Business context and reporting period
Five Below, Inc. filed this Form 10-K for fiscal 2017, the 53-week year ended February 3, 2018—not fiscal 2016. The filing includes fourth-quarter results; fiscal 2017 Q4 contained the extra week. Five Below is a specialty value retailer focused on trend-oriented merchandise priced at $5 and below. At year-end it operated 625 stores in 32 states and had an e-commerce channel.
Financial performance and position
| Metric | Fiscal 2017 | Fiscal 2016 |
|---|---|---|
| Net sales | $1,278.2 million | $1,000.4 million |
| Gross profit / margin | $463.4 million / 36.3% | $357.0 million / 35.7% |
| Operating income / margin | $157.4 million / 12.3% | $114.0 million / 11.4% |
| Net income | $102.5 million | $71.8 million |
| Diluted earnings per share | $1.84 | $1.30 |
| Cash from operating activities | $167.4 million | $106.6 million |
| Capital expenditures | $67.8 million | $44.8 million |
Fiscal 2017 Q4 net sales were $504.8 million and net income was $67.4 million, compared with $388.1 million and $49.8 million, respectively, in fiscal 2016 Q4. The extra week in fiscal 2017 affects comparability.
At February 3, 2018, cash and cash equivalents were $112.7 million and short- and long-term investment securities totaled $159.7 million. The company had no line-of-credit borrowings and reported $20.0 million available under its $20.0 million revolving facility. Total liabilities were $237.2 million; substantial lease commitments are separately disclosed. Current assets were $479.4 million and current liabilities $164.5 million.
Changes versus the prior comparable period
- Annual sales increased 27.8%; management attributed $217.3 million of the increase to non-comparable sales and $60.5 million to comparable sales. Comparable sales rose 6.5%, reflecting approximately 5.8% more transactions and 0.7% higher average transaction value.
- Fiscal 2017 included 103 net new stores, compared with 85 in fiscal 2016; year-end store count rose from 522 to 625.
- Gross margin expanded 60 basis points, primarily from lower store occupancy and merchandise costs as a percentage of sales. SG&A declined as a share of sales by approximately 40 basis points.
- Net income rose 42.6%. Operating cash flow increased by $60.8 million, while investing cash outflow rose to $139.2 million, driven by investment-security purchases and higher capital spending.
Outlook, commentary, risks and unusual items
- Management planned approximately 125 store openings and approximately $137 million of capital expenditures in fiscal 2018, expected to be funded from operating cash flow. Its long-term target is more than 2,500 U.S. stores; this is an ambition, not a guarantee.
- Management expected a fiscal 2018 effective tax rate of approximately 24.5% following the Tax Cuts and Jobs Act. Fiscal 2017 tax expense included a provisional net $0.5 million benefit related to tax reform, and the final impact could change.
- The company authorized a share repurchase program of up to $100 million on March 20, 2018, after fiscal year-end; completion, timing and amount were not assured.
- Key risks include execution of rapid store and distribution expansion, inventory management and shrink, dependence on store traffic and holiday-season sales, competition and online retail, labor and occupancy cost inflation, overseas sourcing and potential tariffs, cybersecurity, and implementation of the new ERP system.
- Operating lease commitments totaled $948.0 million, including assumed extensions, as of year-end. The company expected new lease-accounting standards to materially increase reported assets and liabilities. Management reported no material off-balance-sheet arrangements other than ordinary-course operating leases.
- Management said pending ordinary-course legal matters were not expected to have a material adverse effect. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the reporting-period distinction: this is fiscal 2017, ended February 3, 2018, with a 53rd week—not a fiscal 2016 10-K.
- Assess the effect of the extra week on annual and fourth-quarter comparisons, alongside the 6.5% comparable-sales result.
- Track whether planned fiscal 2018 store openings, capital expenditures and distribution expansion proceed on schedule and within budget.
- Review cash conversion and investment-security liquidity against inventory needs, lease commitments and the share repurchase authorization.
- Monitor the final tax-reform impact and the expected fiscal 2018 tax rate; the filing describes the fiscal 2017 tax benefit as provisional.