Five Below, Inc. — Form 10-K Summary
Period clarification: The request labels this “2017 Q4,” but the supplied filing is the annual report for fiscal 2018, the 52 weeks ended February 2, 2019. Fiscal 2017 was a 53-week year. The filing also reports fourth-quarter results; comparisons with fiscal 2017 Q4 are affected by its extra week.
Business context
Five Below operates a specialty value-retail chain targeting tweens and teens, with a broad assortment principally priced at $5 and below. At year-end it had 750 stores in 33 states and an e-commerce channel. It opened 125 net new stores in fiscal 2018.
Financial performance
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Net sales | $1,559.6 million | $1,278.2 million | Up 22.0% |
| Comparable sales | Up 3.9% | Up 6.5% | FY2018 growth comprised approximately 3.1% higher average transaction value and 0.8% more transactions |
| Gross profit / margin | $565.1 million / 36.2% | $463.4 million / 36.3% | Margin down approximately 10 basis points |
| SG&A | $377.9 million / 24.2% of sales | $306.0 million / 23.9% | Expense ratio increased approximately 30 basis points |
| Operating income / margin | $187.2 million / 12.0% | $157.4 million / 12.3% | Income up 18.9%; margin down approximately 30 basis points |
| Net income | $149.6 million | $102.5 million | Up 46.1%; FY2018 effective tax rate was 22.0%, versus 35.5% |
| Diluted EPS | $2.66 | $1.84 | Up approximately 44.6% |
| Operating cash flow | $184.1 million | $167.4 million | Up $16.7 million |
| Capital expenditures | $113.7 million | $67.8 million | Increased with store, distribution and infrastructure investment |
Fourth-quarter FY2018 sales were $602.7 million and net income was $89.3 million, compared with $504.8 million and $67.4 million, respectively, in FY2017 Q4. FY2017 Q4 included an extra fiscal week, so the reported quarter comparison is not like-for-like.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $251.7 million at year-end, and short-term investments were $85.4 million, together $337.2 million, compared with $244.6 million a year earlier.
- No revolver borrowings were outstanding. The company reported approximately $20 million available under its revolving credit facility and stated it was in covenant compliance.
- Total assets were $952.3 million, total liabilities $337.2 million and shareholders’ equity $615.1 million. Inventory rose to $243.6 million from $187.0 million.
- Operating lease commitments, including assumed extensions, totaled $1.139 billion; $147.4 million was due in less than one year. These commitments are material to the company’s liquidity profile.
Changes, outlook and risks
- Sales growth was driven mainly by new stores: non-comparable sales increased $232.3 million, while comparable sales increased $49.1 million. Comparable-sales growth slowed from 6.5% to 3.9%.
- Management planned approximately 145–150 new stores and approximately $170 million in capital expenditures for fiscal 2019. It described continued positive comparable-sales growth and longer-term store-base potential above 2,500 locations, but provided no numerical comparable-sales or earnings guidance in the supplied text.
- In March 2019, after fiscal year-end, the company completed a purchase of an approximately 700,000-square-foot distribution center in Georgia for about $42 million. It also reported that the new lease-accounting standard was expected to increase reported assets and liabilities by approximately $600–$800 million upon adoption in fiscal 2019.
- Key exposures include tariffs and sourcing costs, the ability to maintain merchandise appeal and margins at low price points, execution of rapid store and distribution expansion, labor and occupancy costs, inventory management, seasonality, weather, competition including online retail, cybersecurity and ERP implementation. Holiday-quarter performance is especially important; approximately 40% of annual sales occurred in the fourth quarter over the prior two fiscal years.
- The company recorded no long-lived asset impairment in FY2018. Management and the auditor reported effective internal control over financial reporting, and the auditor gave unqualified opinions on the financial statements and controls. Ordinary-course legal matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Confirm the period being analyzed: this is FY2018, not a standalone FY2017 Q4 filing, and FY2017 included an extra week.
- Assess whether store openings and planned FY2019 capital spending deliver acceptable returns while comparable-sales growth has moderated.
- Monitor gross and operating margins, including merchandise cost, occupancy, wage and tariff impacts.
- Review the cash and investment position alongside substantial lease commitments, distribution-center spending and the expected lease-accounting balance-sheet increase.
- Check subsequent filings for actual FY2019 store openings, capital expenditures, comparable sales, lease-standard adoption effects and distribution-center costs.