Five Below, Inc. — Form 10-K Summary
Period clarification: The filing is for fiscal 2012, ended February 2, 2013—not fiscal 2011 Q4. Fiscal 2012 comprised 53 weeks, versus 52 weeks in fiscal 2011; the fourth quarter included the extra week. Unless noted, amounts are in U.S. dollars.
Business context and reporting period
Five Below operates a specialty value retail chain targeting teens and pre-teens, with merchandise priced at $5 and below. It had 244 stores in 18 states at year-end, after opening 52 stores during fiscal 2012. Its business is seasonal, with approximately 42% of recent annual sales occurring in the fourth quarter.
Key financial metrics
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Net sales | $418.8 million | $297.1 million |
| Gross profit / margin | $149.8 million / 35.8% | $104.9 million / 35.3% |
| Operating income / margin | $37.7 million / 9.0% | $26.2 million / 8.8% |
| Net income | $20.0 million | $16.1 million |
| Net income (loss) attributable to common shareholders | $(45.4) million | $0.1 million |
| Operating cash flow | $30.4 million | $46.7 million |
| Capital expenditures | $22.9 million | $18.6 million |
| Cash and cash equivalents at year-end | $56.1 million | $41.3 million |
Fiscal 2012 comparable-store sales grew 7.1%, driven mainly by a 6.9% increase in transactions; average transaction value rose approximately 0.2%. Fourth-quarter sales were $173.6 million and net income was $19.2 million. The filing reports annual basic and diluted loss per common share of $1.28, reflecting the allocation of the $99.5 million dividend to preferred and unvested restricted shareholders, rather than an operating net loss.
Material changes versus the prior period
- Sales rose 41.0%; the company attributed $98.4 million of the increase to comparable stores and $23.3 million to non-comparable stores. The latter included $5.0 million from the 53rd week.
- Gross margin improved 54 basis points, primarily because store occupancy costs grew more slowly than sales. SG&A increased 42.7% and rose to 26.8% of sales from 26.5%.
- Operating income increased 43.6%, while net income rose 24.2%. Fiscal 2012 results included $10.5 million of stock-based compensation associated with option cancellations and restricted-share grants, $1.0 million of secondary-offering costs, and $1.6 million of debt-extinguishment expense.
- Operating cash flow declined by $16.3 million, with management citing higher taxes paid, settlement of prior-year book overdrafts, payment of accrued executive bonuses, and increased working-capital needs.
Liquidity, debt, and financing
At February 2, 2013, the company had $56.1 million of cash, $34.5 million outstanding under its term loan, and no direct revolver borrowings. Approximately $19.7 million was available under its $20.0 million revolving credit facility, net of an undrawn $0.3 million letter of credit. The term loan bore interest at 5.25%; $15.0 million was classified as current, and management planned to repay that amount within 12 months. The company reported covenant compliance. It said cash, operating cash flow, and revolver availability should fund planned capital spending, working capital, and debt service.
Fiscal 2012 financing included a $100.0 million term loan and $73.2 million of net IPO proceeds. The company used $99.5 million for a special dividend and repaid $65.5 million of term-loan principal during the year. The February 2013 secondary offering was entirely shareholder sales; Five Below received no proceeds. Operating lease commitments totaled $373.5 million, including assumed extensions.
Outlook, risks, and unusual items
- Management planned approximately 60 net new stores and about $26.0 million of capital expenditures in fiscal 2013, including spending for new stores and the Olive Branch, Mississippi distribution center, expected to become operational during fiscal 2013. The company had signed leases for 51 fiscal 2013 openings by year-end.
- Management cited a long-term opportunity to grow to more than 2,000 U.S. stores. Its new-store model targets first-full-year sales of $1.5–$1.6 million, investment of about $0.3 million, and payback in under one year; these are management targets, not guarantees.
- Principal risks include execution of rapid store growth and distribution expansion; merchandise sourcing, trend changes, inventory and shrink; competition and inflation or freight, labor, and occupancy cost increases; seasonality and holiday performance; lease obligations; and variable-rate debt and its covenants.
- Superstorm Sandy resulted in closures at 122 stores in October 2012. Management stated that inflation and commodity-price changes had not materially affected results to date, but warned that higher costs may be difficult to pass through under its low-price model.
- Ordinary-course litigation was disclosed; management did not expect it to have a material adverse effect. The filing does not quantify a material loss contingency. KPMG issued an unqualified audit opinion. Management reported effective disclosure controls; an internal-control-over-financial-reporting assessment and auditor attestation were not included because of the transition period for newly public companies.
Important facts for investors to verify
- Separate underlying operating trends from the 53rd week, new-store contributions, and the reported 7.1% comparable-store-sales growth.
- Review the common-shareholder loss per share in light of the special dividend and preferred-share conversion, and distinguish it from the $20.0 million of net income.
- Track cash conversion, inventory growth, planned debt repayments, variable interest exposure, and compliance with term-loan covenants.
- Assess whether the new distribution center and planned store openings are delivered on time and within budget, and whether new-store economics persist as the chain expands.
- Consider long-term lease commitments, rising public-company and stock-compensation costs, and the effect of the secondary offering, which generated no cash for the company.