Five Below, Inc. — Form 10-K Summary
Reporting period: The filing covers fiscal 2013, the 52 weeks ended February 1, 2014, and includes fourth-quarter results. The request metadata says “2012 Q4,” but this is not a fiscal 2012 quarterly filing. The prior-year comparison, fiscal 2012, comprised 53 weeks.
Business context
Five Below operates a specialty value-retail chain focused on trend-oriented merchandise priced at $5 or less, primarily for teen and pre-teen customers. At year-end it had 304 stores in 19 states, following 60 net new openings during fiscal 2013. Management describes a long-term U.S. opportunity exceeding 2,000 stores.
Financial performance
| Metric | Fiscal 2013 | Fiscal 2012 | Change / context |
|---|---|---|---|
| Net sales | $535.4 million | $418.8 million | Up 27.8%; fiscal 2013 had one fewer week |
| Comparable-store sales | +4.0% | +7.1% | 2013 increase reflected transactions up about 4.8%, partly offset by average transaction value down about 0.8% |
| Gross profit / margin | $188.0 million / 35.1% | $149.8 million / 35.8% | Margin down about 70 basis points, mainly from higher distribution costs following the second distribution center opening |
| SG&A / sales | $134.3 million / 25.1% | $112.2 million / 26.8% | SG&A increased in dollars but declined as a share of sales |
| Operating income / margin | $53.7 million / 10.0% | $37.7 million / 9.0% | Operating income up 42.7% |
| Net income | $32.1 million | $20.0 million | Up 60.5%; diluted EPS was $0.59 |
| Operating cash flow | $31.2 million | $30.4 million | Up $0.8 million |
| Capital expenditures | $25.9 million | $22.9 million | Primarily stores, infrastructure and distribution facilities |
Year-end cash was $50.2 million, compared with $56.1 million a year earlier. Inventory rose to $89.4 million from $60.8 million, reflecting growth and seasonal inventory needs. Total assets were $232.1 million and total liabilities were $115.2 million. The $19.5 million term-loan balance was classified as current at year-end and repaid in February 2014. The company reported no revolver borrowings and approximately $20 million of availability under its $20 million asset-based credit facility.
Material changes and unusual items
- Sales growth was driven chiefly by non-comparable stores, contributing $102.0 million of the $116.6 million increase; comparable-store sales contributed $14.6 million.
- Fiscal 2013 included the opening of the Olive Branch, Mississippi distribution center, which contributed to distribution-cost pressure.
- Fiscal 2012 net income and common-share results were affected by a $99.5 million special dividend funded in part with term debt; the dividend contributed to a reported loss attributable to common shareholders despite positive net income that year.
- Fiscal 2013 and fiscal 2012 included $6.1 million and $10.5 million, respectively, of stock-based compensation related to option cancellations and replacement restricted shares. Each year also included about $1.0 million of secondary-offering-related expenses.
- Secondary offerings during fiscal 2013 were sales by shareholders; the company received no proceeds from those offerings.
Outlook, risks and contingencies
- Management planned approximately 62 new stores and about $35 million in capital expenditures for fiscal 2014, including approximately $17 million for store construction and openings. It expected to fund the plan with operating cash flow.
- Management said cash, operating cash flow and available revolver capacity should meet planned capital, working-capital and debt-service needs over the next 12 months and thereafter, while noting that additional financing could be needed if those sources prove insufficient.
- Management cited growth execution, site availability, distribution capacity, inventory management, labor and lease costs, competition, merchandise sourcing, weather and holiday-season performance as key risks. The business is seasonal, with approximately 40% of sales in the last fiscal quarter over the prior two years.
- Operating lease commitments, including assumed extensions, totaled $422.6 million; the filing also disclosed 17 additional store leases committed to after year-end through March 26, 2014, with approximately $28.6 million of future minimum payments.
- Ordinary-course litigation was disclosed; management did not believe its resolution would materially adversely affect financial condition or results. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Assess whether comparable-store sales growth and average transaction value can stabilize or improve as the store base expands.
- Track gross margin and distribution costs as the second distribution center scales, and confirm whether planned store growth is achieved within stated investment assumptions.
- Confirm the term-loan repayment and monitor liquidity, inventory growth, seasonal working-capital needs and use of the revolving facility.
- Review the substantial operating-lease commitments and the economics of the additional post-year-end store leases.
- Compare reported year-over-year growth carefully: fiscal 2012 had 53 weeks, while fiscal 2013 had 52 weeks.