Five Below, Inc. — Form 10-Q Summary
Period clarification: The request metadata says “2017 Q3,” but the filing itself covers the 13 and 39 weeks ended November 3, 2018, compared with periods ended October 28, 2017. This summary follows the filing’s stated period. Financial statements are unaudited; amounts below are in U.S. dollars.
Business context and reporting period
Five Below is a value retailer focused on teen and pre-teen customers, primarily selling merchandise priced at $5 and below. At November 3, 2018, it operated 745 stores in 33 states and also sold online. The company noted that sales are seasonal and typically highest in the fourth fiscal quarter.
Financial performance
| Metric | 13 weeks ended Nov. 3, 2018 | 13 weeks ended Oct. 28, 2017 | 39 weeks ended Nov. 3, 2018 | 39 weeks ended Oct. 28, 2017 |
|---|---|---|---|---|
| Net sales | $312.8 million | $257.2 million | $956.9 million | $773.4 million |
| Gross profit / margin | $102.1 million / 32.6% | $83.6 million / 32.5% | $321.1 million / 33.6% | $255.9 million / 33.1% |
| Operating income / margin | $15.5 million / 5.0% | $14.8 million / 5.8% | $70.7 million / 7.4% | $53.9 million / 7.0% |
| Net income | $13.5 million | $9.9 million | $60.4 million | $35.1 million |
| Diluted EPS | $0.24 | $0.18 | $1.07 | $0.63 |
| Comparable sales growth | 4.8% | 8.5% | 3.6% | 6.9% |
- Quarterly sales rose 21.6%; comparable sales contributed $8.1 million of the $55.6 million increase. Year-to-date sales rose 23.7%, with $31.8 million from comparable sales.
- Quarterly gross margin improved about 10 basis points, mainly from lower store occupancy costs as a share of sales. SG&A rose to 27.7% of sales from 26.8%, reflecting store growth and corporate costs; operating margin consequently declined from 5.8% to 5.0%.
- Year-to-date gross margin increased about 50 basis points, while SG&A as a share of sales increased slightly, to 26.2% from 26.1%.
- Effective tax rates fell to 18.6% from 34.8% for the quarter and to 18.2% from 36.0% year to date, primarily reflecting federal tax reform and discrete tax benefits related to share-based compensation accounting.
Cash flow, balance sheet, and liquidity
- For the 39 weeks, operating cash flow was $1.6 million, versus $17.0 million a year earlier. Inventory purchases used $152.9 million of cash, partly offset by higher accounts payable. Capital expenditures were $82.0 million, versus $49.5 million.
- Cash and cash equivalents were $103.3 million and short-term investments were $85.0 million at November 3, 2018. Current assets totaled $599.1 million versus current liabilities of $239.4 million.
- The company reported no revolving-credit borrowings and approximately $20.0 million available under its $20 million facility. It was in covenant compliance. There was no material funded debt reported on the balance sheet.
- Cash and cash equivalents decreased $9.4 million during the 39 weeks. The company said it expected cash, investments, operating cash flow, and credit availability to fund planned expenditures, authorized repurchases, and working capital needs for at least the next 12 months.
Material changes, outlook, and risks
- The company planned approximately 125 net new stores in fiscal 2018 and approximately $130 million in fiscal-year cash capital expenditures, including about $38 million for new stores. These are company plans, not a guarantee of results.
- It signed a purchase agreement for a Georgia distribution center costing approximately $42 million, with occupancy expected in early 2019. The company also entered into 118 new retail leases and modifications from February 4 through November 3, with approximately $225.3 million of future minimum lease payments; 35 new leases were signed during the quarter.
- A $100 million share repurchase authorization runs through March 31, 2021; no repurchases were made during the 39-week period.
- The company planned to adopt the new lease accounting standard in fiscal 2019 and expected a significant increase in reported assets and liabilities because of its store leases. Revenue-standard adoption increased opening retained earnings by $0.5 million and had an immaterial effect on the reported 39-week results.
- Management identified risks including execution of store and distribution growth, inventory availability and management, customer traffic, competition and online retail, weather and seasonality, labor and operating-cost inflation, cybersecurity and systems, and potential tariffs that could raise merchandise costs or weaken discretionary spending. The filing states that risk factors had not materially changed from prior disclosures.
- Ordinary-course legal proceedings were disclosed; management did not believe their resolution would materially adversely affect financial condition or results, while noting outcomes cannot be predicted with certainty. The filing provided no specific earnings guidance.
Important facts for investors to verify
- Confirm the period: the filing is for the quarter ended November 3, 2018, notwithstanding the request metadata’s 2017 period.
- Assess whether comparable-sales growth and store openings can sustain sales growth, particularly as quarterly comparable-sales growth slowed from the prior-year 8.5% to 4.8%.
- Monitor inventory and working-capital needs: operating cash flow was low despite higher net income, and inventory increased substantially.
- Verify delivery, cost, and utilization of the Georgia distribution center and the company’s ability to manage its significant new lease commitments.
- Track the impact of lease-accounting adoption, tariff exposure, and tax benefits on future reported liabilities, margins, and earnings.