Five Below, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2019, the 13 weeks ended November 2, 2019; year-to-date covers 39 weeks. Comparatives are the periods ended November 3, 2018. Financial statements are unaudited.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 39 weeks 2019 | 39 weeks 2018 |
|---|---|---|---|---|
| Net sales | $377.4M | $312.8M | $1,159.6M | $956.9M |
| Gross profit / margin | $118.7M / 31.4% | $102.1M / 32.6% | $384.8M / 33.2% | $321.1M / 33.6% |
| Operating income / margin | $12.7M / 3.4% | $15.5M / 5.0% | $73.2M / 6.3% | $70.7M / 7.4% |
| Net income | $10.2M | $13.5M | $64.7M | $60.4M |
| Diluted EPS | $0.18 | $0.24 | $1.15 | $1.07 |
| Comparable sales growth | 2.9% | 4.8% | 2.4% | 3.6% |
- Q3 sales increased 20.7%; comparable sales contributed $8.4M and non-comparable sales $56.2M. Comparable growth reflected higher average transaction value and more transactions. The company operated 894 stores versus 745 a year earlier.
- Q3 gross margin fell 120 basis points, principally due to higher merchandise costs, including net unmitigated tariffs. SG&A rose 22.5% and increased to 28.1% of sales, reflecting store growth, lease-standard adoption and corporate costs.
- For the first 39 weeks, sales rose 21.2%, but operating margin declined 110 basis points. Gross-margin pressure reflected merchandise, occupancy and distribution costs; SG&A also grew faster than sales. Year-to-date net income increased 7.1%.
Cash, liquidity, debt and capital spending
- At November 2, cash and equivalents were $77.5M and short-term investments were $54.1M. The company had no revolver borrowings and approximately $20M available under its $20M credit facility; it reported covenant compliance.
- Year-to-date operating cash flow was $1.9M, versus $1.6M. Inventory absorbed $175.7M of cash. Investing activities used $132.3M, including $156.4M in capital expenditures; financing activities used $43.8M, including $36.9M for share repurchases. Cash declined $174.3M to $77.5M.
- The company reported $1,167.4M of undiscounted future operating lease payments and $895.1M in present-value lease liabilities. It adopted the lease accounting standard in fiscal 2019; comparative balance sheets were not restated. Adoption added approximately $618M of net assets and liabilities at transition, with no material impact on operating results or cash flows.
Outlook, commentary and risks
- Management planned to open 150 stores in fiscal 2019 and forecast approximately $210M of cash capital expenditures for the year, excluding tenant allowances. It expected about $50M for new stores, with the remainder for distribution facilities, corporate infrastructure and existing stores.
- Management said cash, investments, operating cash flow and credit availability should fund planned capital spending, repurchases and working capital needs for the next 12 months and foreseeable future; additional financing might be required if those sources prove insufficient. No specific earnings or sales guidance was provided in the supplied filing text.
- The company expanded its assortment above $5 in select stores and rolled out higher pricing on certain products chain-wide in fall 2019; most merchandise remained priced at $5 or less. Management identified tariffs and sourcing costs as risks to margins and noted potential effects on prices and discretionary demand.
- Other disclosed risks include execution of store and distribution growth, inventory management, competition, consumer traffic, labor and operating costs, supply-chain disruption, cybersecurity, weather and seasonality. Sales are typically highest in the fourth quarter. Management said ordinary-course legal matters were not expected to materially adversely affect financial condition or results, while acknowledging outcomes are uncertain.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether comparable-sales trends and new-store productivity support continued growth, given slower comparable growth than the prior-year periods.
- Whether tariff and merchandise-cost pressures, pricing actions and distribution expenses affect gross margins and customer demand.
- Whether operating cash generation improves as inventory builds and planned capital expenditures continue.
- Whether the $210M fiscal-year capital expenditure plan and distribution-center projects remain on schedule and within expected costs.
- How lease obligations, seasonal working-capital needs, share repurchases and limited revolver capacity affect liquidity through the holiday quarter.