FIVE BELOW, INC quarterly report, Q3 FY2020

Business context and reporting period

Five Below, Inc. is a specialty value retailer serving tween and teen customers, with most merchandise priced at $5 and below. It operated 1,018 stores in 38 states as of October 31, 2020, versus 894 stores a year earlier, and also sells online. The filing is an unaudited Form 10-Q for the 13 and 39 weeks ended October 31, 2020. The request metadata says “2019 Q3,” but the filing itself reports 2020 Q3.

Financial performance and liquidity

• Third-quarter comparable sales growth reflected a 25.7% increase in average transaction value, partly offset by a 10.2% decline in transaction count.
• For the 39-week period, operating cash flow was $121.3 million, versus $1.9 million. Investing cash use was $191.8 million, including $149.3 million of capital expenditures; financing cash use was $15.0 million. Cash declined $85.4 million to $117.0 million. Operating cash flow less capital expenditures was approximately negative $28.0 million.
• At October 31, cash and cash equivalents were $117.0 million and short-term investments were $96.7 million. Current assets were $712.3 million and current liabilities $496.8 million. There were no revolver borrowings and approximately $225 million of availability.
• Operating lease liabilities totaled approximately $1.059 billion, including $136.5 million current and $922.8 million long-term. These are lease obligations, not reported borrowings.

Material changes versus comparable periods

• Quarterly sales rose 26.3%, with $44.4 million from comparable sales growth and $54.8 million from non-comparable sales, primarily newer stores. Quarterly net income roughly doubled year over year.
• Year-to-date sales fell 4.8%, chiefly due to temporary store closures beginning March 20, 2020. Substantially all stores had reopened to the public by the end of June. Year-to-date gross margin fell 5.0 percentage points, with store occupancy costs weighing more heavily on sales during closures.
• Year-to-date SG&A rose 4.7% despite temporary cost cuts; SG&A as a share of sales increased 2.7 percentage points. The company recorded a $15.2 million income tax benefit for the period, including discrete effects of the CARES Act and share-based payment tax accounting; the reported effective tax rate was 96.4% on a pretax loss.
• Cash and investments together were approximately $213.8 million at quarter-end. The company borrowed and repaid approximately $50 million under its facility earlier in the year. It repurchased no shares in the quarter; year-to-date repurchases were approximately $12.7 million.

Outlook, commentary, and risks

• Management planned approximately $200 million of fiscal 2020 capital expenditures, excluding tenant allowances, and 120 net new stores. Approximately $50 million of planned capex was for new stores; the remainder was intended for distribution centers, store projects, and corporate infrastructure. The filing does not provide specific earnings or sales guidance.
• Management believed cash, operating cash flow, and revolver availability would fund planned capex, authorized repurchases, and working capital needs over the next 12 months and beyond, while noting additional financing might be needed if those sources proved insufficient. Capital spending and the 2020 store-opening plan had been reduced during the pandemic.
• COVID-19 remained a material uncertainty: renewed restrictions, store closures or reduced traffic, consumer spending changes, supply-chain disruption, and added safety costs could materially affect sales, earnings, and cash flows. Management said future impairment charges were possible, though none were recorded in Q3. Rent deferrals and abatements had been agreed with virtually all landlords; future rent withholding could prompt lease-default claims.
• The amended secured asset-based revolver matures April 24, 2023 and carries variable rates; it includes financial and other covenants, availability requirements, and restrictions on certain actions. The company reported covenant compliance at quarter-end. Other disclosed risks include inventory and distribution execution, import costs and tariffs, competition, and the ability to meet lease obligations.
• Management stated that ordinary-course legal matters were not expected to have a material adverse effect. The company also disclosed 93 new fully executed retail leases and modifications with approximately $192.7 million of future minimum lease payments since February 2, 2020, and a planned Arizona distribution center expected to cost approximately $65 million, with about $13 million paid by quarter-end.

Important facts for investors to verify

1. Confirm the intended period: the supplied filing is for the quarter ended October 31, 2020, not 2019 Q3.
2. Track comparable sales, transaction counts and average transaction values, particularly if pandemic restrictions or consumer behavior change.
3. Assess whether gross margin and SG&A leverage recover as sales normalize, and interpret the large year-to-date tax benefit and 96.4% effective rate in context.
4. Monitor operating cash generation against capital spending, inventory levels, and working-capital needs during the holiday season.
5. Review lease commitments, new-store obligations, distribution-center spending, revolver availability and covenant requirements, along with any renewed COVID-related closures or impairment charges.