Five Below, Inc. — Form 10-Q Summary
Period: The supplied filing is for the thirteen and thirty-nine weeks ended October 28, 2017, compared with October 29, 2016. This differs from the request metadata identifying 2016 Q3. Amounts below are in U.S. dollars; financial-statement amounts are converted from thousands to millions where appropriate.
Business context
Five Below is a specialty value retailer serving teen and pre-teen customers with merchandise generally priced at $5 or less. It also sells online through fivebelow.com. At quarter-end, it operated 625 stores in 32 states, versus 517 stores a year earlier.
Key financial results
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Net sales | $257.2m | $199.5m | $773.4m | $612.3m |
| Comparable sales growth | 8.5% | (0.2)% | 6.9% | 2.6% |
| Gross profit | $83.6m | $64.0m | $255.9m | $197.6m |
| Gross margin | 32.5% | 32.1% | 33.1% | 32.3% |
| Operating income | $14.8m | $8.6m | $53.9m | $35.1m |
| Net income | $9.9m | $5.4m | $35.1m | $22.1m |
| Diluted EPS | $0.18 | $0.10 | $0.63 | $0.40 |
For Q3, sales rose 28.9% and net income rose 81.4% year over year. For the 39-week period, sales increased 26.3% and net income increased 59.1%. Q3 comparable-sales gains reflected approximately 7.1% more transactions and a 1.4% increase in average transaction value; year to date, the increases were approximately 6.7% and 0.2%, respectively. Management attributed margin improvement mainly to lower store occupancy costs as a percentage of sales in Q3, and lower merchandise costs and occupancy costs as a percentage of sales year to date. SG&A rose 24.3% in both periods, while declining as a share of sales.
Cash flow, balance sheet and liquidity
- For the 39 weeks, operating cash flow was $17.0m, compared with cash used of $2.9m in the prior-year period. The improvement was attributed mainly to store performance, partly offset by taxes and working-capital changes.
- Investing cash flow was negative $41.1m, including $49.5m of capital expenditures. Financing cash flow was positive $2.9m. Cash declined $21.2m to $54.9m.
- At October 28, 2017, the company reported $56.7m of short-term and $23.2m of long-term investment securities. Inventory was $271.7m. Total current assets were $430.1m and current liabilities were $194.2m.
- There were no revolver borrowings. The $20m revolving facility was reported fully available; it matures May 10, 2022, is secured by substantially all company and subsidiary assets, and is subject to covenants. The facility may be increased to $50m subject to conditions. The company reported covenant compliance.
- Total liabilities were $262.0m. The filing describes significant operating-lease commitments, which are not reflected as lease assets and liabilities under the accounting rules then in effect.
Outlook, commitments and risks
- Management planned 103 net new stores for fiscal 2017 and approximately $75m in fiscal-year capital expenditures, excluding tenant allowances. About $35m of that budget was expected to support new stores.
- Management said cash, operating cash flow and revolver availability were expected to fund planned capital expenditures and working capital over the next 12 months and foreseeable future, while noting that additional financing might be needed if those sources proved insufficient.
- From January 29 through October 28, 2017, the company entered 87 new retail leases and other lease modifications with approximately $158.2m of future minimum payments. Separately, it disclosed a 15-year Philadelphia headquarters lease with approximately $50m of future minimum payments. During Q3, it committed to 24 new store leases with approximately $42.9m of future minimum payments.
- The company expected the forthcoming lease-accounting standard to have a significant financial-statement impact, principally through recognition of right-of-use assets and related liabilities; adoption was planned for fiscal 2019. Revenue-recognition guidance was not expected to have a material impact, though gift-card breakage remained under evaluation.
- Disclosed risks include execution of store and online growth, inventory and distribution management, lease obligations, competition, weather and seasonality, labor and operating costs, cybersecurity and IT systems, and reliance on merchandise manufactured outside the U.S. Ordinary-course legal matters were disclosed; management did not expect their resolution to materially affect financial condition or results, but outcomes cannot be predicted with certainty.
Most important facts for investors to verify
- Confirm the intended reporting year: the source filing covers Q3 2017, not Q3 2016.
- Assess whether comparable-sales growth and transaction trends continued, and how much sales growth depends on new stores.
- Track inventory growth, holiday-season working-capital needs, operating cash generation and planned capital spending.
- Evaluate the scale of lease commitments alongside store expansion and the expected balance-sheet effect of lease-accounting adoption.
- Review the full credit agreement, covenants and available liquidity; the revolver is secured and its stated availability is $20m.
- Consider that interim results are unaudited and the company notes that retail sales are seasonal, typically highest in the fourth quarter.