Five Below, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2016 Q2, but the filing covers the thirteen and twenty-six weeks ended July 29, 2017, compared with periods ended July 30, 2016. The financial statements are unaudited.
Business context and reporting period
Five Below is a specialty value retailer selling merchandise targeted to teens and pre-teens, generally priced at $5 or less. It operated 584 stores in 32 states at quarter-end, versus 491 stores a year earlier, and also sold online. Fiscal 2017 is a 53-week year. The company notes that sales are seasonal and typically highest in the holiday-season fourth quarter.
Key financial metrics
| Metric | 13 weeks ended July 29, 2017 | 13 weeks ended July 30, 2016 | 26 weeks ended July 29, 2017 | 26 weeks ended July 30, 2016 |
|---|---|---|---|---|
| Net sales | $283.3 million | $220.1 million | $516.2 million | $412.8 million |
| Gross profit / margin | $98.5 million / 34.8% | $73.4 million / 33.3% | $172.3 million / 33.4% | $133.6 million / 32.4% |
| Operating income / margin | $26.3 million / 9.3% | $15.7 million / 7.1% | $39.1 million / 7.6% | $26.5 million / 6.4% |
| Net income | $16.8 million | $9.8 million | $25.2 million | $16.6 million |
| Diluted EPS | $0.30 | $0.18 | $0.45 | $0.30 |
| Comparable-sales growth | 9.3% | 3.1% | 6.1% | 3.9% |
For the 26-week period, operating cash flow was $31.1 million, investing cash flow was negative $34.4 million, and financing cash flow was $1.9 million. Cash and cash equivalents were $74.8 million at July 29, 2017; short-term investments were $92.7 million. Current assets were $390.6 million and current liabilities were $133.5 million. The company had no credit-facility borrowings and reported approximately $20 million of availability. Total liabilities were $195.1 million; no long-term debt balance is reported.
Changes versus prior comparable periods
- Quarterly sales rose 28.7%; year-to-date sales rose 25.0%. Management attributed most of the increases to non-comparable sales from new and recently opened stores, with comparable sales also higher.
- Quarterly comparable sales growth of 9.3% reflected approximately 9.1% more transactions and 0.2% higher average transaction value. Year-to-date growth of 6.1% reflected approximately 6.4% more transactions, partly offset by a 0.3% decline in average transaction value.
- Gross margin improved 150 basis points for the quarter and 100 basis points year to date, mainly from lower merchandise costs as a percentage of sales; quarterly occupancy costs also declined as a percentage of sales.
- SG&A increased in dollars with store and corporate growth, but declined as a share of sales: 25.5% versus 26.2% for the quarter and 25.8% versus 26.0% year to date.
- Year-to-date operating cash flow increased from $16.4 million to $31.1 million. Cash declined by $1.3 million, compared with a $14.0 million increase in the prior-year period, as investment-security purchases and capital spending drove higher investing outflows.
Outlook, risks, contingencies, and unusual items
- Management planned approximately 100 new store openings in fiscal 2017 and approximately $78 million of capital expenditures, excluding tenant allowances. It expected to fund these investments from operating cash flow and believed cash, investments, operating cash flow, and the credit line would cover planned needs for at least the next 12 months.
- In May 2017, the company amended its revolving facility: up to $20 million, potentially expandable to $50 million subject to conditions, with a May 2022 expiration. It requires at least $100 million of eligible inventory and is secured by substantially all company and subsidiary assets. The company reported covenant compliance.
- From January 29 through July 29, 2017, the company entered 63 new retail leases and other lease modifications with approximately $115.3 million of future minimum payments. Its new Philadelphia headquarters lease has approximately $50 million of future minimum payments. The company expects the new lease-accounting standard to significantly affect its financial statements.
- The company adopted share-based-payment accounting guidance in fiscal 2017; related excess tax benefits or deficiencies now affect income tax expense and operating cash flow classification. The effective tax rate was 36.7% for the quarter and 36.5% year to date, versus 37.6% in both prior-year periods.
- Management cited risks including store-growth execution, inventory and supply-chain disruptions, competition and online retail, lease obligations, labor and operating costs, seasonality, information systems, and weather or other disruptions. It reported ordinary-course legal matters and did not expect their resolution to materially adversely affect financial condition or results, while noting outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Confirm the intended reporting year: the supplied filing is for Q2 2017, not Q2 2016.
- Assess how much sales and profit growth came from new stores versus comparable-store performance, and whether the strong quarterly comparable-sales trend continued.
- Track planned store openings, capital expenditures, inventory growth, and cash generation through the holiday season.
- Review lease commitments and the expected balance-sheet effect of the new lease-accounting standard.
- Verify credit-facility availability, inventory requirements, and covenant compliance as expansion proceeds.