Five Below, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended August 1, 2015, compared with periods ended August 2, 2014. This differs from the request metadata’s “2014 Q2” label. Financial statements are unaudited.
Business context and results
Five Below operates a specialty value-retail business focused on teen and pre-teen customers, with merchandise priced at $5 and below. At August 1, 2015, it operated 417 stores in 26 states, versus 353 stores a year earlier.
| Metric | 13 weeks ended Aug. 1, 2015 | 13 weeks ended Aug. 2, 2014 | 26 weeks ended Aug. 1, 2015 | 26 weeks ended Aug. 2, 2014 |
|---|---|---|---|---|
| Net sales | $182.2 million | $152.5 million | $335.9 million | $278.5 million |
| Gross profit / margin | $59.8 million / 32.8% | $50.9 million / 33.4% | $107.0 million / 31.8% | $89.8 million / 32.3% |
| Operating income / margin | $11.6 million / 6.3% | $13.3 million / 8.7% | $18.6 million / 5.5% | $18.6 million / 6.7% |
| Net income | $7.1 million | $8.3 million | $11.3 million | $11.4 million |
| Diluted earnings per share | $0.13 | $0.15 | $0.21 | $0.21 |
Liquidity, cash flow and debt
- At August 1, 2015, cash and cash equivalents were $60.9 million; current assets were $224.8 million and current liabilities were $99.4 million.
- For the first half, operating cash flow was $26.3 million, capital expenditures were $29.9 million, and financing cash flow was positive $1.4 million. Cash decreased $2.3 million from the fiscal-year start.
- The company had no borrowings under its revolving credit facility and reported approximately $20.0 million available. The facility permits up to $20.0 million of borrowings, subject to a borrowing base; it expires May 2017. The company reported covenant compliance.
- Lease commitments are significant: 44 new retail leases and lease modifications entered from February 1 through August 1 carried approximately $78.5 million of future minimum payments. A new distribution-center lease has approximately $45 million of future minimum payments.
Changes versus prior comparable periods
- Quarterly sales grew 19.5%; first-half sales grew 20.6%. Most of the increase came from non-comparable stores: $25.7 million for the quarter and $51.3 million for the first half. Comparable-store sales rose 3.0% and 2.4%, respectively.
- Quarterly net income fell 15.1% to $7.1 million; first-half net income declined 0.5% to $11.3 million. Despite sales growth, operating income was essentially flat year over year for the first half.
- Gross margin fell 50 basis points for the quarter and 40 basis points for the first half. Quarterly SG&A rose to 26.5% of sales from 24.6%; first-half SG&A rose to 26.3% from 25.6%.
- First-half operating cash flow increased from $12.6 million to $26.3 million, while capital expenditures rose from $19.7 million to $29.9 million. The prior-year period included a $19.5 million term-loan repayment; no such repayment occurred in the current period.
Outlook, commentary and risks
- Management planned approximately 70 net new stores in fiscal 2015 and approximately $56 million in fiscal-year capital expenditures, including about $22 million for new stores. It expected to fund planned spending from operating cash flow and said cash, operating cash flow and credit availability should cover needs over the next 12 months and foreseeable future. These are management expectations, not a guarantee.
- Management attributed quarterly gross-margin pressure mainly to distribution costs, including transition costs for the new Pedricktown, New Jersey distribution center; first-half pressure was primarily due to store occupancy costs. Higher SG&A reflected store growth, marketing, corporate costs and share-based compensation.
- Key disclosed risks include executing the growth strategy, distribution capacity and disruption, inventory management and shrink, competition including online retailers, lease obligations, seasonality, weather, staffing, technology and information-security risks, and access to financing. The company stated there were no material changes to previously disclosed risk factors.
- Business is seasonal, with sales usually highest in the fourth quarter. Management cautioned that interim results are not necessarily indicative of full-year results.
- Quarterly results included $0.3 million of other expense, with no clear explanation of its nature in the filing text. The prior-year first half included a $0.2 million debt-extinguishment loss.
- A securities class action and a related shareholder derivative action were voluntarily dismissed without prejudice in May and June 2015, respectively. The company said it did not expect legal matters to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Confirm the period being analyzed: the filing is for the quarter ended August 1, 2015, not 2014.
- Assess whether new-store growth and the distribution-center transition can sustain sales while recovering gross and operating margins.
- Track comparable-store sales, store-opening pace, and the contribution of new and immature stores to reported growth.
- Review capital spending, inventory and working-capital needs, lease commitments, and seasonal borrowing requirements.
- Seek clarification on the $0.3 million quarterly other expense and monitor any subsequent developments in legal matters.