FIVE BELOW, INC annual report, FY2014

Business context and reporting period

Five Below, Inc. is a specialty value retailer selling trend-focused merchandise priced at $5 or less, primarily to teens and pre-teens. This filing is a Form 10-K for fiscal 2014, the 52 weeks ended January 31, 2015—not a standalone 2013 Q4 filing. It reports fiscal 2013 comparisons and unaudited quarterly results, including Q4.

The company operated 366 stores in 21 states at year-end, after opening 62 stores. CEO Joel Anderson and Executive Chairman Thomas Vellios assumed their roles effective February 1, 2015.

Financial performance and liquidity

Sales grew 27.0% year over year; comparable-store sales increased 3.4%, reflecting higher transaction values and transaction counts. SG&A rose to $160.8 million but declined as a share of sales to 23.6% from 25.1%. Gross margin slipped about 10 basis points, primarily due to store occupancy costs. Net cash increased $13.0 million during fiscal 2014.

Fiscal Q4 sales were $263.8 million versus $212.0 million in fiscal 2013 Q4; net income was $33.3 million versus $24.8 million. The company noted that its holiday-season fourth quarter is typically its strongest period.

At year-end, total current assets were $207.6 million and current liabilities $79.4 million. The $19.5 million term-loan balance was repaid in February 2014; no term debt or revolver borrowings remained at year-end. The revolving facility provided approximately $20 million of availability, and the company reported covenant compliance. Operating lease commitments totaled $539.6 million, including assumed extensions.

Material changes, outlook and risks

• Net income increased 49.4% from fiscal 2013, while operating income grew faster than sales. Comparable-store growth moderated from 4.0% to 3.4%.
• Management planned approximately 70 new stores and about $56 million in capital expenditures for fiscal 2015, including approximately $22 million for new stores. It expected to fund the plan from operating cash flow and believed liquidity was adequate.
• A new distribution center in Pedricktown, New Jersey was expected to become operational during fiscal 2015 and eventually replace the New Castle facility. The new facility, store growth and planned multi-year ERP implementation carry execution, cost and timing risks. Management expected incremental fiscal 2015 costs from leadership investments and the distribution-center transition.
• Key risks include dependence on successful store expansion and trend selection, inventory management and shrink, distribution capacity and timely inventory receipt, seasonality and adverse holiday weather, lease commitments, cost inflation, and competition—including online retailers, while Five Below did not sell merchandise online.
• The company and certain current and former officers faced a securities class action filed in January 2015; a shareholder derivative action followed in February. Damages sought were unspecified and the outcome uncertain. Management said it intended to defend the actions and did not believe ordinary-course claims would materially affect results.
• KPMG gave unqualified opinions on the financial statements and internal control over financial reporting. No impairment of long-lived assets was reported for fiscal 2014.

Important facts for investors to verify

1. Confirm the period: the filing covers fiscal 2014 ended January 31, 2015; the supplied “2013 Q4” label does not match the filing period.
2. Track comparable-store sales, new-store productivity and the pace and returns of planned expansion.
3. Assess gross-margin pressure, occupancy and distribution costs, inventory levels and seasonal working-capital needs.
4. Monitor execution and total costs of the Pedricktown distribution center and ERP implementation.
5. Review developments in the securities and derivative lawsuits, and the company’s substantial lease commitments and revolver terms.