Five Below, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended July 28, 2012, compared with periods ended July 30, 2011. This differs from the request metadata identifying 2011 Q2. Financial statements are unaudited. Five Below operated 226 stores in 18 states at quarter-end.
Key financial results
| Metric | 13 weeks ended July 28, 2012 | 13 weeks ended July 30, 2011 | 26 weeks ended July 28, 2012 | 26 weeks ended July 30, 2011 |
|---|---|---|---|---|
| Net sales | $86.8 million | $62.0 million | $158.6 million | $109.4 million |
| Gross profit / margin | $28.7 million / 33.1% | $20.0 million / 32.3% | $51.8 million / 32.6% | $34.6 million / 31.6% |
| SG&A | $24.0 million / 27.7% of sales | $16.3 million / 26.3% | $49.0 million / 30.9% | $29.2 million / 26.7% |
| Operating income | $4.7 million | $3.7 million | $2.8 million | $5.3 million |
| Net income | $1.2 million | $2.2 million | $0.1 million | $3.2 million |
| Net loss attributable to common shareholders | $(64.2) million | $(1.7) million | $(65.3) million | $(4.5) million |
Revenue increased 40.1% for the quarter and 45.0% year to date. Comparable-store sales rose 8.6% and 9.4%, respectively; growth also reflected new stores and stores not yet in the comparable-store base. Gross margin improved, while higher SG&A as a share of sales pressured operating performance. The large common-shareholder loss primarily reflects the $99.5 million dividend paid to common, preferred and restricted shareholders, allocated in the per-share calculation; it is not the same as operating or net income.
Cash flow and balance sheet: For the 26 weeks, operating cash flow was $(20.6) million versus $2.8 million provided in 2011; capital expenditures were $11.6 million versus $9.2 million. Cash declined $23.6 million to $17.7 million. At July 28, 2012, current assets were $104.0 million, including $63.6 million of inventory, and current liabilities were $44.4 million. Total assets were $154.2 million and total liabilities $107.4 million. Shareholders’ equity was $46.8 million, versus a deficit of $129.8 million at January 28, 2012, reflecting the preferred-stock conversion and IPO.
Debt and liquidity: The company had $34.75 million outstanding on its variable-rate term loan, bearing 5.25% interest at quarter-end, after repaying $65.25 million of principal following its IPO. It also had a $20 million asset-based revolving facility, with no borrowings during the first half; availability is subject to a borrowing base and covenants. Management stated that cash, expected operating cash flow and revolver availability should fund planned needs for the next 12 months and foreseeable future. A 100-basis-point rate increase was estimated to raise annual term-loan interest expense by about $0.3 million.
Material changes and unusual items
- On July 24, 2012, Five Below completed its IPO at $17 per share. The company issued 4.8 million shares and received $73.4 million net proceeds; selling shareholders sold a further 6.25 million shares, from which the company received no proceeds. Most company proceeds repaid term-loan principal and interest.
- All 89.3 million preferred shares converted into 30.9 million common shares immediately before the IPO. The company also completed a 0.3460-for-1 reverse stock split; share and per-share data are adjusted retroactively.
- The May 2012 $99.5 million dividend was financed with term-loan proceeds and cash. The partial loan repayment caused a $1.6 million write-off of deferred financing costs, reported as a debt-extinguishment loss.
- Year-to-date stock-based compensation was $8.2 million, including expense related to replacing certain options with restricted shares. SG&A also included higher store-growth and corporate costs.
- Operating cash use reflected inventory growth, taxes paid, settlement of prior-period book overdrafts, executive bonuses accrued previously, and working-capital needs associated with expansion.
Outlook, commentary and risks
- Management planned 18 additional store openings in the remainder of fiscal 2012, for approximately 52 net new stores for the year, and projected about $22 million of fiscal-year capital expenditures, including store construction and a new distribution center. The filing does not provide specific revenue or earnings guidance.
- Management expected an effective tax rate of approximately 40% for the rest of fiscal 2012. Sales are seasonal, typically highest in the fourth quarter; inventory and working-capital needs rise ahead of the holiday season.
- Expansion brings substantial lease commitments: minimum operating-lease payments disclosed totaled $290.2 million, including assumed extensions. Since January 28, 2012, the company had entered 38 retail leases with approximately $62 million of future minimum payments; four additional leases signed after quarter-end added approximately $5.6 million.
- Key stated risks include executing growth plans, inventory and shrink management, merchandise sourcing and distribution, lease obligations, competition, seasonality, staffing, economic conditions, information technology and data security, public-company costs, and debt covenants. The company reported covenant compliance at quarter-end and no material change to previously disclosed risk factors.
- Management considered ordinary-course legal matters not likely to have a material adverse effect, but noted outcomes are uncertain. Potential severance and change-in-control payments under certain employment agreements were up to approximately $3.7 million.
Important facts for investors to verify
- Confirm that the reported period is Q2 and first half of fiscal 2012, ended July 28, 2012—not 2011 Q2.
- Assess whether comparable-store growth and new-store openings can continue without further deterioration in SG&A leverage or operating margins.
- Track cash conversion, inventory levels, seasonal working-capital requirements, and the funding of planned capital expenditures.
- Review term-loan amortization, variable interest exposure, leverage and availability under the revolver, and compliance with restrictive covenants.
- Evaluate the economic burden of long-term store leases and the effect of the dividend and IPO-related transactions on per-share comparisons and equity.