Business context and reporting period
Five Below, Inc. filed this Form 10-K for fiscal 2016, the 52-week year ended January 28, 2017, with fiscal 2015 as the principal comparison. This does not match the request metadata of “2015 Q4”; the filing’s fourth-quarter figures are unaudited and are identified separately below.
The company is a specialty value retailer focused on trend-right merchandise priced at $5 or less, primarily for teens and pre-teens. At year-end it operated 522 stores in 31 states, up from 437 a year earlier, and began e-commerce sales in August 2016.
Financial performance and liquidity
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Net sales | $1,000.4 million | $832.0 million | +20.2% |
| Gross profit / gross margin | $357.0 million / 35.7% | $291.9 million / 35.1% | Margin +60 bps |
| SG&A / sales | $243.1 million / 24.3% | $199.0 million / 23.9% | Expense +22.2% |
| Operating income / margin | $114.0 million / 11.4% | $92.9 million / 11.2% | Income +22.6% |
| Net income | $71.8 million | $57.7 million | +24.5% |
| Diluted EPS | $1.30 | $1.05 | +$0.25 |
| Comparable sales growth | 2.0% | 3.4% | Slowed 1.4 percentage points |
Comparable-sales growth reflected a 2.4% increase in average transaction value, partly offset by a 0.4% decrease in store transactions. Most of the sales increase came from non-comparable sales, including new stores.
Operating cash flow was $106.6 million, versus $87.9 million. Investing activities used $86.8 million, including $44.8 million of capital expenditures; financing activities provided $3.1 million. Cash and cash equivalents were $76.1 million at year-end, with $77.8 million of short-term and $10.5 million of long-term investment securities. Total current assets were $339.8 million and current liabilities $116.6 million.
The company reported no debt outstanding. Its revolving facility provided up to $20.0 million, with $19.7 million available and $0.3 million committed to a letter of credit. The prior term loan had been fully repaid in February 2014. Shareholders’ equity was $331.4 million.
Fourth-quarter fiscal 2016 sales were $388.1 million versus $326.4 million in fourth-quarter fiscal 2015; net income was $49.8 million versus $42.0 million. The fourth quarter is the company’s strongest season, contributing approximately 40% of annual sales in each of the last two fiscal years.
Material changes versus the prior period
- Sales rose 20.2%, supported by 85 net store additions, compared with 71 net additions in fiscal 2015. Store count increased approximately 19.5%.
- Gross margin improved by 60 basis points, mainly from lower merchandise costs and distribution costs as a percentage of sales.
- SG&A as a share of sales increased 40 basis points, reflecting store-related growth and marketing costs, as well as corporate expenses.
- Operating cash flow increased $18.7 million. Cash and investments increased overall, while capital expenditures declined from fiscal 2015’s distribution-center investment level.
- Comparable-sales growth decelerated to 2.0% from 3.4%.
Outlook, commentary, risks and unusual items
- Management planned approximately 100 new stores in fiscal 2017 and identified a long-term opportunity to exceed 2,000 U.S. locations. It had signed leases for 67 fiscal 2017 openings as of January 28, 2017.
- Management expected fiscal 2017 capital expenditures of approximately $78 million, funded from operating cash flow. The budget included about $35 million for roughly 100 new stores, with the balance for headquarters, stores, distribution and infrastructure.
- Management stated that available cash, investments, operating cash flow and the revolver should cover planned capital and working-capital needs for the next 12 months and foreseeable future. This is an expectation, not a guarantee.
- Key risks include the ability to sustain store growth and comparable sales; holiday-season concentration and weather exposure; low-price-model sensitivity to merchandise, freight, wage and occupancy costs; inventory management and shrink; distribution capacity; competition including online retailers; and execution of the new e-commerce channel and multi-year ERP implementation.
- The company had $813.3 million of minimum operating-lease commitments, including assumed extensions, plus $4.6 million of purchase obligations. It also entered 17 additional store leases after year-end through March 23, 2017, with approximately $34.6 million of future minimum payments.
- A new Philadelphia headquarters lease was signed in September 2016, with initial occupancy planned for early 2018. The company expected adoption of the new lease accounting standard to materially increase balance-sheet assets and liabilities, but not materially affect its income statement.
- No material adverse effect from ordinary-course legal matters was expected by management. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective controls.
Important facts for investors to verify
- Confirm the intended period: this filing reports fiscal 2016, not fiscal 2015 Q4; the Q4 comparisons are fiscal 2016 versus fiscal 2015.
- Track whether comparable-sales growth, transaction counts and margins improve or weaken as the store base expands.
- Assess whether planned store openings achieve the stated approximate $1.6 million first-full-year sales and less-than-one-year average payback assumptions.
- Monitor e-commerce economics, including fulfillment costs, customer acquisition and any shift of sales away from stores.
- Review lease commitments, headquarters and distribution investments, revolver renewal or replacement, and the effect of lease-standard adoption on reported leverage.
- Check the impact of seasonality, inventory levels, shrink, wage and freight inflation, and tax-accounting changes on cash flow and earnings.