Five Below, Inc. — Form 10-Q Summary
Period note: The request metadata says “2017 Q2,” but the supplied filing is for the quarter ended August 4, 2018, and compares results with the quarter ended July 29, 2017. The figures below summarize the filing provided.
Business context and reporting period
Five Below is a specialty value retailer targeting teen and pre-teen customers, with merchandise generally priced at $5 and below. At August 4, 2018, it operated 692 stores in 33 states and also sold online. The filing reports unaudited results for the 13 and 26 weeks ended August 4, 2018.
Financial performance and liquidity
| Metric | 13 weeks ended Aug. 4, 2018 | Year-over-year change | 26 weeks ended Aug. 4, 2018 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $347.7 million | +22.7% | $644.1 million | +24.8% |
| Comparable sales growth | 2.7% | 9.3% prior year | 3.0% | 6.1% prior year |
| Gross profit / margin | $121.8 million / 35.0% | 34.8% prior year | $219.0 million / 34.0% | 33.4% prior year |
| SG&A / percent of sales | $91.3 million / 26.3% | 25.5% prior year | $163.9 million / 25.4% | 25.8% prior year |
| Operating income / margin | $30.4 million / 8.7% | 9.3% prior-year margin | $55.1 million / 8.6% | 7.6% prior-year margin |
| Net income | $25.1 million | +49.1% | $46.9 million | +86.0% |
| Diluted EPS | $0.45 | $0.30 prior year | $0.84 | $0.45 prior year |
- For the 26-week period, operating cash flow was $44.4 million, compared with $31.1 million a year earlier. Capital expenditures were $46.5 million, implying operating cash flow less capital expenditures of approximately negative $2.1 million.
- Cash and cash equivalents were $133.3 million and short-term investments were $131.4 million at August 4, 2018. The company had no line-of-credit borrowings and approximately $20.0 million available; total liabilities were $264.4 million.
- Inventory was $228.1 million, up from $184.5 million at July 29, 2017. The company reported no material debt outstanding.
Material changes versus the prior comparable period
- Sales growth was driven mainly by new and non-comparable stores: these added $53.1 million of second-quarter sales growth, versus $11.3 million from comparable sales. Comparable sales growth moderated to 2.7% from 9.3%; transaction value rose about 3.4%, while transaction count fell about 0.7%.
- Gross margin improved 20 basis points in the quarter and 60 basis points year to date, primarily because store occupancy costs declined as a percentage of sales. Quarterly SG&A as a percentage of sales rose 80 basis points, reflecting store-growth and corporate expenses.
- The effective tax rate fell to 20.2% in the quarter and 18.1% year to date, from 36.7% and 36.5%, respectively. Management attributed the decline primarily to the U.S. Tax Cuts and Jobs Act and discrete share-based compensation tax benefits.
- Cash provided by operations increased, while net cash used in investing activities declined to $19.7 million from $34.4 million, largely reflecting investment-security maturities and redemptions, partly offset by higher capital expenditures.
Outlook, risks, contingencies, and unusual items
- Management planned approximately 125 new store openings in fiscal 2018 and forecast approximately $130 million of cash capital expenditures for the year, excluding tenant allowances. It expected to fund planned spending from operating cash flows and existing liquidity.
- The company authorized up to $100 million of share repurchases through March 31, 2021; no repurchases were made during the 26 weeks ended August 4, 2018.
- In June 2018, it signed a purchase agreement for an approximately 700,000-square-foot Georgia distribution center costing approximately $42 million, with occupancy expected in early 2019. It also committed to 41 new store leases in the quarter with approximately $85 million in future minimum lease payments; 84 new or modified leases since February 4 had approximately $165.6 million in future minimum payments.
- The company expected adoption of the new lease accounting standard in fiscal 2019 to significantly increase reported assets and liabilities. The amount of the impact was still under evaluation.
- Management highlighted proposed and enacted U.S. tariffs, particularly on imports from China, as a risk to merchandise costs, margins, import expenses, and discretionary consumer demand. Other cited risks include execution of store and distribution growth, inventory and supply-chain disruptions, competition, labor costs, weather, technology, and seasonality.
- Ordinary-course legal matters were disclosed; management did not believe their resolution would materially adversely affect financial condition or results. No material changes to previously disclosed risk factors were reported apart from the tariff discussion.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied document is for Q2 2018, not Q2 2017.
- Track comparable-sales trends and the balance between new-store growth and sales from established stores.
- Assess whether gross-margin gains can persist while quarterly SG&A as a percentage of sales has increased.
- Monitor inventory growth, capital spending, and the funding and execution of the store and distribution-center expansion plans.
- Evaluate tariff exposure and potential mitigation through sourcing changes, pricing, or product mix.
- Review the eventual balance-sheet impact of lease-standard adoption and the company’s use of its repurchase authorization.