Five Below, Inc. — Form 10-Q Summary
Period clarification: Although the request metadata says “2011 Q3,” this filing reports the 13 and 39 weeks ended October 27, 2012, compared with the periods ended October 29, 2011. Dollar amounts below are in millions unless otherwise stated.
Business context and reporting period
Five Below is a specialty value retailer selling merchandise priced at $5 and below, primarily to teen and pre-teen customers. At quarter-end it operated 243 stores in 18 states, versus 189 a year earlier. The company’s fiscal year ended February 2, 2013 and comprised 53 weeks. Interim results may not indicate full-year performance; sales are typically highest in the holiday-season fourth quarter.
Financial results and key metrics
| Metric | 13 weeks ended Oct. 27, 2012 | 13 weeks ended Oct. 29, 2011 | 39 weeks ended Oct. 27, 2012 | 39 weeks ended Oct. 29, 2011 |
|---|---|---|---|---|
| Net sales | $86.6 | $61.9 | $245.2 | $171.3 |
| Gross profit / margin | $26.9 / 31.1% | $18.4 / 29.7% | $78.7 / 32.1% | $53.0 / 30.9% |
| SG&A / % of sales | $25.1 / 29.0% | $17.6 / 28.5% | $74.1 / 30.2% | $46.9 / 27.4% |
| Operating income / margin | $1.8 / 2.1% | $0.7 / 1.2% | $4.6 / 1.9% | $6.1 / 3.6% |
| Net income | $0.7 | $0.4 | $0.8 | $3.7 |
| Net income (loss) attributable to common shareholders | $0.7 | $(3.5) | $(64.6) | $(8.1) |
Quarterly sales rose 39.9%; comparable-store sales increased 8.8%, driven mainly by 8.2% more transactions. Year-to-date sales rose 43.2%; comparable-store sales increased 9.2%. Gross margin improved in both comparisons, but year-to-date operating income declined as SG&A rose faster than sales. The company reported positive net income for both 2012 periods, while common-shareholder results were substantially affected by the $99.5 million dividend and preferred-stock-related allocations. Year-to-date basic and diluted loss per common share was $2.21; the quarter’s earnings per share were $0.01.
For the 39 weeks, operating cash flow was $(23.8), investing cash flow $(17.4), and financing cash flow $7.2, versus operating cash flow of $5.2 and investing cash flow of $(15.4) in the prior-year period. Capital expenditures were $17.4. Cash declined by $34.0 to $7.2. Management attributed the operating cash outflow principally to higher taxes paid, settlement of prior-period book overdrafts, executive bonuses, and increased working-capital needs, partly offset by improved store operating cash flows.
At October 27, 2012, current assets were $113.8 and current liabilities $55.1; cash was $7.2 and inventory $84.4. Term-loan debt was $34.5, bearing a variable rate of 5.25%; there were no revolver borrowings. The revolving facility permits up to $20.0 of borrowing, subject to its borrowing base and covenants. Total liabilities were $119.6. Operating-lease minimum commitments were $311.2, including the second distribution center lease.
Material changes and unusual items
- Gross margin increased 142 basis points in the quarter and 117 basis points year to date, mainly because occupancy and distribution costs grew more slowly than sales.
- Year-to-date SG&A increased 58.0% and rose 284 basis points as a share of sales. Contributing items included store growth, stock-based compensation and corporate costs.
- The company completed its IPO on July 24, 2012, issuing 4.8 million shares and receiving net proceeds of $73.3. It used $65.3 to repay term-loan principal and $0.7 for interest. The remaining IPO proceeds were for general corporate purposes, including working capital. Selling shareholders sold an additional 6.25 million shares; the company received no proceeds from those sales.
- In May, the company borrowed $100.0 under a term loan and paid a $99.5 dividend to common and preferred shareholders. After IPO-related repayments, $34.5 remained outstanding. A $1.6 write-off of deferred financing costs contributed to year-to-date interest and debt-extinguishment expense.
- All outstanding Series A preferred stock converted into common stock immediately before the IPO. The filing also reflects a 0.3460-for-1 reverse stock split, with per-share and share-count data adjusted retroactively.
Outlook, risks and contingencies
Management expected to open one additional store during the remainder of fiscal 2012 and planned fiscal-year capital expenditures of approximately $22.9, including spending on 52 new stores and a new distribution center. Management believed cash, operating cash flows and revolver availability would be sufficient for planned expenditures, working capital and debt service over the next 12 months and thereafter, while cautioning that additional financing might be needed if those sources proved inadequate. Management estimated an approximately 40.5% effective tax rate for the remainder of fiscal 2012.
The company signed a 10-year lease for a second, approximately 600,000-square-foot distribution center in Mississippi, with approximately $16.7 of minimum payments over the initial term. It also reported $3.1 of related infrastructure and systems purchase commitments. Subsequent to quarter-end, it committed to six additional 10-year retail leases with approximately $9.0 of future minimum payments. Other disclosed exposures include long-term store leases, employment-agreement severance and change-in-control payments of up to approximately $3.8, and ordinary-course legal claims. Management did not expect legal matters to have a material adverse effect, but noted outcomes cannot be predicted with certainty.
Risks highlighted include execution of store growth and distribution expansion, inventory and supply-chain management, lease obligations, competition, seasonality, employee retention, operating-cost inflation, IT and data security, public-company costs, access to financing, and restrictions under debt agreements. The company was in compliance with its loan covenants at quarter-end. A 100-basis-point increase in market rates was estimated to increase annual term-loan interest expense by approximately $0.3. Management reported disclosure controls effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether sales growth and comparable-store momentum continued after quarter-end, and how much growth came from new stores.
- Whether gross-margin gains can offset rising SG&A, stock compensation and costs of public-company operations.
- How holiday-season inventory needs affect operating cash flow and liquidity, given the $23.8 year-to-date operating cash outflow and low quarter-end cash balance.
- The term-loan balance, variable-rate exposure, covenant headroom and actual availability under the borrowing-base revolver.
- The scale and timing of lease, distribution-center and store-opening commitments, and the resulting capital requirements.
- The reconciliation of reported net income to the substantial year-to-date loss attributable to common shareholders, including dividend and preferred-stock allocations.