Five Below, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended May 4, 2019 (fiscal 2019 Q1), compared with the 13 weeks ended May 5, 2018. The request metadata says 2018 Q1, but the filing itself is for 2019 Q1. Financial statements are unaudited.
Business context and performance
Five Below is a value retailer targeting tween and teen customers, with merchandise traditionally priced at $5 and below, plus e-commerce. It operated 789 stores in 36 states at quarter-end, versus 658 stores a year earlier.
- Net sales were $364.8 million, up 23.1%. Comparable sales increased 3.1%; the balance of growth was primarily from new and recently opened stores.
- Gross profit was $120.0 million, up 23.4%; gross margin was 32.9%, versus 32.8%.
- SG&A was $95.5 million, up 31.7%, and increased to 26.2% of sales from 24.5%. Operating income was $24.5 million, down slightly from $24.7 million; operating margin declined to 6.7% from 8.3%.
- Net income was $25.7 million, up 17.7%. Diluted earnings per share were $0.46, versus $0.39. The effective tax rate was 1.9%, compared with 15.4%, primarily due to discrete tax benefits associated with share-based compensation accounting.
Cash flow, balance sheet and liquidity
- Operating cash flow was $20.8 million, compared with $33.0 million. Investing cash outflow was $44.2 million, including $61.7 million of capital expenditures; financing cash outflow was $7.6 million. Cash declined $31.0 million to $220.8 million.
- At May 4, 2019, the company held $67.9 million of short-term investments in addition to cash. It had no borrowings under its revolving credit facility and approximately $20.0 million available. The facility is secured by substantially all company assets and has customary covenants; the company reported compliance.
- Total liabilities were $956.3 million, including $744.7 million of operating lease liabilities. The company adopted the new lease standard in fiscal 2019; adoption added approximately $618 million of net assets and liabilities, and comparative periods were not restated. Management said adoption did not materially affect operating results or cash flows.
- Management said cash, operating cash flow and available credit were expected to fund planned capital expenditures, authorized repurchases and working capital needs for the next 12 months and foreseeable future.
Material changes, outlook and risks
- Management planned to open 145–150 net new stores in fiscal 2019 and forecast approximately $205 million in cash capital expenditures, excluding tenant allowances. About $50 million was expected to support new-store construction; the remainder was for distribution facilities, existing stores and corporate infrastructure.
- The company completed the purchase of a roughly 700,000-square-foot distribution center in Georgia for approximately $42 million. It also entered into 39 new store leases with terms of 10–15 years and approximately $69.1 million in future minimum payments.
- Gross margin benefited from lower store occupancy costs as a percentage of sales, partly offset by higher distribution costs, including start-up costs for a new Southeast distribution center. Higher SG&A reflected store growth, tax reinvestments, lease-accounting effects and corporate expenses.
- Management disclosed exposure to tariffs and other costs on imported merchandise, higher wages and operating costs, and the possibility of price increases, including prices above $5. It cautioned that higher prices could reduce unit sales or weaken the extreme-value proposition, and that tariffs could pressure margins or consumer demand.
- Other highlighted risks include store and distribution-network execution, inventory management, competition, e-commerce execution, technology and cybersecurity, seasonality, and the ability to meet lease obligations. The company said ordinary-course legal matters were not expected to have a material adverse effect, while acknowledging outcomes cannot be predicted with certainty.
- Results are seasonal, with sales usually highest in the fourth fiscal quarter; first-quarter results may not indicate full-year performance. No specific full-year earnings or sales guidance is provided in the supplied filing text.
Important facts for investors to verify
- Whether planned store openings and capital spending remain on track, and whether new stores and distribution investments generate expected returns.
- Whether comparable-sales growth, gross margin and SG&A leverage hold up as the store base expands.
- The effect of tariffs, sourcing changes and any pricing above $5 on costs, unit volumes and customer perception.
- Whether the unusually low 1.9% quarterly effective tax rate is nonrecurring; the filing attributes the lower rate mainly to discrete items.
- Cash-flow and working-capital trends, including inventory needs, capital expenditures and the substantial operating lease commitments.