Five Below, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended November 2, 2013. This differs from the “2012 Q3” period in the request metadata. Financial statements are unaudited. Five Below operated 304 stores in 19 states and sells value-priced merchandise targeted at teens and pre-teens.
Financial performance
| Metric | 13 weeks ended Nov. 2, 2013 | Prior-year quarter | 39 weeks ended Nov. 2, 2013 | Prior-year YTD |
|---|---|---|---|---|
| Net sales | $110.7 million | $86.6 million | $323.4 million | $245.2 million |
| Gross profit / margin | $34.2 million / 30.9% | $26.9 million / 31.1% | $103.8 million / 32.1% | $78.7 million / 32.1% |
| Operating income / margin | $3.0 million / 2.7% | $1.8 million / 2.1% | $13.4 million / 4.1% | $4.6 million / 1.9% |
| Net income | $1.7 million | $0.7 million | $7.3 million | $0.8 million |
| Comparable-store sales growth | 9.0% | 8.8% | 6.6% | 9.2% |
Quarterly sales rose 27.9%, driven by approximately $17.9 million in non-comparable-store sales and $6.2 million in comparable-store sales. Transactions increased 10.6%, while average transaction value fell 1.6%. Year-to-date sales increased 31.9%; 60 net new stores opened during fiscal 2013 to date. Quarterly gross margin declined 20 basis points, principally reflecting distribution-center costs; year-to-date gross margin was unchanged. SG&A fell as a percentage of sales, supporting higher operating margins.
Cash flow, liquidity and debt
- For the 39-week period, operating cash flow was negative $17.3 million, versus negative $23.8 million a year earlier; investing cash flow was negative $21.8 million, primarily capital expenditures; financing cash flow was negative $11.5 million.
- Cash declined $50.5 million during the period to $5.6 million. Inventory increased $54.7 million, reflecting seasonal inventory build and growth.
- At November 2, 2013, the company had $19.5 million outstanding under its term loan, bearing 5.25% interest, and no revolver borrowings. The $20 million revolving facility was fully available, with no letters of credit outstanding. The term loan matures May 16, 2015; no minimum quarterly principal payments were then required.
- Management said cash, operating cash flow and revolver availability should fund planned capital expenditures, working capital and debt service for the next 12 months and foreseeable future. The company planned approximately $28 million of fiscal 2013 capital expenditures.
- The term loan and revolver are secured by substantially all company assets and include financial or availability covenants and other restrictions. The company reported covenant compliance. A 100-basis-point rate increase was estimated to raise annual term-loan interest expense by approximately $0.2 million.
Outlook, changes and risks
- For the remainder of fiscal 2013, management estimated an effective tax rate of approximately 38.7%; no specific sales or earnings guidance is provided in the filing.
- On June 12, 2013, the company restructured merchandising operations into a wholly owned subsidiary, which joined as guarantor under both credit facilities. Management attributed a lower effective tax rate in 2013 partly to the resulting mix of income across jurisdictions and entities.
- Lease commitments, including assumed extensions, totaled approximately $405.2 million; 39 new retail leases and modifications added approximately $61.9 million of future minimum payments since February 2, 2013. The company also disclosed up to approximately $3.9 million in potential severance and change-in-control payments.
- Legal matters arise in the ordinary course; management did not expect their ultimate resolution to materially harm financial condition or results, but outcomes cannot be predicted. A new risk disclosure notes potential costs and sourcing, pricing and reputational effects from conflict-minerals rules.
- Key operating risks include execution of store growth, inventory and shrink management, distribution capacity and disruption, seasonality, competition, lease obligations, staffing, technology and data security, and restrictions under debt agreements. Results are seasonal, with sales typically highest in the fourth quarter.
- Secondary offerings in 2013 were sales by existing shareholders; Five Below received no proceeds. The 39-week results included $0.3 million of debt-extinguishment loss related to a term-loan repayment.
Important facts for investors to verify
- Confirm the intended reporting period: this filing is for the quarter ended November 2, 2013, not 2012 Q3.
- Track comparable-store sales, transaction size and store openings, and whether new-store growth translates into sustained profitability.
- Assess seasonal inventory needs, operating cash use, low period-end cash and actual revolver availability through the holiday season.
- Review term-loan maturity, covenant headroom, variable-rate exposure and the substantial lease commitments.
- Monitor distribution-center cost effects on gross margin, legal developments and compliance costs or sourcing impacts from conflict-minerals rules.