Five Below, Inc. — Form 10-K summary
Reporting period: The filing is for fiscal 2019, the 52 weeks ended February 1, 2020, and was filed March 19, 2020. Although the request identifies “2018 Q4,” this 10-K reports fiscal 2019 and includes its fourth-quarter results; the filing’s fiscal 2018 ended February 2, 2019.
Business context and results
Five Below is a specialty value retailer focused on tween and teen customers, with 900 stores in 36 states at year-end and an e-commerce channel. Most items were priced at $5 or below, but the company rolled out higher prices on some items in fall 2019.
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Net sales | $1,846.7 million | $1,559.6 million |
| Gross profit / gross margin | $674.0 million / 36.5% | $565.1 million / 36.2% |
| Operating income / margin | $217.3 million / 11.8% | $187.2 million / 12.0% |
| Net income | $175.1 million | $149.6 million |
| Diluted earnings per share | $3.12 | $2.66 |
| Operating cash flow | $187.0 million | $184.1 million |
| Capital expenditures | $212.3 million | $113.7 million |
Fiscal 2019 fourth-quarter net sales were $687.1 million and net income was $110.4 million. The fourth quarter is seasonally the company’s strongest, accounting for approximately 40% of annual sales over the last two fiscal years.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $202.5 million and short-term investments were $59.2 million at February 1, 2020, a combined $261.7 million.
- No direct borrowings were outstanding under the revolving credit facility during fiscal 2019. The facility had $20 million available at year-end; on March 18, 2020, the company increased its size to $50 million, all available.
- Operating lease liabilities totaled $948.1 million, including $110.5 million current and $837.6 million long-term. Undiscounted operating lease payments were $1.214 billion. These are lease obligations, not reported revolving-credit borrowings.
- Total assets rose to $1.959 billion from $952.3 million, largely reflecting adoption of lease accounting, which added operating lease assets and liabilities. The company reported $842.988 million of operating lease assets at year-end.
Changes versus the prior year
- Sales grew 18.4%, principally from new stores: non-comparable sales increased $278.2 million, while comparable sales added $8.9 million. Comparable sales growth slowed to 0.6% from 3.9%; average transaction value rose about 1.1%, offset by transactions declining about 0.5%.
- Gross margin improved 30 basis points, mainly from lower merchandise cost as a percentage of sales, partly offset by higher store occupancy costs.
- SG&A rose 20.8% to $456.7 million and increased from 24.2% to 24.7% of sales, including store-growth costs and the effect of the new lease accounting standard. Operating margin consequently declined from 12.0% to 11.8%.
- Net income increased 17.0%. The effective tax rate declined to 21.0% from 22.0%, primarily due to discrete items, including share-based compensation tax effects.
- Operating cash flow was broadly stable, while investing cash outflow increased substantially with higher capital spending and lower net proceeds from investment securities. Financing outflow also increased, primarily because of share repurchases.
Outlook, risks, and unusual items
- Management planned approximately $270 million of fiscal 2020 capital expenditures, excluding tenant allowances, including approximately $75 million for new-store construction. The company planned further store openings and cited a long-term opportunity to grow to more than 2,500 U.S. locations; 105 leases for fiscal 2020 openings had been executed as of year-end.
- Management reported no specific fiscal 2020 sales or earnings guidance in the supplied filing text. It said cash, operating cash flow, and credit availability were expected to fund planned capital expenditures, authorized repurchases, and working capital needs.
- COVID-19 was a major subsequent event, not part of fiscal 2019 results. The company said it would close all stores effective after business on March 19, 2020, until at least March 31; e-commerce remained available and distribution centers were operating as of filing. Management could not reasonably estimate the financial impact and warned of adverse effects on results, financial position, and liquidity.
- Key risks include the pandemic and reduced store traffic; weaker comparable sales; tariffs and overseas sourcing costs; price increases potentially weakening the value proposition; labor and occupancy cost inflation; inventory management; distribution capacity and construction execution; and competition from online and physical retailers.
- The company purchased a distribution center in Georgia for approximately $42 million and acquired Texas land for a planned distribution center expected to cost approximately $56 million in total; approximately $31 million had been paid by year-end. The company adopted lease accounting in fiscal 2019, materially increasing reported assets and liabilities without materially affecting operating results or cash flows.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective internal controls. Ordinary-course legal matters were disclosed; management did not expect their resolution to materially harm financial condition or results.
Important facts for investors to verify
- How store closures, reopening timing, consumer demand, and any distribution interruptions affected results and liquidity after the filing date; the 10-K gives no reliable quantified COVID-19 estimate.
- Whether the sharp slowdown in comparable sales and transaction count continued, and how higher prices affected unit sales, customer perception, and margins.
- Whether planned fiscal 2020 store openings, approximately $270 million of capital spending, and Texas distribution-center construction proceeded on schedule and within budget.
- How lease commitments, working-capital needs, share repurchases, and available credit affected liquidity during the pandemic; distinguish lease liabilities from funded debt.
- The filing’s period is fiscal 2019, not fiscal 2018; use the stated fiscal-year dates when comparing performance.