Business context and reporting period
Five Below is a specialty value retailer selling merchandise priced at $5 and below, primarily to teen and pre-teen customers. This filing covers the 13 and 26 weeks ended August 2, 2014 (fiscal Q2 and first half of fiscal 2014); the comparable periods ended August 3, 2013. The filing period is 2014, notwithstanding the request metadata’s “2013 Q2” label. The company operated 353 stores, up from 276 a year earlier.
Financial results and liquidity
Amounts below are in millions except per-share data. Changes are versus the comparable prior-year period.
| Metric | 13 weeks ended Aug. 2, 2014 | 26 weeks ended Aug. 2, 2014 |
|---|---|---|
| Net sales | $152.5; +30.2% | $278.5; +30.9% |
| Gross profit / gross margin | $50.9 / 33.4% (33.7% prior year) | $89.8 / 32.3% (32.7% prior year) |
| Operating income / margin | $13.3 / 8.7% (6.1% prior year) | $18.6 / 6.7% (4.9% prior year) |
| Net income | $8.3; +104.5% | $11.4; +102.2% |
| EPS, basic / diluted | $0.15 / $0.15 | $0.21 / $0.21 |
| Comparable-store sales growth | 3.2% (6.6% prior year) | 4.6% (5.4% prior year) |
For the first half, operating cash flow was $12.6, compared with cash used of $5.7 a year earlier; capital expenditures were $19.7 versus $15.1. Financing activities used $17.6, including repayment of the remaining $19.5 term-loan balance. Cash declined $24.6 during the half to $25.6. At August 2, current assets were $159.6 and current liabilities $70.9; inventory was $106.7.
The term loan was fully repaid in February 2014. There were no revolver borrowings and approximately $20.0 of availability under the $20.0 revolving facility; the company reported covenant compliance. The facility is secured by substantially all company assets. Management said cash, operating cash flow, and revolver availability should fund planned capital expenditures, working capital, and debt service for the next 12 months and foreseeable future.
Material changes and management commentary
- Sales growth was driven mainly by non-comparable stores: $32.1 of the quarterly increase and $56.8 of the first-half increase. Comparable-store growth slowed year over year; Q2 growth reflected approximately 2.4% more transactions and 0.8% higher transaction value.
- Gross margin declined 30 basis points in Q2, primarily due to occupancy costs, and 50 basis points year to date, attributed primarily to buying expense. SG&A as a share of sales improved to 24.6% from 27.5% in Q2 and 25.6% from 27.9% year to date, supporting higher operating margins.
- Management planned approximately 62 store openings in fiscal 2014 and approximately $36 of capital expenditures, including about $17 for new-store construction and openings.
- The company signed a lease for a new Oldmans Township, New Jersey distribution center, expected to be operational in fiscal 2015 (year ending January 30, 2016). It will initially occupy approximately 700,000 square feet, with planned expansion to approximately one million square feet.
- New store leases and modifications entered into from February 2 through August 2 carried approximately $64.9 of future minimum payments; the distribution-center lease carried approximately $44.6 of future minimum payments. These long-term commitments increase fixed occupancy obligations.
Outlook, risks, contingencies, and unusual items
The filing provides no specific earnings or sales guidance. Management cautioned that results are seasonal, with sales usually highest in the fourth quarter, and interim results are not necessarily indicative of full-year performance. Management also noted that delays or cost overruns in the new distribution center could hinder store growth and sales.
Risks cited include execution of the store-growth strategy, inventory management and shrinkage, merchandise sourcing and distribution, distribution capacity, competition including online retailers, weather, labor, lease obligations, cost inflation, IT and data-security disruptions, and access to financing. The company reported ordinary-course legal matters; management did not expect their resolution to materially adversely affect financial condition or results, but outcomes cannot be predicted. Certain key-employee agreements provide for severance and change-in-control payments of up to approximately $5.7. A $0.2 first-half debt-extinguishment loss related to repayment of the term loan was also recorded. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether planned fiscal-2014 openings and the approximately $36 capital-expenditure plan were achieved, and the resulting store-level returns.
- Whether comparable-store sales stabilize and gross-margin pressure from occupancy and buying costs moderates.
- Progress, final cost, and timing of the distribution-center project, including capacity to support continued expansion.
- Cash conversion and inventory needs as the company builds seasonal stock; first-half inventory was $106.7 and operating cash flow did not cover capital expenditures.
- Future lease obligations, revolver availability and covenant compliance, and any changes to liquidity assumptions.