Five Below, Inc. — Form 10-Q Summary
Period: The filing covers the unaudited thirteen weeks ended May 5, 2018, the first quarter of fiscal 2018. This differs from the request metadata’s “2017 Q1.” Comparisons are with the thirteen weeks ended April 29, 2017.
Business context and financial performance
Five Below operates a specialty value retail business selling merchandise primarily priced at $5 and below. At quarter-end, it operated 658 stores in 32 states and also sold online.
- Revenue: Net sales were $296.3 million, up 27.2% from $232.9 million. Growth included $51.2 million in non-comparable sales and $12.2 million in comparable sales. Comparable sales rose 3.2%, reflecting a 3.8% increase in average transaction value, partly offset by 0.6% fewer transactions.
- Profit and margins: Gross profit was $97.2 million versus $73.8 million; gross margin rose to 32.8% from 31.7%. SG&A was $72.5 million, or 24.5% of sales, versus $61.0 million, or 26.2%. Operating income increased to $24.7 million from $12.8 million; operating margin was 8.3% versus 5.5%.
- Net income: $21.8 million, or $0.39 per diluted share, compared with $8.4 million, or $0.15 per diluted share. The effective tax rate fell to 15.4% from 35.9%, mainly due to U.S. tax reform and discrete tax benefits.
- Cash flow: Operating cash flow was $33.0 million, compared with $33.7 million. Investing used $55.6 million, primarily for capital expenditures and net investment-security purchases; financing used $5.7 million. Cash and cash equivalents declined $28.3 million to $84.4 million.
- Liquidity and debt: Cash and short-term investment securities totaled $274.2 million at May 5. The company had no line-of-credit borrowings and approximately $20.0 million available under its revolving facility. The filing reports no other debt balance.
- Balance sheet: Current assets were $529.1 million and current liabilities $180.7 million. Inventory was $215.4 million. Total liabilities were $257.1 million and shareholders’ equity $477.9 million.
Material changes and notable items
- Sales growth was driven mainly by store expansion: the store count increased to 658 from 553 year over year. Gross margin improved primarily because store occupancy costs declined as a percentage of sales; SG&A leverage also improved.
- The company adopted the new revenue standard using the modified retrospective method. Gift-card breakage recognition increased retained earnings by $0.5 million; the reported quarterly impact was immaterial.
- The lower effective tax rate materially supported net-income growth; the period’s tax rate may not be representative of future periods.
- Share-based compensation and vesting-related share withholding included $6.9 million of cash outflow for shares withheld for taxes.
Outlook, commitments, and risks
- Management planned approximately 125 new store openings in fiscal 2018 and capital expenditures of approximately $137 million, expected to be funded from operating cash flow.
- During the quarter, the company entered 42 new store leases with terms of 10–15 years and approximately $79.1 million in future minimum lease payments. In June 2018, it signed an approximately $42 million purchase agreement for a 700,000-square-foot Georgia distribution center, expected to be occupied in January 2019.
- The board authorized up to $100 million of share repurchases through March 31, 2021; none were made in the quarter. Management said available liquidity was expected to cover planned capital expenditures, repurchases, and working-capital needs over the next 12 months and foreseeable future.
- The company expects the new lease accounting standard, planned for adoption in fiscal 2019, to significantly affect its financial statements by recognizing right-of-use assets and lease liabilities.
- Key disclosed risks include execution of store and distribution growth, inventory and supply-chain management, store traffic and competition, labor and operating-cost inflation, weather and seasonality, e-commerce execution, technology and data security, and lease obligations. Management did not expect pending ordinary-course legal matters to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Confirm the reporting period: the filing is for Q1 fiscal 2018, ended May 5, 2018, despite the request metadata stating 2017 Q1.
- Assess whether comparable-sales growth and new-store openings can be sustained, and whether expansion continues to support gross and operating margins.
- Evaluate cash needs and returns for the planned store openings, distribution center, lease commitments, and authorized repurchases.
- Monitor the effect of tax reform and discrete tax benefits on future effective tax rates and earnings comparability.
- Review the eventual balance-sheet impact of lease-standard adoption and the company’s ability to meet its long-term lease commitments.