Five Below, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended August 3, 2013. Although the request metadata says 2012 Q2, this is the company’s fiscal 2013 second-quarter filing; comparisons are to the periods ended July 28, 2012. Financial statements are unaudited.
Business context
Five Below is a specialty value retailer selling merchandise primarily priced at $5 or below to teen and pre-teen customers. At quarter-end it operated 276 stores in 19 states, versus 226 stores a year earlier.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $117.1 million | $86.8 million | $212.7 million | $158.6 million |
| Comparable-store sales growth | 6.6% | 8.6% | 5.4% | 9.4% |
| Gross profit / margin | $39.4 million / 33.7% | $28.7 million / 33.1% | $69.6 million / 32.7% | $51.8 million / 32.6% |
| SG&A / % of sales | $32.2 million / 27.5% | $24.0 million / 27.7% | $59.2 million / 27.9% | $49.0 million / 30.9% |
| Operating income / margin | $7.2 million / 6.1% | $4.7 million / 5.5% | $10.4 million / 4.9% | $2.8 million / 1.7% |
| Net income | $4.1 million | $1.2 million | $5.6 million | $0.1 million |
| Net income per common share, diluted | $0.07 | $(3.41) | $0.10 | $(3.71) |
Q2 sales rose 34.9%, driven by $25.2 million of non-comparable-store sales and $5.1 million of comparable-store sales. First-half sales increased 34.1%, including $46.0 million of non-comparable and $8.0 million of comparable-store sales. Comparable growth reflected higher transaction counts and modestly higher average transaction values.
Q2 gross margin expanded 60 basis points, primarily because occupancy costs grew more slowly than sales and due to the timing of store openings; the new second distribution center partly offset the improvement. First-half gross margin rose 10 basis points. First-half SG&A as a share of sales declined 300 basis points, although absolute SG&A increased with store growth and corporate costs.
Cash flow, debt and liquidity
- For the first half, operating cash flow was negative $5.7 million, compared with negative $20.6 million a year earlier. Inventory increased by $22.6 million, contributing to operating cash use.
- Capital expenditures were $15.1 million, versus $11.6 million in the prior-year period. Cash declined by $35.0 million to $21.1 million, from $56.1 million at fiscal-year-end.
- First-half financing cash use was $14.2 million, including a $15.0 million term-loan repayment. The prior-year period included IPO proceeds, term-loan borrowings and a $99.5 million dividend.
- At August 3, 2013, term-loan debt was $19.5 million, bearing interest at 5.25%; no quarterly principal payments were then required, and the remaining balance was due at maturity. The company had no revolver borrowings and approximately $19.1 million of $20.0 million available, net of $0.9 million in letters of credit. It reported compliance with debt covenants.
- Total liabilities were $105.6 million and shareholders’ equity was $82.0 million. Operating lease commitments, including assumed extensions, totaled $390.2 million; these are future commitments, not balance-sheet debt.
Outlook, commentary and risks
- Management planned 60 net new stores in fiscal 2013 and approximately $28 million in capital expenditures, including about $16 million for new-store construction and openings. It expected to fund capital spending from operating cash flow.
- Management said cash, operating cash flow and revolver availability should be adequate for planned capital spending, working capital and debt service over the next 12 months and foreseeable future; additional financing could be needed if those sources prove insufficient.
- Management estimated an approximately 38.8% effective tax rate for the remainder of fiscal 2013. Results are seasonal, with sales typically highest in the fourth quarter, and interim results are not necessarily indicative of full-year performance.
- Key risks cited include execution of store-growth plans, inventory management and shrinkage, merchandise sourcing and distribution capacity, lease obligations, competition, seasonality, economic conditions, financing availability, interest-rate exposure and information-technology or data-security incidents. A new disclosure risk concerns sourcing of conflict minerals.
- The company completed an internal merchandising restructuring in June 2013. Its July 2013 secondary offering sold existing shareholders’ shares; the company received no proceeds and recorded approximately $1.0 million of related expenses. The company also recognized a $0.3 million loss on debt extinguishment following its $15.0 million loan repayment.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It did not believe ordinary-course legal matters would have a material adverse effect, while noting outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Whether planned store openings and capital spending are delivered as expected, and whether comparable-store growth holds up against the prior year’s faster rate.
- Inventory levels, seasonal working-capital needs and cash generation, given first-half operating cash outflow and the planned expansion.
- Term-loan repayment terms and covenants, revolver availability, and the effect of variable interest rates.
- The sustainability of margin gains as the second distribution center and new stores scale, alongside lease commitments and operating costs.
- Potential compliance costs and sourcing effects from conflict-minerals rules, and developments in legal proceedings or other disclosed risks.