Five Below, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the 13 weeks ended November 1, 2014 and the 39 weeks ended November 1, 2014, compared with the corresponding periods ended November 2, 2013. Although the request metadata says 2013 Q3, the filing itself is for fiscal 2014 Q3. Five Below is a value retailer targeting teen and pre-teen customers, with merchandise priced at $5 or less. It operated 365 stores in 21 states at quarter-end, versus 304 stores a year earlier.
Financial performance
| Metric | 13 weeks ended Nov. 1, 2014 | 13 weeks ended Nov. 2, 2013 | 39 weeks ended Nov. 1, 2014 | 39 weeks ended Nov. 2, 2013 |
|---|---|---|---|---|
| Net sales | $138.0 million | $110.7 million | $416.5 million | $323.4 million |
| Gross profit / margin | $41.6 million / 30.2% | $34.2 million / 30.9% | $131.5 million / 31.6% | $103.8 million / 32.1% |
| Operating income / margin | $5.5 million / 4.0% | $3.0 million / 2.7% | $24.1 million / 5.8% | $13.4 million / 4.1% |
| Net income | $3.3 million | $1.7 million | $14.7 million | $7.3 million |
| Diluted earnings per share | $0.06 | $0.03 | $0.27 | $0.13 |
Quarterly sales increased 24.6% and net income increased 97.4% year over year. Year-to-date sales increased 28.8% and net income increased 101.1%. Comparable-store sales grew 1.5% in the quarter and 3.6% year to date, versus 9.0% and 6.6%, respectively, in the prior-year periods. Quarterly comparable-store growth reflected a 3.0% increase in average transaction value, partly offset by a 1.5% decline in transactions.
Gross margin declined 70 basis points in the quarter and 50 basis points year to date, primarily due to store occupancy costs and merchandise costs. SG&A increased in dollars with store growth but declined as a share of sales: 26.2% versus 28.2% for the quarter and 25.8% versus 28.0% year to date. The year-to-date effective tax rate was 38.0%, compared with 38.6%; the quarterly rate was 39.5%, compared with 37.9%.
Cash flow, debt and liquidity
For the 39 weeks, operating activities used $3.6 million of cash, compared with $17.3 million used a year earlier. Inventory increased by $77.8 million and was a significant cash use; accounts payable increased by $46.5 million. Investing activities used $24.8 million, primarily for capital expenditures, versus $21.8 million. Financing activities used $16.5 million, including repayment of the remaining $19.5 million term-loan balance in February 2014. Cash decreased $44.9 million to $5.3 million.
At November 1, 2014, the company had no term-loan balance or revolver borrowings and reported approximately $20.0 million available under its revolving credit facility. Total assets were $290.4 million, current liabilities were $111.2 million, and shareholders’ equity was $138.9 million. Management said cash, operating cash flow and revolver availability should be adequate for planned capital spending, working capital and debt service over the next 12 months and foreseeable future.
Outlook, material commitments and risks
- Management planned to open approximately 62 stores in fiscal 2014 and expected approximately $36 million of fiscal-year capital expenditures, including about $17 million for new-store construction.
- A new New Jersey distribution center is expected to be operational during fiscal 2015. The planned initial space is about 700,000 square feet, with expansion to approximately one million square feet. Its lease has approximately $44.6 million in future minimum payments and expires in 2025, subject to renewal options.
- From February 2 through November 1, 2014, the company entered into 53 new retail leases and other lease modifications with approximately $86.4 million of future minimum payments. It also reported 14 new store lease commitments during the quarter, with approximately $21.5 million of future payments.
- Management cited risks including execution of store growth and distribution expansion, inventory management and availability, competition, seasonality, weather, lease obligations, operating costs, and the ability to attract and retain employees. Delays or cost overruns at the new distribution center could impede growth.
- Ordinary-course legal matters were not considered likely by management to have a material adverse effect, though outcomes cannot be predicted. The filing reported no material changes to previously disclosed risk factors and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-store sales can strengthen after slowing to 1.5% in the quarter, and whether transaction declines persist.
- Whether gross-margin pressure from occupancy and merchandise costs continues, and whether operating-margin improvement is sustainable.
- How seasonal inventory investment converts to cash during the holiday quarter, given the $77.8 million year-to-date inventory build and reduced cash balance.
- Progress, costs and timing for planned store openings and the new distribution center, alongside the company’s substantial lease commitments.
- Whether holiday sales and operating cash generation support management’s liquidity and capital-expenditure expectations.