms or other comparable terminology.

The forward-looking statements contained in this Quarterly Report on Form 10-Q reflect our views as of the date of this report about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described below and in Part II. Item 1A "Risk Factors." These factors include without limitation:

• failure to successfully implement our growth strategy;

• disruptions in our ability to select, obtain, distribute and market merchandise profitably;

• our ability to successfully expand our distribution network capacity;

• disruptions to our distribution network or the timely receipt of inventory;

• inability to attract and retain qualified employees;

• ability to increase sales and improve the efficiencies, costs and effectiveness of our operations;

• our dependence on our executive officers and other key personnel or our inability to hire additional qualified personnel;

• our ability to successfully manage our inventory balances and inventory shrinkage;

• our lease obligations;

• changes in our competitive environment, including increased competition from other retailers;

• increasing costs due to inflation, increased operating costs or energy prices;

• the seasonality of our business;

• disruptions to our information technology systems in the ordinary course or as a result of system upgrades;

• our failure to maintain adequate internal controls;

• our ability to obtain additional financing;

• natural disasters, unusual weather conditions, pandemic outbreaks, global political events, war and terrorism;

• current economic conditions and other economic factors;

• the impact of governmental laws and regulations and the outcomes of legal proceedings;

• our inability to protect our brand name, trademarks and other intellectual property rights;

• increased costs as a result of being a public company; and

• restrictions imposed by our indebtedness on our current and future operations.

Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this quarterly report are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.

Five Below is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the teen and pre-teen customer. We offer a dynamic, edited assortment of exciting products, all priced at $5 and below, including select brands and licensed merchandise across our category worlds. As of July 28, 2012, we operated 226 stores in 18 states.

In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales, comparable store sales, cost of goods sold, gross profit, selling, general and administrative expenses, and operating income.

Net Sales

Net sales constitute gross sales net of merchandise returns for damaged or defective goods. Net sales consist of sales from comparable stores and non-comparable stores. Revenue from the sale of gift cards is deferred and not included in net sales until the gift cards are redeemed to purchase merchandise.

Our business is seasonal and as a result, our net sales fluctuate from quarter to quarter. Net sales are usually highest in the fourth fiscal quarter due to the year-end holiday season.

Comparable Store Sales

Comparable store sales include net sales from stores that have been open for at least 15 full months from their opening date.

Comparable stores include the following:

• Stores that have been remodeled while remaining open;

• Stores that have been relocated within the same trade area, to a location that is not significantly different in size, in which the new store opens at about the same time as the old store closes; and

• Stores that have expanded, but are not significantly different in size, within their current locations.

For stores that are relocated or expanded, the following periods are excluded when calculating comparable store sales:

• The period of construction and pre-opening during which the store is closed through:

• the last day of the fiscal year in which the store was relocated or expanded (for stores that increased significantly in size); or

• the last day of the fiscal month in which the store re-opens (for all other stores); and

• The period beginning on the first anniversary of the date the store closed for construction through the first anniversary of the date the store re-opened.

There may be variations in the way in which some of our competitors and other retailers calculate comparable or "same store" sales. As a result, data in this quarterly report regarding our comparable store sales may not be comparable to similar data made available by other retailers. Non-comparable store sales are comprised of new store sales, sales for stores not open for a full 15 months, and sales from existing store relocation and expansion projects that were temporarily closed and not included in comparable store sales.

Measuring the change in fiscal year-over-year comparable store sales allows us to evaluate how our store base is performing. Various factors affect comparable store sales, including:

• consumer preferences, buying trends and overall economic trends;

• our ability to identify and respond effectively to customer preferences and trends;

• our ability to provide an assortment of high-quality, trend-right and everyday product offerings that generate new and repeat visits to our stores;

• the customer experience we provide in our stores;

• the level of traffic near our locations in the power, community and lifestyle centers in which we operate;

• competition;

• changes in our merchandise mix;

• pricing;

• our ability to source and distribute products efficiently;

• the timing of promotional events and holidays;

• the timing of introduction of new merchandise and customer acceptance of new merchandise;

• our opening of new stores in the vicinity of existing stores; and

• the number of items purchased per store visit.

Opening new stores is an important part of our growth strategy. As we continue to pursue our growth strategy, we expect that a significant percentage of our net sales will continue to come from new stores not included in comparable store sales. Accordingly, comparable store sales are only one measure we use to assess the success of our growth strategy.

Cost of Goods Sold and Gross Profit

Gross profit is equal to our net sales less our cost of goods sold. Gross margin is gross profit as a percentage of our net sales. Cost of goods sold reflects the direct costs of purchased merchandise and inbound freight, as well as store occupancy, distribution and buying expenses. Store occupancy costs include rent, common area maintenance, utilities and property taxes for all store locations. Distribution costs include costs for receiving, processing, warehousing and shipping of merchandise to or from our distribution center and between store locations. Buying costs include compensation expense and other costs for our internal buying organization.

These costs are significant and can be expected to continue to increase as our company grows. The components of our cost of goods sold may not be comparable to the components of cost of goods sold or similar measures of our competitors and other retailers. As a result, data in this quarterly report regarding our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers.

The variable component of our cost of goods sold is higher in higher volume quarters because the variable component of our cost of goods sold generally increases as net sales increase. We regularly analyze the components of gross profit as well as gross margin. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns, and a significant increase in inventory shrinkage or inability to generate sufficient sales leverage on the store occupancy, distribution and buying components of costs of goods sold could have an adverse impact on our gross profit and results of operations. Changes in the mix of our products may also impact our overall cost of goods sold.

Selling, General and Administrative Expenses

Selling, general and administrative, or SG&A, expenses are composed of payroll and other compensation, marketing and advertising expense, depreciation and amortization expense and other selling and administrative expenses. SG&A expenses as a percentage of net sales are usually higher in lower sales volume quarters and lower in higher sales volume quarters.

The components of our SG&A expenses may not be comparable to those of other retailers. We expect that our SG&A expenses will increase in future periods due to our continuing store growth and in part due to additional legal, accounting, insurance and other expenses we expect to incur as a result of being a public company. Among other things, we expect that compliance with the Sarbanes-Oxley Act of 2002 and related rules and regulations could result in significant incremental legal, accounting and other overhead costs. In addition, any increase in future stock option or other stock-based grants or modifications will increase our stock-based compensation expense included in SG&A.

Operating Income

Operating income equals gross profit less SG&A expenses. Operating income excludes interest expense or income and income tax expense or benefit. We use operating income as an indicator of the productivity of our business and our ability to manage SG&A expenses. Operating income percentage measures operating income as a percentage of our net sales.

On July 17, 2012, we amended our articles of incorporation to reflect a 0.3460-for-1 reverse stock split of our common stock. The amendment also changed the authorized shares of our common stock to 120,000,000 shares. Concurrent with the reverse stock split, we adjusted (i) the conversion price of our Series A 8% convertible preferred stock, (ii) the number of shares subject to and the exercise price of our outstanding stock option awards under our equity incentive plan and (iii) the number of shares subject to and the exercise price of our outstanding warrants to equitably reflect the split. All common stock share and per-share data presented in this quarterly report gives effect to the reverse stock split and the change in authorized shares and have been adjusted retroactively for all periods presented.

On July 24, 2012, we completed our initial public offering of 11,057,692 shares of common stock at a price of $17.00 per share. The common stock was listed on The NASDAQ Global Select Market under the symbol "FIVE." The shares sold in the offering were registered under the Securities Act of 1933, as amended, pursuant to our Registration Statement on Form S-1 (File No. 333-180780), which was declared effective by the Securities and Exchange Commission on July 18, 2012. Of the 11,057,692 shares sold in the offering, we issued 4,807,692 shares, and 6,250,000 shares were sold by selling shareholders, including 1,442,308 shares sold pursuant to the exercise in full of the underwriters' over-allotment option. We did not receive any proceeds from shares sold by the selling shareholders. We received proceeds of approximately $73.4 million, net of approximately $8.4 million in underwriting discounts and legal, accounting and other fees incurred in connection with the offering. Of the $73.4 million net proceeds received from the offering, approximately $65.3 million and $0.7 million, respectively, were used to repay principal and interest under our term loan facility that existed as of the date of the offering. The remaining net proceeds of the offering were used for general corporate purposes, including working capital.

                             Results of Operations

The following tables summarize key components of our results of operations for
the periods indicated, both in dollars and as a percentage of our net sales.



                                             Thirteen Weeks Ended                           Twenty-Six Weeks Ended
                                    July 28, 2012            July 30, 2011          July 28, 2012            July 30, 2011
                                                             (in thousands, except total stores)
Statements of Operations Data:
Net sales                          $         86,820         $        61,966        $        158,649         $       109,393
Cost of goods sold                           58,073                  41,955                 106,882                  74,795

Gross profit                                 28,747                  20,011                  51,767                  34,598
Selling, general and
administrative expenses                      24,012                  16,323                  48,997                  29,249

Operating income                              4,735                   3,688                   2,770                   5,349
Interest expense, net                         1,316                       5                   1,279                       2
Loss on debt extinguishment                   1,587                      -                    1,587                      -
Other income                                   (258 )                    -                     (258 )                    -

Income before income taxes                    2,090                   3,683                     162                   5,347
Income tax expense                              843                   1,471                      72                   2,136

Net income                         $          1,247         $         2,212        $             90         $         3,211

Percentage of Net Sales:
Net sales                                       100 %                   100 %                   100 %                   100 %
Cost of goods sold                             66.9 %                  67.7 %                  67.4 %                  68.4 %

Gross profit                                   33.1 %                  32.3 %                  32.6 %                  31.6 %
Selling, general and
administrative expenses                        27.7 %                  26.3 %                  30.9 %                  26.7 %

Operating income                                5.5 %                   6.0 %                   1.7 %                   4.9 %
Interest expense, net                           1.5 %                    -  %                   0.8 %                    -  %
Loss on debt extinguishment                     1.8 %                    -  %                   1.0 %                    -  %
Other income                                   (0.3 %)                   -  %                  (0.2 %)                   -  %

Income before income taxes                      2.4 %                   5.9 %                   0.1 %                   4.9 %
Income tax expense                              1.0 %                   2.4 %                    -  %                   2.0 %

Net income                                      1.4 %                   3.6 %                   0.1 %                   2.9 %

Operational Data:
Total stores at end of period                   226                     168                     226                     168
Comparable store sales growth                   8.6 %                   0.7 %                   9.4 %                   3.8 %
Average net sales per store(1)     $            401         $           368        $            766         $           694

(1) Only includes stores open during the full period.

Thirteen Weeks Ended July 28, 2012 Compared to the Thirteen Weeks Ended July 30, 2011

Net Sales

Net sales increased to $86.8 million in the thirteen weeks ended July 28, 2012 from $62.0 million in the thirteen weeks ended July 30, 2011, an increase of $24.9 million, or 40.1%. The increase was the result of a non-comparable store sales increase of $20.4 million and a comparable store sales increase of $4.5 million. During the thirteen weeks ended July 28, 2012, we opened 27 new stores compared to 23 new stores opened during the thirteen weeks ended July 30, 2011. We plan to open 18 additional stores during the remainder of the fiscal year. The increase in non-comparable store sales was driven by new stores and stores that opened in fiscal 2011 but have not been open for 15 full months.

Comparable store sales increased 8.6% for the thirteen weeks ended July 28, 2012 compared to the thirteen weeks ended July 30, 2011. This increase resulted from an increase of approximately 8.0% in the number of transactions in our stores and an increase in the average dollar value of transactions of approximately 0.6%.

Cost of Goods Sold and Gross Profit

Cost of goods sold increased to $58.1 million in the thirteen weeks ended July 28, 2012 from $42.0 million in the thirteen weeks ended July 30, 2011, an increase of $16.1 million, or 38.4%. The increase in cost of goods sold was primarily the result of a $12.1 million increase in the direct costs of goods resulting from an increase in sales and a $3.1 million increase in store occupancy costs as a result of new store openings.

Gross profit increased to $28.7 million in the thirteen weeks ended July 28, 2012 from $20.0 million from the thirteen weeks ended July 30, 2011, an increase of $8.7 million, or 43.7%. Gross margin increased to 33.1% in the thirteen weeks ended July 28, 2012 from 32.3% for the thirteen weeks ended July 30, 2011, an increase of 82 basis points. The increase in gross margin was primarily the result of the combined increase in distribution, buying and store occupancy expense, as these expenses increased at a lower rate than the increase in net sales and increased margin by 55, 9 and 7 basis points, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $24.0 million in the thirteen weeks ended July 28, 2012 from $16.3 million in the thirteen weeks ended July 30, 2011, an increase of $7.7 million, or 47.1%. As a percentage of net sales, selling, general and administrative expenses increased 132 basis points to 27.7% in the thirteen weeks ended July 28, 2012 compared to 26.3% in the thirteen weeks ended July 30, 2011. The increase in selling, general and administrative expense was primarily the result of increases of $4.7 million of store-related expenses to support new store growth, $1.5 million of stock-based compensation expense associated with the ongoing expense recognition over the remaining vesting period related to the cancellation of certain stock options in exchange for the grant of restricted shares in March 2012, and $1.4 million in corporate-related expense.

Interest Expense, Net

Interest expense, net increased to $1.3 million in the thirteen weeks ended July 28, 2012 from $5,000 in the thirteen weeks ended July 30, 2011, an increase of $1.3 million. The increase in interest expense resulted from the outstanding balance of our term loan facility.

Loss on Debt Extinguishment

In connection with a $65.3 million repayment of the $100.0 million term loan facility, we wrote-off $1.6 million of deferred financing costs in the thirteen weeks ended July 28, 2012.

Income Tax Expense

Income tax expense for the thirteen weeks ended July 28, 2012 was $0.8 million compared to $1.5 million for the thirteen weeks ended July 30, 2011, a decrease of $0.6 million, or 42.7%. This decrease in income tax expense was primarily the result of a $1.6 million decrease in pre-tax income. Our effective tax rate was 40.3% for the thirteen weeks ended July 28, 2012 compared to 39.9% for July 30, 2011. For the remainder of fiscal 2012, we believe our effective tax rate will be approximately 40%.

Net Income

As a result of the foregoing, net income decreased to $1.2 million in the thirteen weeks ended July 28, 2012 from $2.2 million in the thirteen weeks ended July 30, 2011, a decrease of $1.0 million, or 43.6%.

Twenty-Six Weeks Ended July 28, 2012 Compared to the Twenty-Six Weeks Ended July 30, 2011

Net Sales

Net sales increased to $158.6 million in the twenty-six weeks ended July 28, 2012 from $109.4 million in the twenty-six weeks ended July 30, 2011, an increase of approximately $49.3 million, or 45.0%. The increase was the result of a non-comparable store sales increase of $40.1 million and a comparable store sales increase of $9.2 million. During the twenty-six weeks ended July 28, 2012, we opened 34 new stores compared to 26 net new stores during the twenty-six weeks ended July 30, 2011. We plan to open 18 additional stores during the remainder of the fiscal year. The primary driver for our increase in non-comparable store sales was from the increase in the number of stores that opened in fiscal 2011 but have not been open for 15 full months, as well as new stores.

Comparable store sales increased 9.4% for the twenty-six weeks ended July 28, 2012 compared to the twenty-six weeks ended July 30, 2011. This increase resulted from an increase of approximately 9.0% in the number of transactions in our stores and an increase in the average dollar value of transactions of approximately 0.4%.

Cost of Goods Sold and Gross Profit

Cost of goods sold increased to $106.9 million in the twenty-six weeks ended July 28, 2012 from $74.8 million in the twenty-six weeks ended July 30, 2011, an increase of $32.1 million, or 42.9%. The increase in cost of goods sold was primarily the result of a $24.3 million increase in the direct costs of goods resulting from an increase in sales and a $5.9 million increase in store occupancy costs as a result of new store openings.

Gross profit increased to $51.8 million in the twenty-six weeks ended July 28, 2012 from $34.6 million in the twenty-six weeks ended July 30, 2011, an increase of $17.2 million, or 49.6%. Gross margin increased to 32.6% in the twenty-six weeks ended July 28, 2012 from 31.6% for the twenty-six weeks ended July 30, 2011, an increase of 100 basis points. The increase in gross margin was primarily the result of 52 and 41 basis point increases from distribution and store occupancy expense, respectively, as these expenses increased at a lower rate than the increase in net sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $49.0 million in the twenty-six weeks ended July 28, 2012 from $29.2 million in the twenty-six weeks ended July 30, 2011, an increase of $19.7 million, or 67.5%. As a percentage of net sales, selling, general and administrative expenses increased 415 basis points to 30.9% in the twenty-six weeks ended July 28, 2012 compared to 26.7% in the twenty-six weeks ended July 30, 2011. The increase in selling, general and administrative expense was primarily the result of increases of $8.6 million of store-related expenses to support new store growth, $7.4 million of stock-based . . .