Five Below, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended May 2, 2020. Comparative period: thirteen weeks ended May 4, 2019. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
Five Below is a specialty value retailer serving tween and teen customers, with most merchandise priced at $5 or less. At quarter-end, it operated 920 stores in 36 states, compared with 789 stores a year earlier, and also sold through fivebelow.com. The quarter was heavily disrupted by COVID-19: all stores were temporarily closed as of March 20, and 111 had reopened by May 2. About 90% were open to the public by the filing date; curbside pickup was also introduced where stores remained closed.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $200.9 | $364.8 |
| Comparable sales growth | (51.8%) | 3.1% |
| Gross profit / gross margin | $20.5 / 10.2% | $120.0 / 32.9% |
| SG&A / percent of sales | $92.7 / 46.1% | $95.5 / 26.2% |
| Operating income (loss) | $(72.2) | $24.5 |
| Net income (loss) | $(50.6) | $25.7 |
| Diluted earnings (loss) per share | $(0.91) | $0.46 |
| Operating cash flow | $(65.3) | $20.8 |
| Capital expenditures | $40.0 | $61.7 |
Sales fell 44.9% year over year. Management attributed the deterioration primarily to store closures. Gross margin contracted as store occupancy costs, including rent, continued while sales were sharply lower. SG&A declined 3.0% in dollars, but rose substantially as a share of sales because of the revenue decline.
Cash and cash equivalents were $69.8 at May 2, down from $202.5 at February 1; short-term investments were $69.2. The company reported no revolver borrowings at quarter-end and approximately $158.9 of availability under its amended $225 million asset-based revolving facility, which expires April 24, 2023. It borrowed and repaid approximately $50 million during the quarter. Total operating lease liabilities were approximately $1,004.2, including $126.7 current; these are lease obligations, not reported borrowings under the credit facility.
Net cash used in investing activities was $50.0, including $40.0 of capital expenditures. Net cash used in financing activities was $17.5, including $12.7 of share repurchases. Cash declined by $132.7 during the quarter.
Material changes versus the prior period
- Net sales fell by $163.9, and comparable sales moved from 3.1% growth to a 51.8% decline.
- Gross margin fell 22.7 percentage points, from 32.9% to 10.2%; the company shifted from $25.7 of net income to a $50.6 net loss.
- Operating cash flow shifted from $20.8 provided to $65.3 used, primarily reflecting weaker store performance and working-capital movements.
- On April 24, the company amended its credit agreement, increasing the secured revolving facility to $225 million from $50 million. Availability is subject to a borrowing base, covenants and other restrictions.
- The company repurchased 137,023 shares for $12.7 during the quarter, at an average $92.42 per share.
Outlook, risks and unusual items
- Management expected COVID-19 to materially affect sales, earnings and cash flows for the foreseeable future. It cited store traffic and closures, consumer spending, e-commerce and curbside demand, supply-chain disruption, and broader economic conditions as uncertainties.
- The company temporarily furloughed most store and distribution-center employees, reduced compensation and non-payroll spending, deferred certain employer FICA taxes, cancelled or delayed vendor orders, and reduced its 2020 capital expenditure budget. Rent was withheld for closed stores beginning in April while the company negotiated deferrals or abatements; landlords could assert lease defaults, and no favorable resolution was assured.
- The filing states a plan to open 100–120 net new stores in fiscal 2020 and estimates fiscal-year cash capital expenditures of approximately $200 million, excluding tenant allowances. It also says the capital budget and new-store count were reduced; the filing does not clearly reconcile these actions with the stated plan.
- The company had entered into 31 new store leases with future minimum payments of approximately $56.6 million. It expected the Conroe, Texas distribution center project to cost approximately $56 million, of which approximately $43 million had been paid, and expected to occupy it in 2020; construction and purchase of a new Midwest distribution center were delayed.
- The CARES Act contributed to an income tax receivable and tax benefit. The quarter’s income tax benefit was $21.5, with a 29.8% effective tax rate. No impairment charges were recorded in the quarter, but future impairment charges were identified as a possibility.
- Management believed cash, investments, operating cash flows and credit availability would be adequate for planned needs over the next 12 months and thereafter, while warning that pandemic impacts were highly uncertain. Ordinary-course litigation was disclosed; management did not expect its resolution to materially affect financial condition or results.
Important facts for investors to verify
- Subsequent store reopening pace, customer traffic, comparable sales and the relative contribution of e-commerce and curbside pickup.
- Whether landlord rent deferrals or abatements are agreed, and whether any landlords assert defaults or seek remedies.
- Cash burn, inventory levels and working-capital needs, as well as actual revolver availability under borrowing-base and covenant requirements.
- How revised capital spending and store-opening plans compare with the stated $200 million capex estimate and 100–120 new-store plan.
- Potential future asset impairments and the continuing effects of COVID-19 on supply chains, consumer demand and liquidity.