Five Below, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter (13 weeks) and year to date (39 weeks) ended October 29, 2022, compared with periods ended October 30, 2021. The filing covers fiscal 2022, not 2021. Five Below operates a value retail business focused on tween and teen customers; it had 1,292 stores in 42 states and e-commerce sales.
Financial performance
| Metric | Q3 2022 | Q3 2021 | 39 weeks 2022 | 39 weeks 2021 |
|---|---|---|---|---|
| Net sales | $645.0m | $607.6m | $1,953.6m | $1,852.0m |
| Gross profit | $207.8m | $202.4m | $643.1m | $633.6m |
| Gross margin | 32.2% | 33.3% | 32.9% | 34.2% |
| Operating income | $20.9m | $42.4m | $119.3m | $192.3m |
| Net income | $16.1m | $24.2m | $90.2m | $138.6m |
| Diluted EPS | $0.29 | $0.43 | $1.62 | $2.46 |
- Q3 sales grew 6.2%, but comparable sales fell 2.7%, reflecting lower average transaction values and transaction counts. Year-to-date sales rose 5.5%, while comparable sales declined 4.1%.
- New-store and other non-comparable sales drove growth, partially offset by comparable-sales declines. Store count increased from 1,173 to 1,292 year over year.
- Margins and earnings weakened: Q3 gross margin declined 110 basis points and SG&A rose 16.9% to $186.9m, reaching 29.0% of sales. Management attributed SG&A growth primarily to store-related costs and corporate expenses; higher occupancy costs pressured gross margin.
- Q3 interest and other income was $0.5m versus expense of $10.6m a year earlier. The prior-year period included a roughly $9.7m impairment and reserve related to an equity-method investment. Year-to-date income-tax expense was $29.4m; the effective tax rate increased to 24.6% from 22.8%, primarily due to discrete items.
Cash, liquidity, and obligations
- For the 39 weeks, operating cash flow was negative $45.0m versus positive $124.7m in the prior-year period. The filing cites working-capital changes, weaker operating cash flows, and higher income taxes paid. Inventory rose to $701.6m from $521.1m at October 30, 2021.
- Investing activities provided $68.5m, including investment-security maturities and redemptions, while capital expenditures were $173.6m. Financing used $44.3m, including $40.0m of share repurchases. Cash declined $20.7m to $44.2m.
- Short-term investments were $72.7m, giving cash and short-term investments of approximately $117.0m. The company had no revolving-credit borrowings and approximately $225m available under its asset-based facility; it reported compliance with applicable covenants.
- The revolving facility was amended in September 2022, extended to September 2027, and transitioned from LIBOR to SOFR-based pricing. It is secured by substantially all assets of the company and its subsidiary and contains availability requirements and other covenants.
- Operating lease liabilities totaled $1.487bn, including $193.6m current; the balance sheet also reported $1.312bn of operating lease assets. The company entered 116 new fully executed retail leases from January 30 through October 29, with approximately $233m of future minimum lease payments.
Outlook, risks, and notable items
- Management planned approximately $235m of fiscal 2022 cash capital expenditures, excluding tenant allowances, including about $90m for approximately 150 new stores. It described plans for approximately 375 new stores over the next two fiscal years, with other spending for relocations, remodels, distribution centers, and corporate infrastructure.
- Management believes cash, investments, operating cash flows, and credit-facility availability should support planned capital expenditures, repurchases, and working capital needs. It cautioned that additional financing might be needed if those sources are insufficient. No specific sales or earnings guidance was provided in the filing text.
- Inventory and working-capital needs rise ahead of the holiday quarter; sales are seasonal and usually highest in Q4. Disclosed risks include inflation and commodity costs, supply-chain and freight disruption, tariffs, discretionary-spending trends, competition, inventory management and shrink, store growth and lease obligations, and cyber and technology risks.
- The company repurchased 247,132 shares for approximately $40.0m during the 39 weeks and exhausted the March 2021 authorization. A new $100m authorization approved in June 2022 had no repurchases as of October 29.
- Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes are uncertain. Disclosure controls were assessed as effective at a reasonable assurance level; no material changes in internal control were reported.
Important facts for investors to verify
- Whether comparable-sales trends and transaction values improve, and how much future growth depends on new stores.
- Whether gross-margin pressure, particularly occupancy costs, and elevated SG&A persist.
- Inventory levels, holiday-season sell-through, and the drivers of negative year-to-date operating cash flow.
- Actual capital spending and store openings versus plans, alongside the funding needs and obligations of new leases.
- Credit-facility availability and covenant headroom as seasonal working-capital requirements increase.