Five Below, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended August 3, 2019 (second quarter of fiscal 2019) and the 26 weeks ended August 3, 2019, compared with the corresponding 2018 periods. The interim financial statements are unaudited. Although the request metadata says “2018 Q2,” the filing itself is for 2019 Q2.
Business context and performance
Five Below is a specialty value retailer targeting tween and teen customers, with merchandise primarily priced at $5 and below. At quarter-end it operated 833 stores in 36 states, versus 692 stores a year earlier, and also sold online.
- Second-quarter sales: $417.4 million, up 20.0% year over year. Comparable sales rose 1.4%; most of the sales increase came from non-comparable sales, primarily newer stores.
- Second-quarter earnings: Gross profit was $146.2 million; operating income was $36.0 million; net income was $28.8 million, up 15.0%. Diluted EPS was $0.51 versus $0.45.
- Second-quarter margins: Gross margin was 35.0%, unchanged year over year. SG&A was 26.4% of sales versus 26.3%, and operating margin was 8.6% versus 8.7%. Net margin was 6.9% versus 7.2%.
- First-half results: Sales were $782.2 million, up 21.4%; comparable sales rose 2.2%. Net income was $54.5 million, up 16.3%, and diluted EPS was $0.97 versus $0.84. Gross margin was 34.0%, unchanged; SG&A rose to 26.3% of sales from 25.4%, and operating margin declined to 7.7% from 8.6%.
Cash flow, liquidity and obligations
- For the first half, operating cash flow was $47.0 million, compared with $44.4 million a year earlier. Capital expenditures were $100.1 million; net cash used in investing was $106.1 million, and net cash used in financing was $13.9 million.
- Cash and cash equivalents were $178.8 million at August 3, 2019, down $72.9 million from fiscal year-end. Short- and long-term investments totaled $91.4 million. The company reported no borrowings under its revolving facility and approximately $20 million available; the facility may be increased to $50 million subject to conditions.
- Adoption of the new lease accounting standard added substantial lease assets and liabilities to the balance sheet. At quarter-end, operating lease assets were $709.3 million and lease liabilities totaled $800.1 million. The company said adoption materially affected the balance sheet but did not materially affect operating results or cash flows.
- Shareholders’ equity was $651.9 million. The company repurchased 146,185 shares for approximately $16.6 million during the quarter and disclosed additional repurchases after quarter-end.
Changes, outlook and risks
- Sales growth reflected store expansion, while comparable-sales growth was slower than the prior-year quarter (1.4% versus 2.7%). Management attributed higher SG&A to store growth, corporate costs and lease accounting effects; first-half SG&A also reflected tax reinvestments.
- Management planned to open 150 stores in fiscal 2019 and expected approximately $210 million in fiscal 2019 capital expenditures, excluding tenant allowances. It expected to fund spending from operating cash flow and cash on hand. These are plans, not guaranteed results.
- The company completed a roughly $42 million purchase of a Georgia distribution center and signed agreements for an approximately $47 million Texas distribution center, expected to be occupied in 2020. It also committed to 32 new store leases during the quarter, with approximately $52.1 million in future minimum lease payments.
- Management believed available cash, operating cash flow and credit availability would be adequate for planned needs over the next 12 months and foreseeable future, while noting that additional financing might be required if those sources were insufficient or unavailable.
- Tariffs and trade uncertainty were highlighted risks. The filing warned that tariffs on imports, especially from China, could raise product and import costs, pressure margins, prompt price increases or product changes, and reduce discretionary consumer spending. Other cited risks include store and distribution expansion, inventory and supply-chain disruptions, competition, labor and operating costs, weather, technology and cybersecurity, and seasonality.
- Management did not believe ordinary-course legal matters would have a material adverse effect, but noted outcomes are uncertain and adverse developments could affect income. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether planned store openings and distribution investments proceed on schedule and within the stated capital budget.
- Comparable-sales trends and whether sales growth can support margins as SG&A grows faster than sales.
- The realized effects of tariffs, including vendor cost changes, pricing actions and any impact on customer demand.
- Cash needs and liquidity through the holiday inventory build, given declining cash and substantial capital spending and lease commitments.
- Subsequent share repurchases and remaining authorization: the filing reported approximately $61 million remaining after post-quarter purchases.