Five Below, Inc. — Form 10-Q Summary
Period: Thirteen weeks ended April 29, 2017 (fiscal Q1 2017), compared with the thirteen weeks ended April 30, 2016. The request metadata says “2016 Q1,” but the filing covers 2017 Q1. Financial statements are unaudited. Five Below is a specialty value retailer; it operated 553 stores in 32 states and also sold online.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Net sales | $232.9 million | $192.7 million | Up 20.8%; comparable sales grew 2.6%, versus 4.9% growth a year earlier |
| Gross profit / margin | $73.8 million / 31.7% | $60.3 million / 31.3% | Margin up approximately 40 basis points |
| SG&A / sales | $61.0 million / 26.2% | $49.5 million / 25.7% | SG&A rose 23.2%; ratio up approximately 50 basis points |
| Operating income / margin | $12.8 million / 5.5% | $10.8 million / 5.6% | Income increased; margin was slightly lower |
| Net income | $8.4 million | $6.8 million | Up 24.2% |
| Diluted EPS | $0.15 | $0.12 | Up $0.03 per share |
| Effective tax rate | 35.9% | 37.6% | Lower, primarily reflecting discrete items, including adoption of share-based payment accounting guidance |
Sales increased by $40.2 million: $35.5 million from non-comparable sales, primarily newer stores, and $4.7 million from comparable sales. Comparable-sales growth reflected approximately 3.4% more transactions, partly offset by a 0.8% decline in average transaction value.
Cash flow, liquidity and debt
- Operating cash flow was $33.7 million, compared with cash used of $10.5 million in the prior-year quarter. Management attributed the improvement primarily to working-capital changes, lower income taxes paid and improved store operating cash flows.
- Investing cash outflow was $45.0 million, including $12.8 million in capital expenditures and net purchases of investment securities. Financing cash inflow was $0.4 million. Cash declined $10.9 million during the quarter to $65.2 million.
- At April 29, 2017, cash and cash equivalents were $65.2 million and investment securities totaled $120.4 million ($113.8 million short-term and $6.7 million long-term). The company had no line-of-credit borrowings and approximately $20.0 million available.
- Current assets were $389.6 million and current liabilities $155.0 million. Inventory was $180.0 million, up from $154.4 million at fiscal year-end. The company reported no debt outstanding under its revolving facility.
- On May 10, 2017, after quarter-end, the company amended and extended its revolving facility: up to $20.0 million, expiring May 10, 2022, with potential increases to $50.0 million subject to conditions. The facility no longer uses a borrowing base but requires at least $100.0 million of eligible inventory; it also removes restrictions on dividends, distributions and share repurchases.
Outlook, commitments and risks
- Management planned approximately 100 new store openings in fiscal 2017 and capital expenditures of approximately $78 million, excluding tenant allowances. About $35 million was allocated to constructing and opening new stores; the remainder was expected to support headquarters, relocations and remodels, distribution centers and infrastructure.
- Management said cash, operating cash flow and available credit were expected to fund planned capital expenditures and working capital needs over the next 12 months and thereafter. No specific revenue or earnings guidance was provided.
- During the quarter, the company entered 38 new store leases with terms of 10–15 years and approximately $69.2 million of future minimum lease payments. Its new Philadelphia headquarters lease carries approximately $50 million of future minimum payments. The company expects the lease accounting standard to materially increase balance-sheet assets and liabilities, but not materially affect operating results.
- Management cited risks including store-growth execution, merchandise sourcing and inventory management, traffic and competition (including online retail), labor and operating cost increases, distribution and technology disruptions, lease obligations, seasonality, and data security. The business is seasonal, with sales usually highest in the fourth quarter.
- Ordinary-course legal matters were not expected by management to have a material adverse effect, though outcomes cannot be predicted. The filing reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether the planned 100 store openings and $78 million capital budget were achieved, and the returns on new-store investment.
- Whether comparable-sales growth can hold or improve given its decline to 2.6% from 4.9%, and the lower average transaction value.
- How inventory growth and seasonal working-capital needs affect operating cash flow and liquidity through the holiday quarter.
- Lease commitments, headquarters costs and the future balance-sheet effect of lease accounting adoption.
- Terms and ongoing compliance with the amended credit facility, including its minimum eligible-inventory requirement and secured-asset provisions.