Five Below, Inc. — Form 10-Q Summary
Reporting period: The filing covers the thirteen and thirty-nine weeks ended October 29, 2016, compared with the periods ended October 31, 2015. This differs from the request metadata, which says 2015 Q3. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted. The statements are unaudited.
Business context
Five Below is a specialty value retailer selling merchandise targeted at teens and pre-teens, generally priced at $5 or less. It operated 517 stores in 31 states at quarter-end, versus 434 stores a year earlier. The company launched fivebelow.com in August 2016; e-commerce sales are included in net sales and comparable sales beginning in Q3.
Financial performance
| Metric | 13 weeks ended Oct. 29, 2016 | Year-over-year change | 39 weeks ended Oct. 29, 2016 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $199.5 | +17.6% | $612.3 | +21.1% |
| Gross profit / margin | $64.0 / 32.1% | +21.3%; +100 bps | $197.6 / 32.3% | +23.7%; +70 bps |
| SG&A | $55.4 | +21.0% | $162.5 | +21.1% |
| Operating income / margin | $8.6 / 4.3% | +$1.6 | $35.1 / 5.7% | +$9.5 |
| Net income | $5.4 | +25.6% | $22.1 | +40.7% |
| Diluted EPS | $0.10 | vs. $0.08 | $0.40 | vs. $0.29 |
Q3 comparable sales fell 0.2%: store transactions declined about 2.1%, partly offset by a 1.9% increase in average transaction value. Year-to-date comparable sales rose 2.6%, reflecting a 3.1% increase in average transaction value and a 0.5% decline in transactions. Q3 sales growth came from $30.2 million of non-comparable sales, offset by a $0.4 million comparable-sales decline. Year-to-date growth included $94.8 million of non-comparable sales and $11.9 million of comparable-sales growth.
Gross margin improved as merchandise cost and distribution costs declined as a percentage of sales. Q3 SG&A rose to 27.8% of sales from 27.0%, primarily due to store and corporate growth costs; year-to-date SG&A as a share of sales was unchanged at 26.5%. Effective tax rates were 37.4% for Q3 and 37.5% year to date, down from 38.2% and 37.9%, respectively.
Cash flow, balance sheet and liquidity
- For the first 39 weeks, operating cash flow was negative $2.9 million, versus negative $1.5 million a year earlier. Inventory increased cash use by $79.8 million; accounts payable provided $47.2 million.
- Investing activities provided $0.7 million, including investment-security maturities and sales, against $35.7 million of capital expenditures. Financing activities provided $2.6 million. Cash increased $0.5 million to $53.5 million.
- At October 29, 2016, cash and cash equivalents were $53.5 million and short-term investments were $9.9 million. Current assets were $330.6 million and current liabilities $145.5 million. Total liabilities were $198.8 million and shareholders’ equity was $278.2 million.
- No direct borrowings were outstanding under the $20 million revolving credit facility. About $19.6 million was available and $0.4 million supported an outstanding letter of credit. The facility was due to expire May 16, 2017; the company reported covenant compliance.
- Management said cash, operating cash flows and facility availability should fund planned capital expenditures, working capital and debt service for the next 12 months and foreseeable future. The company reported no direct debt borrowings at quarter-end.
Outlook, commitments and risks
- The company planned 85 net new stores in fiscal 2016 and approximately $38 million of fiscal-year capital expenditures, including about $25 million for new stores. Management expects to fund the plan with cash generated from operations.
- Retail working-capital needs rise in Q3 and Q4 as inventory is built for the holiday season; management noted that sales are usually highest in Q4. Results for the interim period may not indicate full-year performance.
- From January 30 to October 29, the company entered into 77 new retail leases and lease modifications with approximately $146.6 million of future minimum payments. Separately, a new Philadelphia headquarters lease has approximately $54 million of future minimum payments; initial occupancy of roughly 110,000 square feet is expected in early 2018, with expansion planned by 2023.
- Key disclosed risks include execution of store and e-commerce growth, inventory management, distribution capacity and disruptions, competition, lease obligations, staffing and operating-cost inflation, seasonality, information-technology and data-security risks, and economic or weather events. The company said there were no material changes to previously disclosed risk factors.
- Ordinary-course legal proceedings were disclosed; management did not believe their ultimate resolution would materially harm financial condition or results, though adverse developments could affect income. No material off-balance-sheet arrangements were reported apart from ordinary-course operating leases.
Important facts for investors to verify
- Confirm the period: the filing is for Q3 2016, not Q3 2015.
- Assess whether Q3’s slight comparable-sales decline and lower store transactions persist, and separate comparable growth from new-store expansion.
- Track holiday inventory, working-capital demands and operating cash flow, which was negative year to date despite higher earnings.
- Review execution and profitability of the new e-commerce channel and the planned 85 store openings.
- Evaluate the scale and timing of lease commitments, including the headquarters lease, and the status or renewal of the revolving facility due in May 2017.