Five Below, Inc. — Form 10-Q Summary
Period: First quarter of fiscal 2023, the 13 weeks ended April 29, 2023, compared with the 13 weeks ended April 30, 2022. The filing is for 2023, notwithstanding the request metadata indicating 2022. Five Below is a value retailer focused on tween and teen customers; it operated 1,367 stores in 43 states and sold through its website and third-party delivery services.
Key financial results
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $726.2 million | $639.6 million | +13.5% |
| Comparable sales | +2.7% | -3.6% | Improved |
| Gross profit / margin | $234.8 million / 32.3% | $206.8 million / 32.3% | Profit +13.6%; margin flat |
| SG&A / share of sales | $192.4 million / 26.5% | $164.4 million / 25.7% | Expense +17.0%; margin +0.8 percentage points |
| Operating income / margin | $42.4 million / 5.8% | $42.3 million / 6.6% | Income nearly flat; margin declined |
| Net income | $37.5 million | $32.7 million | +14.5% |
| Diluted EPS | $0.67 | $0.59 | +$0.08 |
| Operating cash flow | $85.3 million | $42.1 million | +$43.2 million |
- Sales rose $86.6 million: comparable sales contributed $16.8 million and non-comparable sales $69.8 million, principally from stores opened in fiscal 2022 and 2023. Comparable sales reflected transactions up approximately 3.9%, partly offset by average transaction value down approximately 1.2%.
- Cost of goods sold increased 13.5%, in line with sales growth. Gross margin remained 32.3%. SG&A growth outpaced sales, reflecting higher store-related and corporate costs to support expansion.
- Interest income and other income, net, was $3.6 million versus net expense of $0.2 million. The effective tax rate fell to 18.6% from 22.3%, primarily due to discrete tax items, including share-based payment tax accounting effects.
- Cash from operations increased mainly due to working-capital changes and store performance. Investing activities used $66.5 million versus providing $57.4 million, primarily reflecting greater net purchases of investment securities and other investments, partly offset by lower capital expenditures. Capital expenditures were $45.1 million versus $58.1 million.
- Financing activities used $15.8 million, versus $44.0 million, when the prior-year period included $40.0 million of share repurchases. No shares were repurchased in the current quarter; $15.9 million of cash was used for shares withheld for taxes.
Liquidity, obligations and outlook
- At April 29, 2023, cash and cash equivalents were $335.3 million and short-term investment securities were $88.2 million. The company reported no borrowings on its $225 million secured revolving credit facility, with approximately $225 million available, and stated it was in covenant compliance.
- Total current assets were $1.084 billion and current liabilities $618.6 million. The balance sheet had substantial operating lease obligations: $1.518 billion present value, including $207.5 million current and $1.310 billion long-term. These are lease liabilities, not revolving-credit borrowings.
- Management planned approximately $335 million of fiscal 2023 cash capital expenditures, excluding tenant allowances, including approximately $155 million for construction and opening of over 200 new stores. The remainder was expected to support relocations, remodels, shipcenters and corporate infrastructure. Funding was expected from operating cash flow, cash and investments and, if needed, the credit facility.
- Management believed available liquidity would fund planned capital expenditures, authorized repurchases and working capital for the next 12 months and foreseeable future. This is not earnings guidance. The company noted financing could be needed if operating cash flows and facility borrowings prove insufficient.
- During the quarter, the company committed to 95 new store leases, with average terms of approximately 10 years and future minimum payments of approximately $154.3 million. It reported approximately $17.1 million of other purchase commitments for new-store construction materials.
Management commentary, risks and contingencies
Management highlighted store growth and merchandise sourcing as part of its strategy. It cautioned that results are seasonal, with sales typically highest in the holiday quarter, and that interim results are not necessarily indicative of full-year results. Risks cited include inflation and commodity costs, supply-chain and freight disruptions, tariffs, inventory management and shrink, store traffic and competition, execution of expansion and e-commerce, lease obligations, technology and cybersecurity, and weather or other disruptions. Management said inflation’s historical effects had been immaterial but could affect future results.
The company is subject to ordinary-course legal proceedings, including commercial, intellectual-property, customer and employment matters; management did not believe their ultimate resolution would materially affect financial condition or results. No material changes to previously disclosed risk factors, material off-balance-sheet arrangements, or material changes in internal control were reported. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether comparable-sales growth and transaction trends persist, and how average transaction value develops.
- Whether SG&A growth moderates as new stores mature, given the decline in operating margin despite sales growth.
- Execution and returns on the plan to open over 200 stores, and the timing and total funding needs of the $335 million capital expenditure plan.
- Cash-flow sustainability and seasonal inventory funding needs; first-quarter cash generation may not indicate full-year performance.
- Lease commitments and credit-facility availability, including borrowing-base and covenant requirements.
- The effects of inflation, freight, tariffs, supply-chain conditions, shrink and discretionary-spending trends on margins and sales.