Five Below, Inc. — Form 10-K Summary
Business context and reporting period
The filing is the company’s annual report for fiscal 2015, a 52-week year ended January 30, 2016—not a fiscal 2014 fourth-quarter filing, despite the request metadata. Five Below operates value retail stores focused on trend-oriented merchandise priced at $5 and below, primarily targeting teens and pre-teens. It had 437 stores in 27 states at year-end, after opening 71 net new stores.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $832.0 million | $680.2 million | +22.3% |
| Gross profit / margin | $291.9 million / 35.1% | $237.8 million / 35.0% | +22.8%; margin +10 bps |
| SG&A / % of sales | $199.0 million / 23.9% | $160.8 million / 23.6% | +23.8%; ratio +30 bps |
| Operating income / margin | $92.9 million / 11.2% | $77.0 million / 11.3% | +20.7% |
| Net income | $57.7 million | $48.0 million | +20.1% |
| Diluted EPS | $1.05 | $0.88 | +19.3% |
| Cash from operations | $87.9 million | $61.4 million | +$26.5 million |
Comparable-store sales rose 3.4%, matching FY2014; transactions increased about 1.8% and average transaction value about 1.6%. The fourth quarter was the strongest: sales were $326.4 million and net income $42.0 million, compared with $263.8 million and $33.3 million, respectively, in FY2014 Q4.
At January 30, 2016, cash was $53.1 million and short-term investments were $46.3 million; current assets were $264.7 million versus current liabilities of $102.2 million. The company had no debt outstanding, no FY2015 revolver borrowings, and approximately $20 million available under its revolving facility. Operating cash flow exceeded capital expenditures of $53.1 million by approximately $34.9 million. Investing cash outflow was $99.4 million, including $46.3 million of investment-security purchases. Shareholders’ equity was $244.5 million.
Material changes versus prior comparable period
- Sales growth was driven mainly by non-comparable stores, contributing $130.7 million of the $151.8 million increase; comparable-store sales contributed $21.1 million.
- Net income increased $9.7 million. Gross margin edged up 10 basis points as merchandise costs improved, while SG&A as a share of sales rose 30 basis points, reflecting store and corporate costs and higher share-based compensation.
- Operating cash flow increased, while cash and cash equivalents declined $10.1 million, primarily in the context of higher capital investment and purchases of short-term securities.
- The company completed repayment of its term loan in February 2014; FY2015 had no debt balance or revolving borrowings.
Outlook, risks, contingencies, and unusual items
- Management planned approximately 85 new stores in FY2016 and capital expenditures of approximately $44 million, including about $27 million for new stores. It stated that cash, operating cash flow, and revolver availability should fund expected needs. It also described a long-term opportunity to exceed 2,000 U.S. stores; these are plans and expectations, not guaranteed results.
- New stores are modeled at approximately $1.6 million in first-full-year sales, with roughly $0.3 million initial cash investment and an average payback period under one year; these are management estimates.
- Principal risks include expansion execution and distribution capacity, merchandise trend and sourcing risks, inflation and wage or freight cost pressure, inventory shrink and markdowns, seasonal dependence on holiday sales, competition from online retailers while Five Below does not sell online, weather, data security, and implementation of a multi-year ERP system.
- Operating lease commitments, including assumed extensions, totaled $616.8 million; purchase obligations were $3.7 million. After year-end, the company committed to 14 additional store leases with approximately $25.0 million in future minimum payments.
- The company expected to implement and certify EMV chip card acceptance during FY2016 Q1; until implementation, it faced increased liability for certain fraudulent card transactions.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. The filing reports no material impairment charges and no material off-balance-sheet arrangements apart from ordinary operating leases. No cash dividends were planned for the foreseeable future.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective controls at year-end. The company early adopted deferred-tax balance-sheet presentation guidance, retrospectively reclassifying prior-period balances.
Important facts for investors to verify
- Whether new-store openings and comparable-store growth support the planned expansion without weakening store economics or margins.
- Whether gross-margin gains persist as merchandise, freight, occupancy, wages, and other costs change.
- How capital spending, investment-security purchases, inventory growth, and seasonal working-capital needs affect cash and liquidity.
- Progress and costs for the ERP and distribution-center expansion, including the planned increase in Pedricktown capacity to approximately one million square feet by 2019.
- Actual EMV certification timing, the extent of payment-fraud exposure, and the company’s ability to mitigate online competition while it has no online sales channel.
- The scale of long-term lease commitments and the additional obligations from continued store openings.