Five Below, Inc. — Form 10-Q Summary
Period clarification: The request identifies “2012 Q1,” but this filing reports the 13 weeks ended May 4, 2013, compared with the 13 weeks ended April 28, 2012. The filing is unaudited.
Business context and results
Five Below operates specialty value stores targeting teens and pre-teens, selling merchandise priced at $5 and below. It operated 258 stores in 18 states at quarter-end, versus 199 a year earlier.
| Metric | 13 weeks ended May 4, 2013 | Prior-year comparable period |
|---|---|---|
| Net sales | $95.6 million | $71.8 million |
| Gross profit / margin | $30.2 million / 31.6% | $23.0 million / 32.0% |
| SG&A / share of sales | $27.0 million / 28.3% | $25.0 million / 34.8% |
| Operating income (loss) | $3.2 million | $(2.0) million |
| Net income (loss) | $1.6 million | $(1.2) million |
| Diluted earnings (loss) per share | $0.03 | $(0.32) |
Performance, cash flow, and liquidity
- Sales grew 33.1%; $20.8 million of the increase came from non-comparable stores and $3.0 million from comparable stores. Comparable sales increased 4.2%, down from 10.4% in the prior-year quarter, reflecting transaction growth of about 2.7% and average transaction value growth of about 1.5%.
- Gross margin fell about 40 basis points. Management attributed the primary pressure to distribution costs from opening a second distribution center, partly offset by occupancy and buying costs growing more slowly than sales.
- SG&A increased 8.2% in dollars but declined as a share of sales, largely reflecting sales leverage and a $4.1 million year-over-year reduction in stock-based compensation expense.
- Operating cash flow was negative $11.8 million, improving from negative $23.7 million. Inventory increased $14.5 million during the quarter; capital expenditures were $8.1 million, compared with $4.8 million a year earlier. Cash declined $19.4 million to $36.7 million.
- At May 4, debt under the term loan was $34.5 million, including $15.0 million classified as current; the stated interest rate was 5.25%. The company repaid $15.0 million after quarter-end in May. There were no revolver borrowings and approximately $19.4 million of its $20.0 million capacity was available, net of letters of credit.
- Management said cash, expected operating cash flows, and revolver availability should fund planned capital expenditures, working capital, and debt service for the next 12 months and foreseeable future. It planned approximately $27 million in fiscal 2013 capital expenditures, including construction of 60 net new stores.
Changes, outlook, and risks
- The company planned 60 net new stores in fiscal 2013. Growth was accompanied by higher inventory needs, store occupancy costs, and distribution costs.
- On June 12, 2013, after quarter-end, the company completed an internal restructuring, transferring merchandising operations to a wholly owned subsidiary and amending credit documents to add the subsidiary as a guarantor.
- A proposed secondary offering of up to 8,563,172 shares, with an underwriters’ option for up to 1,284,475 additional shares, was expected to close in the quarter ending August 3, 2013. Selling shareholders—not the company—would receive the proceeds; the company estimated its related expenses at approximately $1.0 million.
- Management expected an effective tax rate of approximately 40% for the rest of fiscal 2013. The reported quarterly rate was 41.4%, affected by expected secondary-offering fees.
- Key risks include execution of store growth, inventory management and shrinkage, merchandise sourcing and distribution capacity, lease obligations, competition, seasonality, variable-rate debt, and restrictive debt covenants. Operating lease commitments, including assumed extensions, totaled $381.5 million. Management did not expect pending legal matters to have a material adverse effect, but noted outcomes could not be predicted with certainty.
Important facts for investors to verify
- Confirm the correct reporting period: the filing covers Q1 2013, not Q1 2012.
- Track comparable-sales trends and the contribution of new stores to sales growth.
- Assess whether the second distribution center and store expansion improve margins and cash generation over time.
- Verify post-quarter debt repayment and remaining term-loan balance, along with covenant compliance and revolver availability.
- Monitor inventory growth, operating cash flow, planned capital spending, and the substantial lease commitments.
- Check the timing and costs of the secondary offering; it provides no proceeds to Five Below.