UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 31, 2015February 3, 2018
OR
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-35600
Five Below, Inc.
(Exact name of Registrant as specified in its charter)
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| Pennsylvania | | | | 75-3000378 |
(State or other jurisdiction of incorporation or organization) | | | | (I.R.S. Employer Identification Number) |
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1818701 Market Street
Suite 2000
300 Philadelphia, PA 1910319106
(Address of Principal Executive Office) | | | | 1910319106
(Zip Code) |
| | | (215) 546-7909 (Registrant's Telephone Number, Including Area Code) | | |
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| Securities registered pursuant to Section 12(b) of the Exchange Act: |
| Title of each class | | | | Name of each exchange on which registered |
| Common Stock, $0.01 par value per share | | | | The NASDAQ Stock Market LLC |
| Securities registered pursuant to Section 12(g) of the Exchange Act: |
| Title of each class | | | | Name of each exchange on which registered |
| Not applicable | | | | Not applicable |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the securities act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer þ Accelerated Filer ¨ Non-Accelerated Filer ¨ Smaller Reporting Company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨No þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of August 1, 2014,July 28, 2017, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of common stock (based upon the last reported sales price on The NASDAQ Global Select Market) held by non-affiliates of the registrant was approximately $1,657,136,309.$2,213,100,933.
The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of March 25, 201521, 2018 was 54,421,296.55,475,828.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 20152018 Annual Meeting of Shareholders to be held on June 18, 201519, 2018 (hereinafter referred to as the “Proxy Statement”) are incorporated by reference into Part III of this report.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, or Annual Report, contains forward-looking statements pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or present facts or conditions, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the introduction of new merchandise, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or the negative of these terms or other comparable terminology.
The forward-looking statements contained in this Annual Report reflect our views as of the date of this report about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described below, in Part I, Item 1A “Risk Factors,” and in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These factors include without limitation:
•failure to successfully implement our growth strategy;
•disruptions in our ability to select, obtain, distribute and market merchandise profitably;
•increased competition from online retailers duereliance on merchandise manufactured outside of the United States;
•dependence on a volume of traffic to our lackstores;
•inability to attract and retain qualified employees;
•inability to successfully build, operate or expand our distribution centers or network capacity;
•disruptions to our distribution network or the timely receipt of online sales;inventory;
•extreme weather conditions in the areas in which our stores are located could negatively affect our business and results of operations;
•inability to successfully expand our distribution network capacity;
•disruptions to our distribution network or the timely receipt of inventory;
failure to secure customers’ confidential or credit card information, or other private data relating to our employees or our company;
•inabilityincreased operating costs or exposure to attract and retain qualified employees;fraud or theft due to customer payment-related risks;
•inability to increase sales and improve the efficiencies, costs and effectiveness of our operations;
•dependence on our executive officers, senior management and other key personnel or inability to hire additional qualified personnel;
•inability to successfully manage our inventory balances and inventory shrinkage;
•inability to meet our lease obligations;
•changes in our competitive environment, including increased competition from other retailers and the presence of online retailers;
•increasing costs due to inflation, increased operating costs, wage rate increases or energy prices;
•the seasonality of our business;
•inability to successfully implement our expansion into online retail;
•disruptions to our information technology systems in the ordinary course or as a result of system upgrades;
•the impact of damage or interruptions to our technology systems;
•failure to maintain adequate internal controls;
•complications with the design or implementation of the new enterprise resource system;
•natural disasters, unusualadverse weather conditions, pandemic outbreaks, global political events, war and terrorism;
•the impact of changes in tax legislation;
•current economic conditions and other economic factors;
•the impact of governmental laws and regulations;
•the impact of changes in accounting standards;
•the impact to our financial performance related to insurance programs;
•the costs and consequences of legal proceedings;
•inability to protect our brand name, trademarks and other intellectual property rights;
•the impact of product and food safety claims and effects of legislation;
•increased costs as a result of being a public company;
•inability to obtain additional financing, if needed; and
•restrictions imposed by our indebtedness on our current and future operations.operations; and
•regulations related to conflict minerals.
Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this Annual Report are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.
PART I
ITEM 1. BUSINESS
General
Five Below, Inc. was incorporated in Pennsylvania in January 2002. Our principal executive office is located at 1818701 Market Street, Suite 2000,300, Philadelphia, PA 1910319106 and our telephone number is (215) 546-7909. Our corporate website address is www.fivebelow.com. The information contained on, or accessible through, our corporate website does not constitute part of this Annual Report. As used herein, “Five Below,” the “Company,” “we,” “us,” “our” or “our business” refers to Five Below, Inc. (collectively with its wholly owned subsidiary), except as expressly indicated or unless the context otherwise requires.
We purchase products in reaction to existing marketplace trends and, hence, refer to our products as “trend-right.” We use the term “dynamic” merchandise to refer to the broad range and frequently changing nature of the products we display in our stores. We use the term “power” shopping center to refer to an unenclosed shopping center with 250,000 to 750,000 square feet of gross leasable area that contains three or more “big box” retailers (large retailers with floor space over 50,000 square feet) and various smaller retailers with a common parking area shared by the retailers. We use the term “lifestyle” shopping center to refer to a shopping center or commercial development that is often located in suburban areas and combines the traditional retail functions of a shopping mall with leisure amenities oriented towards upscale consumers. We use the term “community” shopping center to refer to a shopping area designed to serve a trade area of 40,000 to 150,000 people where the lead tenant is a variety discount, junior department store and/or supermarket. We use the term “trade area” to refer to the geographic area from which the majority of a given retailer's customers come from. Trade areas vary by market based on geographic size, population density, demographics and proximity to alternative shopping opportunities.
We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31 of the following year. References to "fiscal year 2018" or "fiscal 2018" refer to the period from February 4, 2018 to February 2, 2019, which consists of a 52-week fiscal year. References to "fiscal year 2017" or "fiscal 2017" refer to the period from January 29, 2017 to February 3, 2018, which consists of a 53-week fiscal year. References to "fiscal year 2016" or "fiscal 2016" refer to the period from January 31, 2016 to January 28, 2017, which consists of a 52-week fiscal year. References to “fiscal year 2015” or “fiscal 2015” refer to the period from February 1, 2015 to January 30, 2016, which consists of a 52-week fiscal year. References to “fiscal year 2014” or “fiscal 2014” refer to the period from February 2, 2014 to January 31, 2015, which consists of a 52-week fiscal year.References to “fiscal year 2013” or “fiscal 2013” refer to the period from February 3, 2013 to February 1, 2014, which consists of a 52-week fiscal year. References to “fiscal year 2012” or “fiscal 2012” refer to the period from January 29, 2012 to February 2, 2013, which consists of a 53-week fiscal year. References to2018, 2017, 2016, 2015, 2014,, 2013, and 20122013 are to our fiscal years unless otherwise specified.
Our Company
Five Below is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the teen and pre-teen customer. We offer a dynamic, edited assortment of exciting products, all priced at $5 and below, including select brands and licensed merchandise across a number of our category worlds: Style, Room, Sports, Tech, CraftsCreate, Party, Candy and Now. We believe we are transforming the shopping experience of our target demographic with a unique merchandising strategy and high-energy retail concept that our customers consider fun and exciting. Based on management’s experience and industry knowledge, we believe our compelling value proposition and the dynamic nature of our merchandise offering have fostered universal appeal to teens and pre-teens, as well as customers across a variety of age groups beyond our target demographic.
We opened the first Five Below store in the greater Philadelphia area in 2002 and, since then, have been expanding across the Northeast, South, Midwest and MidwestWest regions of the United States of America.States. As of January 31, 2015,February 3, 2018, we operated a total of 366625 locations across 2132 states. Our new store model assumes a store size of approximately 7,5008,000 square feet and is typically located within power, community and lifestyle shopping centers across a variety of urban, suburban and semi-rural markets. We opened 62103 net new stores in fiscal 20142017 and plan to open approximately 70125 new stores in fiscal 2015.2018. We believe that we have the opportunity to grow our store base to more than 2,0002,500 locations over time.time.
In August 2016, we commenced selling merchandise on the internet, through our fivebelow.com e-commerce website. We launched our e-commerce operation as an additional channel to serve our customers.
We believe that our business model has resulted in strong financial performance irrespective of the economic environment:
We have achieved positive comparable store sales during each of the last 35 fiscal quarters.
Our comparable store sales increased by 3.4%6.5% in fiscal 20142017, 4.0%2.0% in fiscal 20132016, and 7.1%3.4% in fiscal 20122015.
We expanded our store base from 244437 stores at the end of fiscal year 20122015 to 366625 stores at the end of fiscal year 20142017, representing a compounded annual growth rate of 22.5%19.6%.
Between fiscal 20122015 and 20142017, our net sales increased from $418.8832.0 million to $680.2$1,278.2 million, representing a compounded annual growth rate of 27.4%24.0%. Over the same period, our operating income increased from $37.7$92.9 million to $77.0$157.4 million, representing a compounded annual growth rate of 43.0%30.1%.
Our Competitive Strengths
We believe the following strengths differentiate Five Below from competitors and are the key drivers of our success:
Unique Focus on the Teen and Pre-Teen Customer. We target an attractive customer segment of teens and pre-teens with trend-right merchandise at differentiated price points of $5 and below. We have built our concept to appeal to this customer base, which we believe to be economically influential and resilient based on our industry knowledge and experience, as well as their parents and others who shop for them. Our brand concept, merchandising strategy and store ambience work in concert to create an upbeat and vibrant retail experience that is designed to appeal to our target audience, drive traffic to our stores and keep our customers engaged throughout their visits. We monitor trends in the ever-changing teen and pre-teen markets and are able to quickly identify and respond to trends that become mainstream. Our price points enable teens and pre-teens to shop independently, often using their own money to make frequent purchases of items geared primarily to them and to exercise self-expression through their independent retail purchases.
Broad Assortment of Trend-Right, High-Quality Merchandise with Universal Appeal. We deliver an edited assortment of trend-right as well as everyday products within each of our category worlds that changes frequently to create a sense of anticipation and freshness, which we believe provides excitement for our customers. We have a broad range of vendors, most of which are domestically-based, which enables us to shorten response lead times, maximizes our speed to market and equips us to make more informed buying decisions. Our unique approach encourages frequent customer visits and limits the cyclical fluctuations experienced by many other specialty retailers. The breadth, depth and quality of our product mix and the diversity of our category worlds attract shoppers across a broad range of age and socio-economic demographics.
Exceptional Value Proposition for Customers. We believe we offer a clear value proposition to our customers. Our price points of $5 and below resonate with our target demographic and with other value-oriented customers. We are able to deliver on this value proposition through sourcing products in a manner that is designed to achieve low cost, fast response and high item velocity and sell-through. We maintain a dynamic and collaborative relationship with our vendor partners that provideprovides us with favorable access to quality merchandise at attractive prices. We also employ an opportunistic buying strategy, capitalizing on select excess inventory opportunities with our vendors. This unique and flexible sourcing strategy allows us to offer high-quality products at exceptional value across all of our category worlds.
Differentiated Shopping Experience. We believe we have created a unique and engaging in-store and online atmosphere that customers find fun and exciting. While we refresh our products frequently, we maintain a consistent floor layout, designed with an easy-to-navigate racetrack flow and featuring sight-lines across the entire store enabling customers to easily identify our category worlds. All of our stores feature a sound system playing trend-right music throughout the shopping day. We employ novel and dynamic techniques to display our products, including distinctive merchandise fixtures and colorful and stimulating signage. This approach makes our stores a destination, encouraging hands-on interaction with our products and conveying our value pricing. We have developed a unique culture that emanates from our employees, many of whom frequently shop at Five Below, to our customers, thereby driving a higher level of connectivity and engagement. Additionally, we believe our price points of $5 and below, coupled with our dynamic merchandising approach, create an element of discovery, driving repeat visits and customer engagement.
Powerful and Consistent Store Economics. We have a proven store model that generates strong cash flow, consistent store-level financial results and a high level return on investment. Our stores have been successful in varying geographic regions, population densities and real estate settings and our new stores have achieved average payback periods of less than one year. We believe our robust store model, reinforced by our rigorous site selection process and in-store execution, drives the strength and consistency of our comparable store sales financial results across all geographic regions and store-year classes.
Highly Experienced and Passionate Senior Management Team with Proven Track Record. Since our inception, our co-founders, David Schlessinger and Thomas Vellios, who have approximately 70 combined years of retail experience, have set the vision and strategic direction for Five Below. Messrs. Schlessinger and Vellios have assembled a talentedOur senior management team, averaging 26 years ofled by Joel Anderson, our President and Chief Executive Offer, has extensive retail experience across a broad range of disciplines, including merchandising, real estate, finance, store operations, supply chain management and information technology. In July 2014, Joel Anderson joined the senior management team. Mr. Anderson brings more than 20 years of experience in the retail sector, most recently as President and CEO of Walmart.com. He oversaw all aspects of the business including merchandising, marketing, operations and overall site experience. In December 2014, Mr. Anderson was appointed as Chief Executive Officer and Mr. Vellios was appointed as Executive Chairman, both effective February 1, 2015. Mr. Schlessinger continues to serve on the board of directors as Chairman Emeritus. Our management team drives our operating philosophy, which is based on a relentless focus on providing high-quality merchandise at exceptional value and a superior shopping experience utilizing a disciplined, low-cost operating and sourcing structure. We believe our management team is integral to our success and has positioned us well for long-term growth.
Growth Strategy
We believe we can grow our net sales and earnings by executing on the following strategies:
Grow Our Store Base. We believe there is significant opportunity to expand our store base in the United States from 366625 locations as of January 31, 2015February 3, 2018 to more than 2,0002,500 locations within the United States over time. Based upon our strategy of store densification, in existing markets and expanding into adjacent states and markets, we expect most of our near-term growth will occur within our existing markets, as well as contiguous new markets. This strategy allows us to benefit from enhanced brand awareness and achieve operational efficiencies. We opened 6085 net new stores in fiscal 2013, 622016 and 103 net new stores in fiscal 2014,2017, and plan to open approximately 70125 new stores in fiscal 2015.2018. Our new store model assumes approximately 7,5008,000 square feet and is primarily in-line locations within power, community and lifestyle shopping centers across a variety of urban, suburban and semi-rural markets. We have a talented and disciplined real estate management team and a rigorous real estate site selection process. We analyze the demographics of the surrounding trade areas and the performance of adjacent retailers, as well as traffic and specific site characteristics and other variables. As of January 31, 2015,February 3, 2018, we have executed lease agreements for the opening of 5268 new stores in fiscal 20152018.
Drive Comparable Store Sales. We expect to continue generating positive comparable store sales growth by continuing to hone and refine our dynamic merchandising offering and differentiated in-store shopping experience. We intend to increase our brand awareness through cost-effective marketing efforts and enthusiastic customer engagement. We believe that executing on these strategies will increase the size and frequency of purchases by our existing customers and attract new customers to our stores.
Increase Brand Awareness. We have a cost-effective marketing strategy designed to promote brand awareness and drive store traffic and promote brand awareness.traffic. Our strategy includes the use of newspaper circulars, television, digital, and grassrootslocal community marketing to support existing and new market entries. We leverage our growing e-mail database, new mobile website and social media presence to drive brand excitementengagement and increased store visits within existing and new markets. We believe that our digital experience is an extension of our brand and retail stores, serving as a marketing and customer engagement tool for us. Our digital experience allows us to continue to build brand awareness and expand our customer base.
Enhance Operating Margins. We believe we have further opportunities to drive margin improvement over time. A primary driver of our expected margin expansion will come from leveraging our cost structure as we continue to increase our store base and drive our average net sales per store. We intend to capitalize on opportunities across our supply chain as we grow our business and achieve further economies of scale.
Our History
Five Below,The Company was incorporated in Pennsylvania in January 2002 under the name of Cheap Holdings, Inc. was founded in 2002 by David Schlessinger and Thomas Vellios, who recognized a market need for a fun and affordable shopping destination aimed at our target customer. In July 2014, Joel Anderson joined the Five Below senior management team. In December 2014, Joel Anderson was appointed as Chief Executive Officer and Thomas Vellios was appointed as Executive Chairman, both effective February 1, 2015. David Schlessinger continues to serve on the board of directors as Chairman Emeritus.
The Company was incorporated in Pennsylvania in January 2002 under the name of Cheap Holdings, Inc. We changed our name to Five Below, Inc. in August 2002. In October 2010, Advent International Corporation ("Advent") acquired a majority interest inJuly 2014, Joel Anderson joined the Five Below (the "2010 Transaction"), with the goal of supporting thesenior management team, and in accelerating our growth. As of January 31, 2015, Advent no longer owns any outstanding common stock.December 2014, he was appointed Chief Executive Officer effective February 1, 2015.
On July 24, 2012, we completed our initial public offering (the "IPO"), of 11,057,692 shares of common stock at a price of $17.00 per share. Our common stock is listed on The NASDAQ Global Select Market under the symbol “FIVE.” Of the shares sold in the IPO, 4,807,692 shares were sold by the Company and 6,250,000 shares were sold by selling shareholders. In February, July and September 2013, certain of our shareholders sold 13,012,250, 6,900,000 and 7,100,000 shares of common stock, respectively, in separate secondary public offerings.
On June 12, 2013, we completed an internal business restructuring pursuant to which we formed Five Below Merchandising, Inc., a wholly-owned subsidiary (the “Subsidiary”), and transferred to the Subsidiary assets, operations and employees related to our merchandising operations (the “Restructuring”). Following the Restructuring, the Subsidiary purchases and sells to us certain goods for sale at our retail locations, and we provide to the Subsidiary back office support, office space and other services, in each case, pursuant to agreements between us and the Subsidiary.
Our Market Opportunity
As a result of our unique merchandise offering and value proposition, we believe we have effectively tapped the teen and pre-teen markets. According to the U.S. Census Bureau, there were over 63 million people in the United States between the ages of 5 and 19, which represented over 20% of the U.S. population as of April 1, 2010. Based on management’s experience and industry knowledge, we believe that this segment of the population has a significant amount of disposable income as the vast majority of this age group’s basic needs are already met.
Our Merchandise
Strategy
We offer a dynamic, edited assortment of trend-right, high-quality products, all priced at $5 or below, including select brands and licensed merchandise, targeted at the teen and pre-teen customer. We believe we are transforming the shopping experience of our target demographic with a unique merchandising strategy and high-energy retail concept that our customers consider fun and exciting. Based on management’s experience and industry knowledge, we believe our compelling value proposition and the dynamic nature of our merchandise offering has fostered universal appeal to customers across a variety of age groups beyond our target demographic.
Our typical store features in excess of 4,000 stock-keeping units, or SKUs, across a number of our category worlds including Style, Room, Sports, Tech, CraftsCreate, Party, Candy and Now. We focus our merchandising strategy on maintaining core categories within our stores, but aim to generate high item velocity and sell-through to keep our assortment fresh and drive repeat visits. We monitor trends in our target demographic market, historical sales trends of current and prior products and the success of new product launches to ensure that our merchandise is relevant for our customers. We have a highly planned merchandise strategy focused on trend-right and everyday products supplemented by selected opportunistic purchases from our vendors to drive traffic and therefore offer our customers a consistently exciting shopping experience.
We believe we offer a compelling value proposition to our customers across all of our core product categories. The common element of our dynamic merchandise selection is the consistent delivery of exceptional value to the consumer, with all products offered at or below the $5 price point. Pricing all items at $5 or below enables us to provide an extensive range of exciting products, while maintaining the attraction of a value retailer. Many of the products we sell can also be found in mall specialty stores, department stores, mass merchandisers and drug stores; however, we offer all of these products in an exciting and easy to shop retail environment at price points of $5 and below.
Product Mix
We organize the merchandise in our stores into the following category worlds:
Style: Consists primarily of accessories such as novelty socks, sunglasses, jewelry, scarves, gloves, hair accessories, athletic tops and bottoms and “attitude” t-shirts. Our beauty offering includes products such as nail polish, lip gloss, fragrance, and branded cosmetics.
Room: Consists of items used to complete and personalize our customer’s living space, including glitter lamps, posters, frames, fleece blankets, plush items, pillows, candles, incense, lighting, novelty décor and related items. We also offer storage options for the customer’s room and locker.room.
Sports: Consists of an assortment of sport balls, team sports merchandise and fitness accessories, including hand weights, jump ropes and gym balls. We also offer a variety of games, including name brand board games, puzzles, collectibles and toys and plush items.including remote control. In the summer season, our sports offering also includes pool, beach and outdoor toys, games and accessories.
Tech: Consists of a selection of accessories for PCs, cell phones, tablet, audio and tablet computers. The offering includes cases, chargers, headphones and other related items. We also carry a range of media products including books, video games and DVDs.
CraftsCreate: We offer an assortment of craft activity kits, as well as arts and crafts supplies such as crayons, markers and stickers. We also offer trend-right items for school such as backpacks, fashion notebooks and journals, novelty pens and pencils, locker accessories as well as everyday name brand items.
Party: Consists of party goods, decorations, gag gifts and greeting cards, as well as every day and special occasion merchandise.
Candy: Consists of branded items that appeal to teens and pre-teens. This category includes an assortment of classic and novelty candy bars and movie-size box candy, seasonal-related candy as well as gum and snack food. We also sell chilled drinks via coolers.
Now: Consists of seasonally-specific items used to celebrate and decorate for events such as Christmas, Easter, Halloween and St. Patrick’s Day. These products are most often placed at the front of the store.
Set forth below is data for the following groups of products – leisure, fashion and home, and party and snack. The percentage of net sales represented by each product group for each of the last three fiscal years was as follows:
| | | Sales by Product Group | Percentage of Net Sales | |
| 2014 | | 2013 | | 2012 | |
| | | Percentage of Net Sales |
| 2017 | | 2016 | | 2015 |
| Leisure | 51.0 | % | | 51.7 | % | | 52.6 | % | 50.1 | % | | 50.0 | % | | 50.8 | % |
| Fashion and home | 29.3 | % | | 29.3 | % | | 30.3 | % | 31.6 | % | | 31.2 | % | | 29.7 | % |
| Party and snack | 19.7 | % | | 19.0 | % | | 17.1 | % | 18.3 | % | | 18.8 | % | | 19.5 | % |
| Total | 100.0 | % | | 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % | | 100.0 | % |
Leisure includes items such as sporting goods, games, toys, tech, books, electronic accessories, and arts and crafts. Fashion and home includes items such as personal accessories, “attitude” t-shirts, beauty offerings, home goods and storage options. Party and snack includes items such as party and seasonal goods, greeting cards, candy and other snacks, and beverages.
Our Stores
As of January 31, 2015February 3, 2018, we operated 366625 stores throughout the Northeast, South, Midwest and MidwestWest regions of the United States. Our new store model assumes a store size of approximately 7,5008,000 square feet. Our stores are primarily located in power, community and lifestyle shopping centers; approximately 3% of our stores are located in malls. The following map shows the number of stores in each of the states in which we operated and the locations of our distributionsdistribution centers as of January 31, 2015.February 3, 2018.
Store Design and Layout
We present our products in a unique and engaging in-store atmosphere. We maintain a consistent floor layout designed with an easy-to-navigate racetrack flow and featuring sight-lines across the entire store enabling customers to easily identify our category worlds. All of our stores feature a sound system playing popular music throughout the shopping day. We employ novel and dynamic techniques to display our products, including distinctive merchandise fixtures and colorful and stimulating signage, which attract customers, encourage hands-on interaction with our products and convey our value pricing. In addition to traditional perimeter and gondola shelving, racks and tables, we utilize innovative approaches such as wheelbarrows, barrelsoil drums and bins strategically placed throughout our stores. These techniques foster customer interaction with products, supporting the strong relationship we strive to develop with our customers and enhance our upbeat and vibrant shopping environment.
Each of our category worlds is strategically located within our stores in an effort to enhance the customer’s shopping experience. For example, our Now offerings are located in the front of the store with the goal of catching customers’ attention and being “top of mind,” and specially featured value items and other key items are positioned along the center aisle. Impulse items and “dollar value” tables surround the checkout areas to capture add-on purchases.
Expansion Opportunities and Site Selection
Our unique focus on the teen and pre-teen customer is supported by our real estate strategy to locate stores in high-visibility locations. We seek to operate stores in high-visibility, high-traffic retail venues, which reinforce our brand message, heighten brand awareness and drive customer traffic.
Our strategy is to saturate markets with clusters of stores because of the considerable benefit that stores derive from market concentration. Our store model is profitable across a variety of urban, suburban and semi-rural markets and in multiple real estate venues including power, community and lifestyle shopping centers. Our retail concept works well with a large and varied group of national co-tenants that drive customer traffic.
We select store sites for new store openings based upon certain criteria including minimum population density requirements, availability of attractive lease terms, sufficient space and strong positioning within a center. Members of our real estate team spend considerable time evaluating prospective sites before bringing a proposal to our real estate committee. Our real estate committee, which is composed of senior management including our executive officers, approves all of our locations before a lease is signed.
We believe there is a significant opportunity to expand our store base in the United States. We opened 62103 net new stores in fiscal 20142017 and we intend to open approximately 70125 new stores in fiscal 20152018 through expansion in existing markets and by entering new markets. We maintain a pipeline of real estate sites that have been approved by our real estate committee and have executed 5268 leases through January 31, 2015February 3, 2018 for new stores in fiscal 20152018. Our recent store growth is summarized in the following table:
|
| | | | | | | | | | | | |
| Period | Stores at Start of Period | | Stores Opened | | Stores Closed | | Net Store Increase | | Stores at End of Period |
| Fiscal 2012 | 192 | | 52 | | 0 |
| | 52 |
| | 244 |
|
| Fiscal 2013 | 244 | | 62 | | 2 |
| | 60 |
| | 304 |
|
| Fiscal 2014 | 304 | | 62 | | 0 |
| | 62 |
| | 366 |
|
|
| | | | | | | | | | | | | | |
| Period | Stores at Start of Period | | Stores Opened | | Stores Closed | | Net Store Increase | | Stores at End of Period |
| Fiscal 2015 | 366 |
| | 74 |
| | 3 |
| | 71 |
| | 437 |
|
| Fiscal 2016 | 437 |
| | 86 |
| | 1 |
| | 85 |
| | 522 |
|
| Fiscal 2017 | 522 |
| | 104 |
| | 1 |
| | 103 |
| | 625 |
|
Opening stores within existing markets enables Five Below to benefit from enhanced brand awareness and to achieve advertising, operating and distribution efficiencies. Our targeted new store openings include additional locations in existing markets as well as expansion into adjacent states andnew markets. In existing markets, we use a store densification strategy that promotes brand awareness and leverages marketing, operating and distribution costs. When entering new markets, we employ a store clustering strategy, opening multiple stores in a single market on the same day, enabling us to leverage marketing and pre-opening expenses and generate initial new market brand awareness.
Our store growth is supported by our new store economics, which we believe to be compelling. Our new store model assumes a store size of approximately 7,5008,000 square feet that achieves sales of approximately $1.6 million in the first full year of operation and an average new store cash investment of approximately $0.3 million, including our store build-out (net of tenant allowances), inventory (net of payables) and cash pre-opening expenses. Our new store model targets an average payback period of less than one year on our initial investment.
Store Management, Culture and Training
Each of our stores is managed by a generalstore manager and one or two assistant managers who oversee full-time and part-time team members within each store. Each generalstore manager is responsible for the day-to-day operations of his or her store, including the unit’s operating results, maintaining a clean and appealing store environment and the hiring, training and development of personnel. We also employ regional managersdirectors who are responsible for overseeing the operations of our district managers. Our district managers are responsible for overseeing the operations of 10 to 15 stores, on average.
We are guided by a philosophy that recognizes strong sales performance and customer service, allowing us to identify and reward team members who meet our high performance standards. Store managers and assistant managers participate in a rewarding bonus incentive program based on exceeding planned levels of sales and are paid on a monthly basis.program. We also recognize individual performance through internal promotions and provide extensive opportunities for advancement.
Our employees are critical to achieving our goals, and we strive to hire talented employees with high energy levels and motivation. We have well-established store operating policies and procedures and an in-store training program for new store managers, assistant managers and staff. In addition, we have a dedicated group of training and new store opening managers who are focused on ensuring a consistent new store opening process and who leverage their extensive experience and knowledge of the Five Below culture to train new store managers. Our customer service and store procedure training programs are designed to enable associates to assist customers in a friendly manner and to help to create a positive sales-driven environment and culture as well as teach successful operating practices and procedures.
Merchandising, Sourcing and Distribution
We have developed a disciplined approach to buying and a dynamic inventory planning and allocation process to support our merchandising strategy.
Merchandising
Our merchandising team consists of an Executive Vice President, Merchandising, who reports directly to our Chief Executive Officer, and is supported by an extensive team of merchandising personnel. Our merchandising team works directly with our product development team and our central planning and allocation group to ensure a consistent delivery of products across our store base. Our Executive Vice President, Merchandising has over 30 years of experience within the retail sector.
Our product development team is led by a Senior Vice President of Business and Product Development. Our product development team works directly with our merchandising group to identify new and improved products through international sourcing. Our Senior Vice President of Business and Product Development has over 30 years of experience within the retail sector.
Sourcing
We believe we have strong sourcing capabilities developed through a dynamic and collaborative relationship with our vendor partners that provide us with favorable access to quality merchandise at attractive prices. We regularly purchase core merchandise in accordance with our key categories. We also employ an opportunistic buying strategy, capitalizing on selected excess inventory opportunities, to purchase complementary merchandise based on consumer trends, product availability and favorable economic terms.
We work with approximately 850800 active vendors, with no single vendor representing more than 8%7% of our purchases in fiscal 2014.2017. We sourced approximately 75%65% of our purchases from domestic vendors in fiscal 2014.2017. We typically have no long-term supply agreements or exclusive arrangements with our vendors, and our top 20 vendors represented approximately 36% of total goods purchased in fiscal 2014.vendors.
Distribution
We distribute over 86%85% of our merchandise from our 421,000approximately 800,000 square foot distribution center in Pedricktown, New Castle, DelawareJersey and our 605,000approximately 600,000 square foot distribution center in Olive Branch, Mississippi, with the remaining merchandise shipped directly from the vendor to our stores. We realize cost savings by working with our vendors to streamline and reduce packaging to diminish shipping costs.
We generally ship merchandise from our distribution centers to our stores between two and four times a week, depending on the season and the volume of a specific store. We use contract carriers to ship merchandise to our stores. From time to time, we augment our distribution facilities with third-party warehousing.
We continuously assess ways to maximize the productivity and efficiency of our existing distribution facilities and evaluate opportunities for additional distribution centers. During fiscal 2014,In June 2015, we signed a lease foropened a new distribution center in Pedricktown, New Jersey to support our anticipated growth, which we expect to be fully operational during fiscal 2015 and eventually replace our New Castle facility.growth. We will initiallycurrently occupy approximately 700,000800,000 square feet at this distribution center and will expand to approximately one million square feet.feet by 2019. The lease agreement, which we expect to beginbegan in fiscal 2015, will expire in 2025 with options to renew for three successive five-year periods. We are planning to lease or build new distribution centers that will open in the Southeast in 2019, the Southwest in 2020, and the Midwest in 2021 to support our growth objectives.
Marketing and Advertising
Our cost-effective marketing strategy is designed to promote brand awareness and drive store traffic and increase brand awareness with our target demographic, as well as other value-oriented customers. Our strategy includes the use of newspaper, television and digital circularsadvertising during peak selling seasons that highlight our brand and exceptional value proposition as well as grassrootslocal community marketing to support existing and new market entries. Additionally, we rely on the strong visibility and the presence of our store locations, email messaging and community fundraising to promote and further our brand image and drive traffic. Our digital experience, anchored by our mobile e-commerce website and social media presence is growing rapidly as we utilize Facebook, Instagram, YouTube and TwitterSnapchat to engage our customers with compelling digital content on a daily basis.
Our marketing team works with our merchandising team to develop novel and dynamic techniques to display our products, including distinctive merchandise fixtures and colorful and stimulating signage, which attract customers, encourage hands-on interaction with our products and convey our value pricing.
For new store openings, we seek to create community awareness and consumer excitement through a mix of print and digital advertising, public relations and community outreach promoting the grand opening and by creating an engaging grand opening event that includes contests, giveaways and signature “Five Cent” hot dogs. We also aim to execute multiple store openings in a given new market on the same day in order to leverage marketing efforts to produce maximum impact.
In addition to our marketing and public relationsadvertising efforts described above, we also maintain aan e-commerce website (www.fivebelow.com) and, over the last year, our online following has grown substantially. We use both our website and social networking sitesmedia channels to highlight our featured products, value proposition, store locations, employment opportunities, and grand openings.
Competition
We compete with a broad range of retailers including discount, mass merchandise, grocery, drug, convenience, variety and other specialty stores with both physical locations and online stores. Many of these retail companies operate stores in many of the areas where we operate, and many of them engage in extensive advertising and marketing efforts. We also compete with
online retailers who do not have traditional brick and mortar locations.
The principal basis upon which we compete is by offering a dynamic, edited assortment of excitingtrend-right products, all priced at $5 or below and including select brands and licensed merchandise, targeted at the teen and pre-teen customer. We believe we are transforming the shopping experience of our target demographic with a unique merchandising strategy and high-energy retail concept that our customers consider fun and exciting. Our success also depends in substantial part on our ability to respond quickly to trends so that we can meet the changing demands of our customers. We believe that we compare favorably relative to many of our competitors based on our merchandising strategy, edited product assortment targeted at teens and pre-teens, store environment, flexible real estate strategy and company culture. Nonetheless, certain of our competitors have greater financial, distribution, marketing and other resources than we do.
Trademarks and Other Intellectual Property
We own several trademarks that have been registered with the U.S. Patent and Trademark Office, including Five Below® and Five Below Hot Stuff. Cool Prices®. We also own domain names, including www.fivebelow.com, and unregistered copyrights in our website content. We attempt to obtain registration of our trademarks whenever practicable and pursue any infringement of those marks. Solely for convenience, trademarks and trade names referred to in this document may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We also refer to product names, trademarks, trade names and service marks that are the property of other companies.
Management Information Systems
Our management information systems provide a full range of business process assistance and timely information to support our merchandising strategy, warehouse management, stores and operating and financial teams. We believe our current systems provide us with operational efficiencies, scalability, management control and timely reporting that allow us to identify and respond to merchandising and operating trends in our business. We use a combination of internal and external resources to support store point-of-sale, merchandise planning and buying, inventory management, financial reporting, real estate, human resource and administrative functions. We continuously assess ways to maximize productivity and efficiency, as well as,and evaluate opportunities to further enhance our existing systems.
Government Regulation
We are subject to labor and employment laws, laws governing advertising, privacy laws, safety regulations and other laws, including consumer protection regulations that regulate retailers and/or govern the promotion and sale of merchandise and the operation of stores and warehouse facilities. We monitor changes in these laws and believe that we are in material compliance with applicable laws.
Insurance
We maintain third-party insurance for a number of risk management activities including but not limited to workers’ compensation, cyber, directors & officers, general liability, property and employee-related health care benefits. We evaluate our insurance requirements on an ongoing basis to ensure we maintain adequate levels of coverage.
Employees
As of January 31, 2015,February 3, 2018, we employed approximately 1,2002,700 full-time and 5,5009,400 part-time personnel. Of our total employees, approximately 200300 were based at our corporate headquarters in Philadelphia, Pennsylvania, approximately 300 were based at our distribution centers in Pedricktown, New Castle, DelawareJersey and Olive Branch, Mississippi and approximately 6,20011,500 were store employees. The number of part-time associates fluctuates depending on seasonal needs. None of our employees belong to a union or are party to any collective bargaining or similar agreement.
Seasonality
Our business is seasonal in nature with the highest level of net sales and net income generated in the fourth fiscal quarter due to the year-end holiday season and, therefore, operating results for any fiscal quarter are not necessarily indicative of results for the full fiscal year. To prepare for the holiday season, we must order and keep in stock more merchandise than we carry during other parts of the year. We expect inventory levels, along with an increase in accounts payable and accrued expenses, generally to reach their highest levels in the third and fourth fiscal quarters in anticipation of the increased net sales during the year-end holiday season. As a result of this seasonality, and generally because of variation in consumer spending habits, we experience fluctuations in net sales, net income and working capital requirements during the year.
Available Information
For more information about us, visit our website at www.fivebelow.com. The contents of our website are not part of this Annual Report on Form 10-K. Our electronic filings with the Securities and Exchange Commission (including all annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and any amendments to these reports), including the exhibits, are available, free of charge, through our website as soon as reasonably practicable after we electronically file them with, or furnish them to, the Securities and Exchange Commission.
ITEM 1A. RISK FACTORS
You should consider carefully the following risks and uncertainties when reading this Annual Report. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our common stock could decline. Although we believe that we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our performance or financial condition.
Risks Relating to Our Business and Industry
We may not be able to successfully implement our growth strategy on a timely basis or at all, which could harm our growth and results of operations.
Our growth is dependent on our ability to open profitable new stores. We believe we have an opportunity to continue to grow our store base from 366625 stores in 2132 states as of January 31, 2015February 3, 2018, to more than 2,0002,500 locations over time.
Our ability to open profitable new stores depends on many factors, including our ability to:
identify suitable markets and sites for new stores;
negotiate leases with acceptable terms;
achieve brand awareness in the new markets;
efficiently source and distribute additional merchandise;
maintain adequate distribution capacity, information systems and other operational system capabilities;
hire, train and retain store management and other qualified personnel; and
achieve sufficient levels of cash flow and financing to support our expansion.
Unavailability of attractive store locations, delays in the acquisition or opening of new stores, delays or costs resulting from a decrease in commercial development due to capital constraints, difficulties in staffing and operating new store locations or lack of customer acceptance of stores in new market areas may negatively impact our new store growth and the costs or the profitability associated with new stores.
Additionally, some of our new stores may be located in areas where we have little experience or a lack of brand recognition. Those markets may have different competitive conditions, market conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause these new stores to be less successful than stores in our existing markets. Other new stores may be located in areas where we have existing stores. Although we have experience in these markets, increasing the number of locations in these markets may result in inadvertent over-saturation of markets and temporarily or permanently divert customers and sales from our existing stores, thereby adversely affecting our overall financial performance.
Accordingly, we cannot assure you that we will achieve our planned growth or, even if we are able to grow our store base as planned, that any new stores will perform as planned. If we fail to successfully implement our growth strategy, we will not be able to sustain the rapid growth in sales and profits that we expect, which would likely have an adverse impact on the price of our common stock.
Any disruption in our ability to select, obtain, distribute and market merchandise attractive to customers at prices that allow us to profitably sell such merchandise could impact our business negatively.
We generally have been able to select and obtain sufficient quantities of attractive merchandise at prices that allow us to be profitable. If we are unable to continue to select products that are attractive to our customers, to obtain such products at costs that allow us to sell such products at a profit, or to market such products effectively to consumers, our sales or profitability could be affected adversely. In addition, the success of our business depends in part on our ability to anticipate, identify and respond promptly to evolving trends in demographics and consumer preferences, expectations and needs. If we are unable to quickly respond to developing trends or if the spending patterns or demographics of these markets change, and we do not timely and appropriately respond to such changes, then the demand for our products, which are discretionary, and our market share could be adversely affected. Failure to maintain attractive stores and to timely identify or effectively respond to changing consumer needs, preferences and spending patterns could adversely affect our relationship with customers, the demand for our products and our market share.
Any disruption in the supply or increase in pricing of our merchandise could negatively impact our ability to achieve anticipated operating results. The products we sell are sourced from a wide variety of domestic and international vendors. We have not experienced any difficulty in obtaining sufficient quantities of core merchandise and believe that, if one or more of our current sources of supply become unavailable, we would generally be able to obtain alternative sources without experiencing a substantial disruption of our business. However, such alternative sources could increase our merchandise costs and reduce the quality of our merchandise, and an inability to obtain alternative sources could affect our sales.
Our reliance on merchandise manufactured outside of the United States subjects us to legal, regulatory, political and economic risks.
A significant majority of our merchandise is manufactured outside the United States, and changes in the prices and flow of these goods for any reason could have an adverse impact on our operations. The United States and other countries have occasionally proposed and enacted protectionist trade legislation, which may result in changes in tariff structures and trade policies and restrictions that could increase the cost or reduce the availability of certain merchandise. In particular, recent political discourse in the United States has increasingly focused on implementing protectionist trade policies. The implementation of protectionist policies such as new import tariffs could adversely affect us because we sell products that are principally manufactured outside the United States. It has also been suggested that the United States may materially modify or withdraw from some of its existing trade agreements. Any of these or other measures, if ultimately enacted, or events relating to vendorsthe manufacturers of our merchandise and the countries in which they are located, or where our merchandise is manufactured, some or all of which are beyond our control, can adversely affect our ability to access suitable merchandise on acceptable terms, negatively impact our operations, increase costs and lower our margins. Such events or circumstances include, but are not limited to:
political and economic instability;
the financial instability and labor problems of vendors;the manufacturers of our merchandise;
the availability and cost of raw materials;
merchandise quality or safety issues;
changes in currency exchange rates;
inflation;the regulatory environment in the countries in which the manufacturers of our merchandise are located;
work stoppages or other employee rights issues;
inflation or deflation; and
transportation availability, costs and disruptions.
Moreover, negative press or reports about products manufactured outside the United States may sway public opinion, and thus customer confidence, away from the products sold in our stores. These and other factors affecting the manufacturers of our vendorsmerchandise who are located outside of the United States and our access to our products could affect our financial performance adversely.
We do not sell our products through the Internet. As the retail industry experiences an increase in onlineOur sales our sales could be adversely affected.
The retail landscape is changing with consumers’ shopping habits shifting away from the traditional brick and mortar stores to online sales. Internet sales have been obtaining an increasing percentagedepend on a volume of retail sales over the past few years and this trend is expected to continue. Because we do not sell our products through the Internet, we are facing increased competition
from online retailers, which provide consumers with the ease and convenience of shopping from their home or office. The continued growth of online sales could have a negative impact on our sales as our customers may decide to make purchases through online retailers instead of travelingtraffic to our stores.
Extreme weather conditionsstores, and a reduction in traffic to, or the closing of, anchor tenants and other destination retailers in the areasshopping centers in which our stores are located could negatively affectsignificantly reduce our businesssales and resultsleave us with excess inventory.
Most of operations.
Extreme weather conditions in the areas in which our stores are located could negatively affect our businessin power, community and resultslifestyle shopping centers that benefit from the ability of operations. Our“anchor” retail tenants, generally big box stores, are currently concentratedand other destination retailers and attractions to generate sufficient levels of consumer traffic in the Northeasternvicinity of our stores. Any decline in the volume of consumer traffic at shopping centers, whether because of consumer preferences to shop on the internet or at large warehouse stores, an economic slowdown, a decline in the popularity of shopping centers, the closing of anchor stores or other destination retailers or otherwise, could result in reduced sales at our stores and Midwestern regions of the United States,leave us with excess inventory, which are pronecould have a material adverse effect on our financial results or business.
An inability to inclement weather conditions,attract and retain qualified employees and to control labor costs, as well as severe storms. Such inclement weatherother labor issues, could adversely affect our business.
Our growth could be adversely impacted by an inability to attract, retain and motivate qualified employees at the store operations level, in distribution facilities, and at the corporate level, at costs which allow us to profitably conduct our operations. Our ability to meet our labor needs, while controlling our labor costs, is subject to many external factors, including competition for and availability of qualified personnel in a given market, unemployment levels within those markets, prevailing wage rates, minimum wage laws, health and other insurance costs, and changes in employment and labor laws (including changes in the process for our employees to join a union) or other workplace regulation. For example, some jurisdictions in which we operate have historically enacted minimum wages that exceed the federal standards. To the extent our competitors increase wage rates for their employees, we will likely have to increase wage rates to stay competitive and attract and retain our employees, which would increase our labor costs. If we do not maintain competitive wages, our customer service could suffer due to declining quality of our workforce or, alternatively, our earnings could decrease if we increase our wage rates. In addition, if a significant portion of our employee base unionizes, or attempts to unionize, our labor costs could increase. Further, we believe the current pricing of our healthcare costs includes the potential future impact of the Patient Protection and Affordable Care Act, but such legislation may further cause our healthcare costs to increase. Significant costs of the Patient Protection and Affordable Care Act may occur due to provisions of the legislation being phased in over time and changes to our healthcare costs structure could have a significant impactnegative effect on consumer behavior, travel and store traffic patterns, as well asour business. In addition, our ability to operate our stores. For example, frequent or unusually heavy snowfall, ice storms, rainstorms or other extreme weather conditions over a prolonged period could make it difficult forpass along any increase in labor costs to our customers to travel tois constrained by our stores and thereby reduce our sales and profitability. Any reduction in sales from extreme weather could be further impacted by the fact that we do not sell our products on the Internet as consumers cannot purchase our products without traveling to our stores during inclement weather. In addition, we typically generate higher revenues and gross margins during our last fiscal quarter, which includes the year-end holiday season. If weather conditions are not favorable during these periods, our operating results and cash flow from operations could be adversely affected.low price model.
Our new store growth is dependent upon our ability to successfully expand our distribution network capacity, and failure to achieve or sustain these plans could affect our performance adversely.
We maintain distribution centers in Pedricktown, New Castle, Delaware,Jersey and Olive Branch, Mississippi. We continuously assess ways to maximize the productivity and efficiency of our existing distribution facilities and evaluate opportunities for additional distribution centers. During fiscal 2014,2015, we signed a lease foropened a new distribution center in Pedricktown, New Jersey to support our growth objectivesobjectives. We currently occupy approximately 800,000 square feet and will expand to approximately one million square feet by 2019. In addition, we expect this new distribution centerare planning to be fully operational during fiscal 2015 and eventually replace our New Castle facility. Delays in opening this new distribution center (orlease or build new distribution centers that will open in the future)Southeast in 2019, the Southwest in 2020, and the Midwest in 2021 to support our growth objectives. Delays in expanding our Pedricktown, New Jersey distribution center or opening the planned new distribution centers could adversely affect our future operations by slowing store growth, which could in turn reduce sales growth. In addition, any distribution-related construction or expansion projects entail risks which could cause delays and cost overruns, such as: shortages of materials; shortages of skilled labor or work stoppages; unforeseen construction, scheduling, engineering, environmental or geological problems; weather interference; fires or other casualty losses; and unanticipated cost increases. The completion date and ultimate cost of future projects, including the planned future expansion of the Pedricktown, New Jersey distribution center opening the planned for fiscal 2015,new distribution centers could differ significantly from initial expectations due to construction-related or other reasons. We cannot guarantee that any project will be completed on time or within established budgets.
A significant disruption to our distribution network or to the timely receipt of inventory could adversely impact sales or increase our transportation costs, which would decrease our profits.
Because most of our products are distributed from our distribution centers, the unexpected loss of any one of our distribution centers, due to natural disaster or otherwise, would materially affect our operations. We also rely upon independent third-party transportation to provide goods to our stores in a timely and cost-effective manner, through deliveries to our distribution centers from vendors and then from the distribution centers or direct ship vendors to our stores. Our use of outside delivery services for shipments is subject to risks outside of our control and any disruption, unanticipated expense or operational failure related to this process could affect store operations negatively. For example, unexpected delivery delays or increases in transportation costs (including through increased fuel costs or a decrease in transportation capacity for overseas shipments or resulting from labor shortages or work stoppages) could significantly decrease our ability to generate sales and earn profits. If we change shipping companies, we could face logistical difficulties that could adversely impact deliveries and we would incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those received from the independent third-party transportation providers we currently use, which would increase our costs. Additionally, long-term disruptions to the United States and international transportation infrastructure from wars, political unrest, terrorism, natural disasters, governmental budget constraints and other significant events that could lead to delays or interruptions of service could adversely affect our business. As we seek to expand our operation through the implementation of our online retail capabilities, we may face increased or unexpected demands on distribution center operations, as well as new demands on our distribution network.
Extreme weather conditions in the areas in which our stores are located could negatively affect our business and results of operations.
Extreme weather conditions in the areas in which our stores are located could negatively affect our business and results of operations. We have a significant number of stores in the Northeastern and Midwestern regions of the United States, which are prone to inclement weather conditions, as well as severe storms. Such inclement weather could have a significant impact on consumer behavior, travel and store traffic patterns, as well as our ability to operate our stores. For example, frequent or unusually heavy snowfall, ice storms, rainstorms or other extreme weather conditions over a prolonged period could make it difficult for our customers to travel to our stores and thereby reduce our sales and profitability. In addition, we typically generate higher revenues and gross margins during our fourth fiscal quarter, which includes the year-end holiday season. If weather conditions are not favorable during these periods, our operating results and cash flow from operations could be adversely affected.
If we are unable to secure our customers’ confidential or credit card information, or other private data relating to our employees or our Company, we could be subject to negative publicity, costly government enforcement actions or private litigation, which could damage our business reputation and adversely affect our financial results.
The protection of our customer, employee and company data is critical to us. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements that affect our business. In addition, customers have a high expectation that we will adequately protect their personal information from cyberattack or other security breaches. We have procedures and technology in place to safeguard our customers’ debit and credit card and other personal information, our employees’ private data and company records and intellectual property. While we have taken significant steps to protect customer and confidential information, the intentional or negligent actions of employees, business associates or third parties may undermine our security measures. As a result, unauthorized parties may obtain access to our data systems and misappropriate confidential data. There can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography or other developments will prevent the compromise of our customer transaction processing capabilities and personal data. Furthermore, because the
techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If any such compromise of our security or the security of information residing with our business associates or third parties were to occur, we could be exposed to negative publicity, government enforcement actions, private litigation or costly response measures. In addition, our reputation within the business community and with our customers may be affected, which could result in our customers discontinuing the use of debit or credit cards in our stores, or not shopping in our stores altogether. This could cause us to lose market share to our competitors and could have an adverse effect on our financial results.
We are subject to customer payment-related risks that could increase operating costs or exposure to fraud or theft, subject us to potential liability and potentially disrupt our business.
AnWe accept payments using a variety of methods, including cash, credit and debit cards and gift cards. Acceptance of these payment options subjects us to rules, regulations, contractual obligations and compliance requirements, including payment network rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. Any inability to attractcomply with such requirements may subject us to increased risk of liability for fraudulent transactions and retain qualified employees, particularly senior management and district, store and distribution center managers, and to control labor costs, as well as other labor issues, couldmay adversely affect our business.business and operating results.
Our growthFor certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us, or if their systems are compromised, it could potentially disrupt our business. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs. As a result, our business and operating results could be adversely impacted by an inability to attract, retain and motivate qualified employees at the store operations level, in distribution facilities, and at the corporate level, at costs which allow us to profitably conduct our operations. Our ability to meet our labor needs, while controlling our labor costs, is subject to many external factors, including competition for and availability of qualified personnel in a given market, unemployment levels within those markets, prevailing wage rates, minimum wage laws, health and other insurance costs, and changes in employment and labor laws (including changes in the process for our employees to join a union) or other workplace regulation. To the extent a significant portion of our employee base unionizes, or attempts to unionize, our labor costs could increase. In addition, we believe the current pricing of our healthcare costs includes the potential future impact of recently enacted comprehensive healthcare reform legislation, but such legislation may further cause our healthcare costs to increase. Significant costs of the healthcare reform legislation may occur due to provisions of the legislation being phased in over time and changes to our healthcare costs structure could have a significant negative effect on our business. In addition, our ability to pass along any increase in labor costs to our customers is constrained by our low price model.affected.
Our growth from existing stores is dependent upon our ability to increase sales and improve the efficiencies, costs and effectiveness of our operations, and failure to achieve or sustain these plans could affect our performance adversely.
Increases in sales in existing stores are dependent on factors such as competition, including from online retailers, merchandise selection, store operations and customer satisfaction. If we fail to realize our goals of successfully managing our
store operations and increasing our customer retention and recruitment levels, our sales may not increase and our growth may be impacted adversely.
Our success depends on our executive officers, senior management, district, store, and distribution center managers, and other key personnel. If we lose our executive officers, senior management, district, store, and distribution center managers, or any other key personnel, or are unable to hire additional qualified personnel, our business could be harmed.
Our future success depends to a significant degree on the skills, experience and efforts of our executive officers, senior management, district, store, and distribution center managers, and other key personnel, including Thomas Vellios, our Executive Chairman, and Joel Anderson, our President and Chief Executive Officer. The loss of the services of any of our executive officers, senior management, district, store, and distribution center managers, or other key personnel could have an adverse effect on our operations. OurCompetition for skilled and experienced management in the retail industry is intense, and our future success will also depend on our ability to attract, retain and motivate qualified personnel, as a failure to attract these key personnel could have an adverse effect on our operations. We do not currently maintain key person life insurance policies with respect to our executive officers or key personnel.
Our profitability and cash flows from operations may be negatively affected if we are not successful in managing our inventory balances and inventory shrinkage.
Our inventory balance represented approximately 39%27% of our total assets as of January 31, 2015February 3, 2018. Efficient inventory management is a key component of our business success and profitability. To be successful, we must maintain sufficient inventory levels and an appropriate product mix to meet our customers’ demands without allowing those levels to increase to such an extent that the costs to store and hold the goods unduly impacts our financial results. If our buying decisions do not accurately predict customer trends or purchasing actions, or if our expectations about customer spending levels are inaccurate, we may have to take unanticipated markdowns to dispose of excess inventory, which also can adversely impact our financial results. We also experience inventory shrinkage, and we cannot assure you that incidences of inventory loss and theft will stay at acceptable levels or decrease in the future, or that the measures we are taking will effectively address the problem of inventory shrinkage. We continue to focus on ways to reduce these risks, but we cannot assure you that we will be successful in our inventory management. If we are not successful in managing our inventory balances, our profitability and cash flows from operations may be negatively affected.
Our business requires that we lease substantial amounts of space and there can be no assurance that we will be able to continue to lease space on terms as favorable as the leases negotiated in the past.
We currently do not own any real estate. Instead,estate but may in the future. Currently, we lease all of our store locations, as well as our corporate headquarters and distribution facilities in Pedricktown, New Castle, DelawareJersey and Olive Branch, Mississippi. In addition, during fiscal 2014, we signed a lease for a new distribution center in Pedricktown, New Jersey to support our anticipated growth, which we expect to be fully operational during fiscal 2015. Our stores are leased from third parties, with typical initial lease terms of ten years. Many of our lease agreements also have additional five-year renewal options. We believe thatHistorically, we have been able to negotiate favorable rental ratesterms that fit within our economic model and tenant allowances over the last few years due in large part to the state of the economy and higher than usual vacancy rates in shopping centers and regional malls. These trends may not continue, andthat we believe are favorable; however, there is no guarantee that we will be able to continue to negotiate such terms. Consolidation in the commercial retail real estate market could affect our ability to successfully negotiate favorable terms.rental terms for our stores in the future. Should significant consolidation occur, a large proportion of our store base could be concentrated with one or a few landlords that would then be in a position to dictate unfavorable terms to us due to their significant negotiating leverage. Many of our lease agreements have defined escalating rent provisions over the initial term and any extensions. Increases in our occupancy costs and difficulty in identifying economically suitable new store locations could have significant negative consequences, which include:
requiring that a greater portion of our available cash be applied to pay our rental obligations, thus reducing cash available for other purposes and reducing our profitability;
increasing our vulnerability to general adverse economic and industry conditions; and
limiting our flexibility in planning for, or reacting to changes in, our business or in the industry in which we compete.
We depend on cash flow from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities to fund these expenses and needs and sufficient funds are not otherwise available to us, we may not be able to service our lease expenses, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which could harm our business. Additional sites that we lease may be subject to long-term non-cancelable leases if we are unable to negotiate our current standard lease terms. If an existing or future store is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. In addition, if we are not able to enter into new leases or renew existing leases on terms acceptable to us, this could have an adverse effect on our results of operations.
Operational difficulties, including those associated with our ability to either lease or build and operate our distribution centers, could adversely impact our business.
We maintain a network of distribution centers and are planning to lease or build new distribution centers that will open in the Southeast in 2019, the Southwest in 2020, and the Midwest in 2021 to support our growth objectives. Delays in opening these new distribution centers could adversely affect our future financial performance by slowing store growth, which may in turn reduce revenue growth, or by increasing transportation costs. In addition, distribution center-related construction entails risks that could cause delays and cost overruns, such as: shortages of materials or skilled labor; work stoppages; unforeseen construction, scheduling, engineering, environmental or geological problems; weather interference; fires or other casualty losses; and unanticipated cost increases. The completion date and ultimate cost of these projects could differ significantly from initial expectations due to construction-related or other reasons. We cannot guarantee that these distribution centers or any future operational projects will be completed on time or within established budgets. Additionally, potential ownership of these facilities and of additional facilities which we may lease, acquire, build and own in the future, entails risks of our ability to comply with regulations restricting the construction and operation of these facilities, as well as local community actions opposed to the location of our facilities at specific sites and the adoption of local laws restricting our operations and environmental regulations, which may impact our ability to find suitable locations, and increase the cost of sites and of constructing, leasing and operating our facilities. We also may have difficulty negotiating real estate purchase agreements or leases on acceptable terms. Failure to manage these and other similar factors effectively may affect our ability to timely build or lease new facilities, which could have a material adverse effect on our future growth and profitability.
We operate in a competitive environment and, as a result, we may not be able to compete effectively or maintain or increase our sales, market shares or margins.
We operate in a highly competitive retail environment with numerous competitors, including online retailers, some of which have greater resources or better brand recognition than we do. We compete with respect to customers, price, store location, merchandise quality and supply, assortment and presentation, in-stock consistency, customer service and employees. This competitive environment subjects us to various risks, including the ability to provide quality, trend-right merchandise to our customers at competitive prices that allow us to maintain our profitability. Because of our low price model, we may have limited ability to increase prices in response to increased costs without losing competitive position which may adversely affect our margins and financial performance. In addition, price reductions by our competitors may result in the reduction of our prices and a corresponding reduction in our profitability. Many of our competitors also make sales through the Internet, and although we do maintain an Internet site, we do not sell merchandise online. Accordingly, we may face periods of intense competition in the future, which could have a material adverse effect on our profitability and results of operations.
Consolidation among retailers, changes in pricing of merchandise or offerings of other services by competitors could have a negative impact on the relative attractiveness of our stores to consumers. We do not possess exclusive rights to many of the elements that comprise our in-store experience and product offerings. Our competitors may seek to copy our business strategy and in-store experience, which could result in a reduction of any competitive advantage or special appeal that we might possess. In addition, most of our products are sold to us on a non-exclusive basis. As a result, our current and future competitors may be able to duplicate or improve on some or all of our in-store experience or product offerings that we believe are important in differentiating our stores and our customers’ shopping experience. If our competitors were to duplicate or improve on some or all of our in-store experience or product offerings, our competitive position and our business could suffer. Our ability to provide quality, trend-right products while offeringat attractive, competitively-priced productscompetitive prices could be impacted by various actions of our competitors that are beyond our control.
Our profitability is vulnerable to inflation, cost increases, wage rate increases and energy prices.
Future increases in costs such as the cost of merchandise, wage rates, shipping rates, freight costs, fuel costs and store occupancy costs may reduce our profitability, particularly given our $5 and below pricing model. These cost increases may be the result of
inflationary pressures that could further reduce our sales or profitability. Increases in other operating costs, including changes in energy prices, transportation costs, wage rates and lease and utility costs, may increase our cost of goods sold or operating expenses. In addition, because our expenses relating to wages are significant, any unfavorable changes in labor costs could negatively affect our operational results, financial position, and cash flows. Our low price model and competitive pressures in our industry may have the effect of inhibiting our ability to reflect these increased costs in the prices of our products and therefore reduce our profitability.
Our business is seasonal, and adverse events during the holiday season could impact our operating results negatively.
Our business is seasonal, with the highest percentage of sales (approximately 40% of total annual sales over the last two fiscal years) occurring during the lastfourth fiscal quarter (November, December and January), which includes the year-end holiday season. This increased percentage of net sales has historically resulted in the highest percentages of net income during
the lastfourth fiscal quarter. We purchase substantial amounts of inventory in the end of the third fiscal quarter (October) and
beginning of the fourth fiscal quarter (November and December) and incur higher shipping costs and higher payroll costs in anticipation of the increased sales activity during these time periods. Adverse events, such as inclement or unusual weather, deteriorating economic conditions, higher unemployment, increased wage rates, higher gas prices or public transportation disruptions or unusual weather could result in lower-than-planned sales during the holiday season which may lead to unanticipated markdowns. Since we rely on third parties for transportation and use third partythird-party warehouses when we build up inventory, a number of these factors are outside of our control. An unsuccessful fourth quarter, or holiday season, will have a substantial negative impact on our financial condition and results of operations for the entire fiscal year.
We may not be successful in implementing our expansion into online retail and if we are successful, we will face new risks and challenges, which could adversely affect our results of operations.
In August 2016, we commenced selling merchandise on the internet, through our fivebelow.com e-commerce website. Our ability to successfully execute our e-commerce strategy may suffer if we are unable to establish an effective online presence and sell our products in a cost-efficient manner while maintaining our $5 and below price point. Because we are in the process of developing our online sales platform, we may not be able to compete as effectively with seasoned online retailers who have a known online presence, well established e-commerce distribution networks and online sales platforms, and more resources than we do.
In addition, if we are successful, we will encounter risks and difficulties frequently experienced by internet-based businesses, including risks related to our ability to attract and retain customers on a cost-effective basis and our ability to operate, support, expand and develop our internet operations, website and software and other related operational systems. Although we believe that our participation in both e-commerce and physical store sales will be a distinct advantage for us due to synergies, the potential for new customers and increased brand-recognition nationwide in markets where we do not yet have stores, supporting product offerings through both of these channels could create issues that have the potential to adversely affect our results of operations. For example, if our e-commerce business successfully grows, it may do so in part by attracting existing customers, rather than new customers, who choose to purchase products from us online rather than from our physical stores, thereby reducing the financial performance of our stores. In addition, selling products through the internet exposes us to the potential for fraud associated with “card-not-present” credit card transactions that does not exist for physical store sales. Criminals are using increasingly sophisticated methods to engage in illegal activities such as unauthorized use of credit or debit cards and bank account information. Requirements relating to consumer authentication and fraud detection are more complex for online sales than for physical store sales. We may be denied the revenues associated with orders resulting from the unauthorized use of a cardholder’s card number in an illegal activity even if the associated financial institution approved payment of the orders. As we develop our e-commerce business, the impact of attracting existing rather than new customers, of the increased costs associated with the technology infrastructure and distribution networks, and of opening up our channels to increased internet competition could have a material adverse impact on our business, financial condition, profitability and cash flows, including future growth.
Material damage to, or interruptions to, or the inability to upgrade or expand, our technology systems as a result of external factors, staffing shortages andor difficulties in updating our existing technology or developing or implementing new technology could have a material adverse effect on our business or results of operations.
We depend on a variety of information technology systems for the efficient functioning of our business. Such systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches and natural disasters. Damage or interruption to these systems may require a significant investment to fix or replace them, and we may suffer interruptions in our operations in the interim. Any material interruptions may have a material adverse effect on our business or results of operations.
We are continuing to expand, upgrade and develop our information technology capabilities, including our point-of-sale system. If we are unable to successfully upgrade or expand our technological capabilities, including our point-of-sale system, we may not be able to take advantage of market opportunities, manage our costs and transactional data effectively, satisfy customer requirements, execute our business plan or respond to competitive pressures. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology, or with maintenance or adequate support of existing systems, could also disrupt or reduce the efficiency of our operations.
We also rely heavily on our information technology staff. Failure to meet these staffing needs may negatively affect our ability to fulfill our technology initiatives while continuing to provide maintenance on existing systems. We rely on certain vendors to maintain and periodically upgrade many of these systems so that they can continue to support our business. The software programs supporting many of our systems were licensed to us by independent software developers. The inability of these developers or us to continue to maintain and upgrade these information systems and software programs would disrupt or reduce the efficiency of our operations if we are unable to convert to alternate systems in an efficient and timely manner. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology, or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations.
Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting, which could harm our business and cause a decline in our stock price.
Reporting obligations as a public company and our anticipated growth are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel. In addition, as a public company, we are required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 so that our management can certify the effectiveness of our internal controls and our independent registered public accounting firm can render an opinion on the effectiveness of our internal control over financial reporting. As a result, we have incurred, and may continue to incur, substantial expenses to test our systems, to make any necessary improvements, and to hire additional personnel. At January 31, 2015,February 3, 2018, our internal control over financial reporting was effective using “Internal Control - Integrated Framework (1992)(2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In 2013, an updated set of internal control standards, COSO 2013, was published. We intend to adopt the COSO 2013 framework in assessing our internal control over financial reporting in 2015;; however, there can be no assurance that our internal control over financial reporting will be effective in future years. If our management is unable to certify the effectiveness of our internal controls or if our independent registered public accounting firm cannot render an opinion on the effectiveness of our internal control over financial reporting, or if material weaknesses in our internal controls are identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could harm our business and cause a decline in our stock price. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to accurately report our financial performance on a timely basis, which could cause a decline in our stock price and harm our ability to raise capital. Failure to accurately report our financial performance on a timely basis could also jeopardize our continued listing on The NASDAQ Global Select Market or any other stock exchange on which our common stock may be listed. Delisting of our
common stock on any exchange could reduce the liquidity of the market for our common stock, which could reduce the price of our stock and increase the volatility of our stock price.
We expect to implementare in the process of implementing a new enterprise resource planning system commencing in fiscal 2015.system. Complications with the design or implementation of this system could adversely impact our business and operations.operations and the implementation of this system could cause a financial statement error not to be detected.
We expect to commenceare in the process of a multi-year implementation of a new enterprise resource planning system (“ERP”) during fiscal 2015.. The ERP will beis designed to enhance functionality and provide timely information to the company's management team related to the operation of the business. We expect theThe ERP implementation process has required, and likely will continue to require the investment of significant human and financial resources. We may not be able to successfully implement the ERP without experiencing delays, increased costs and other difficulties. If we are unable to successfully design and implement the new ERP system as planned, our financial position, results of operations and cash flows could be negatively impacted. The possibility exists that the migration to a new ERP system could adversely affect the effectiveness of our internal controls over financial reporting.
We are exposed to the risk of natural disasters, unusualadverse weather conditions, pandemic outbreaks, global political events, war and terrorism that could disrupt business and result in lower sales, increased operating costs and capital expenditures.
Our headquarters, store locations and distribution centers, as well as certain of our vendors and customers, are located in areas which have been and could be subject to natural disasters such as floods, hurricanes, tornadoes, fires or earthquakes. Adverse weather conditions or other extreme changes in the weather, including resulting electrical and technological failures, may disrupt our business and may adversely affect our ability to sell and distribute products. For example, as a result of Superstorm Sandy in October 2012, we experienced closures in 122the majority of our stores.stores open at that time. In addition, we operate in markets that may be susceptible to pandemic outbreaks war,or terrorist acts, orand our operations may be affected by disruptive global political events, such as civil unrest in countries from which our vendors are located or products are manufactured. Our business may be harmed if our ability to sell and distribute products is impacted by any such events, any of which could influence customer trends and purchases and may negatively impact our net sales, properties or operations. Such events could result in physical damage to one or more of our properties, the temporary closure of some or all of our stores or distribution centers, the temporary lack of an adequate work force in a market, temporary or long-term disruption in the transport of goods, decreases in transportation capacity, increases in transportation costs, delay in the delivery of goods to our distribution centers or stores, disruption of our technology support or information systems, or fuel shortages or dramatic increases in fuel prices, which increase the cost of doing business. These events also can have indirect consequences such as increases in the costs of insurance if they result in significant loss of property or other insurable damage. Any of these factors, or combination thereof, could adversely affect our operations.
Changes to federal, state or provincial income tax legislation could have a material adverse effect on our business and results of operations
From time to time, new tax legislation is adopted by the federal government and various states or other regulatory bodies. Significant changes in tax legislation could adversely affect our business or results of operations in a material way. On December 22, 2018, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"). The changes included in the TCJA are broad and complex. The final transition impacts of the TCJA may differ from he estimates provided elsewhere in this report, possibly materially, due to, among other things, changes in interpretations of the TCJA, any legislative action to address questions that arise because of the TCJA, any changes in accounting standards for income taxes or related interpretations in response to the TCJA, or any updates or changes to estimates we have utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates. As these and other tax laws and related regulations change, our financial results could be materially impacted. Give the unpredictability of possible changes and their potential interdependency, it is very difficult to assess whether the overall effect of such potential tax changes would be cumulatively positive or negative for our earnings and cash flow, but such changes could adversely impact our financial results.
Current economic conditions and other economic factors could adversely impact our financial performance and other aspects of our business in various respects.
Weakness in the U.S. economy or other economic factors affecting disposable consumer income, such as employment levels, inflation, business conditions, fuel and energy costs, natural disasters, terrorist activities, consumer debt levels, lack of available credit, interest rates, tax rates and reform, and erosion in consumer confidence may affect our business adversely. Such factors could reduce overall consumer spending, and discretionary spending in particular, or cause customers to shift their spending to products other than those sold by us or to products sold by us that are less profitable than other product choices, all of which could result in lower net sales, decreases in inventory turnover or a reduction in profitability due to lower margins. We have limited or no ability to control many of these factors. Global economic uncertainty, the impact of recessions and the potential for failures or realignments of financial institutions and the related impact on available credit may impact us, our vendors and other business partners, our landlords, our customers, our service providers and our operations in an adverse manner. In addition, economic downturns may make it difficult for us to accurately forecast future demand trends, which could cause us to purchase excess inventories, resulting in increases in our inventory carrying cost, or insufficient inventories, resulting in our inability to satisfy our customer demand and potential loss of market share.
Changes in state or federal legislation or regulations, including the effects of legislation andor becoming subject to new regulations on product and food safety and quality, wage levels, employee rights, health care, social welfare and entitlement programsas our operations expand, could increase our cost of doing business.
Our business is subject to numerous federal, state and local laws and regulations. We routinely incur costsThe current political environment, financial reform legislation, regulatory reform and stockholder activism may result in complying with thesesubstantial new regulations and disclosure obligations and/or changes in the interpretation of existing laws and regulations. We are exposedregulations, which may lead to additional compliance costs as well as the risk that federal, state or local legislation may negatively impactdiversion of our operations. Changesmanagement's time and attention from strategic initiatives. In addition, changes in product and food safety and quality requirements related to products and food (including changes in labeling or disclosure requirements), federal or state wage requirements, employee rights (including changes in the process for our employees to join a union), health care, social welfare or entitlement programs such as health insurance, paid leave programs, or other changes in workplace regulation or tax laws could adversely impact our ability to achieve our financial targets. Changes in other regulatory areas, such as consumer credit, privacy and information security, or environmental regulation may result in significant added expenses or may require extensive system and operating changes that may be difficult to implement and/or could materially increase our costs of doing business. Untimely compliance or noncompliance with applicable laws and regulations may subject us to legal risk, including government enforcement action, significant fines and penalties and class action litigation, as well as reputational damage, which could adversely affect our results of operations.
In addition, the expansion of our operations into California requires us to comply with a number of additional regulations. For example, California currently enforces legislation commonly referred to as "Proposition 65" that requires that "clear and reasonable" warnings be given to consumers who are exposed to chemicals known to the State of California to cause cancer or reproductive toxicity. Although we will seek to comply with the requirements of Proposition 65, there can be no assurance that we will not be adversely affected by litigation or other actions relating to Proposition 65 or future legislation that is similar or related thereto. Also, the Transparency in Supply Chains Act of 2010 in California requires us to audit our vendors with respect to risks of human trafficking and slavery and mitigate these risks in our operations. Any failure to disclose issues or other non-compliance could subject us to action by the California Attorney General or other regulatory authorities. Increased compliance costs associated with operating in California could adversely affect our business, financial condition and results of operations.
Changes in accounting standards could significantly affect our results of operations and the presentation of those results.
19Changes in accounting standards, including new interpretations and applications of accounting standards, may have adverse effects on our financial condition, results of operations, and liquidity. The Financial Accounting Standards Board ("FASB") have issued and/or adopted new pronouncements that proposes numerous significant changes to current accounting standards. These new standards could significantly change the presentation of financial information and our results of operations. Additionally, the new standards may require us to make systems and other changes that increase our operating costs. Specifically, implementing the new accounting standards related to leases could require us to make significant changes to our lease management system or other accounting systems.
Our current insurance programs may expose us to unexpected costs and negatively affect our financial performance.
Our insurance coverage is subject to deductibles, limits of liability and similar provisions that we believe are prudent based on our overall operations. We may incur certain types of losses that we cannot insure or which we believe are not economically reasonable to insure, such as losses due to acts of war, employee and certain other crime, and some natural disasters. If we incur these losses and they are material, our business could suffer. Certain material events may result in sizable losses for the insurance industry and adversely impact the availability of adequate insurance coverage or result in excessive premium increases. To offset negative cost trends in the insurance market, we may elect to self-insure, accept higher deductibles or reduce the amount of coverage in response to these market changes. In addition, because of ongoing changes in healthcare law, among other things, we may experience an increase in participation in our group health insurance programs, which may lead to a greater number of medical claims. If we experience a greater number of these losses than we anticipate, it could have a material adverse effect on our business, financial condition and results of operations.
Litigation may adversely affect our business, financial condition, results of operations or liquidity.
Our business is subject to the risk of litigation by employees, consumers, vendors, competitors, intellectual property rights holders, shareholders, government agencies and others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. For example, we and certain of our current and former senior officers are currentlyhad been parties to a securities class action lawsuit filed against us, purportedly on behalf of a class of our investors who purchased our publicly traded securities between June 5, 2014 and December 4, 2014. In addition, a shareholder derivative lawsuitwhich was filed on behalf of Five Below, as nominal defendant, asserting claims against certain of our directors.dismissed. The outcome of litigation, particularly class action lawsuits, regulatory actions and intellectual property claims, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to these lawsuits may remain unknown for substantial periods of time. In addition, certain of these lawsuits, if decided adversely toagainst us or settled by us, may result in liability material to our consolidated financial statements as a whole or may negatively affect our operating results if changes to our business operation are required. The cost to defend litigation may be significant. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition, results of operations or liquidity.
If we fail to protect our brand name, competitors may adopt trade names that dilute the value of our brand name.
We may be unable or unwilling to strictly enforce our trademarks in each jurisdiction in which we do business. Also, we may not always be able to successfully enforce our trademarks against competitors or against challenges by others. Our failure to successfully protect our trademarks could diminish the value and efficacy of our brand recognition and could cause customer confusion, which could, in turn, adversely affect our sales and profitability.
Product and food safety claims and the effects of legislation and regulations on product safety and quality and food safety and quality could affect our sales and results of operations adversely.
We may be subject to product liability claims from customers or actions requiredbrought or penalties assessed by government agencies relating to products, including food products that are recalled, defective or otherwise alleged to be harmful. Such claims may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling and transportation phases. All of our vendors and their products are contractually required to comply with applicable product and food safety laws. We generally seek contractual indemnification and insurance coverage from our vendors. However, if we do not have adequate contractual indemnification and/or insurance available, such claims could have a material adverse effect on our business, financial condition and results of operations. Our ability to obtain indemnification from foreign vendors may be hindered by the manufacturers’ lack of understanding of U.S., state-specific or local product liability or other laws, which may make it more likely that we be required to respond to claims or complaints from customers as if we were the manufacturer of the products. Even with adequate insurance and indemnification, such claims could significantly damage our reputation and consumer confidence in our products. Our litigation expenses could increase as well, which also could have a materially negative impact on our results of operations even if a product liability claim is unsuccessful or is not fully pursued.
Furthermore, if our vendors are unable or unwilling to recall products failing to meet standards, we may be required to recall those products at a substantial cost to us.
We purchase a portion of our products on a closeout basis. Some of these products are obtained through brokers or intermediaries rather than through manufacturers. The closeout nature of a portion of our products sometimes makes it more difficult for us to investigate all aspects of these products. We attempt to assure compliance and to test products when appropriate, and we seek to obtain indemnification through our vendors or to be listed as an additional insured, but there is no assurance that these efforts will be successful.
We incur significant expenses as a result of being a public company, which could negatively impact our financial performance and cause our results of operations and financial condition to suffer.
As a public company, we are required to comply with the Sarbanes-Oxley Act of 2002, together with related rules implemented by the Securities and Exchange Commission and The NASDAQ Stock Market LLC. These laws, rules and regulations have increased our expenses, including our legal, accounting and insurance compliance costs, and have made some activities more time consuming and costly. In addition, these laws, rules and regulations may make it more expensive for us to obtain director and officer liability insurance in the future, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as officers. Due to our public company status, we may also incur certain other expenses in the future, which will negatively impact our financial performance and could cause our results of operations and financial condition to suffer.
Our ability to obtain additional financing on favorable terms, if needed, could be adversely affected by volatility in the capital markets.
We obtain and manage liquidity from the positive cash flow we generate from our operating activities, our access to capital markets and our revolving credit facility. There is no assurance that our ability to obtain additional financing from financial institutions or through the capital markets, if needed, will not be adversely impacted by economic conditions. Tightening in the credit markets, low liquidity and volatility in the capital markets could result in diminished availability of credit, higher cost of borrowing and lack of confidence in the equity market, making it more difficult to obtain additional financing on terms that are favorable to us.
The terms of our revolving credit facility may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations.
Our revolving credit facility contains, and any additional debt financing we may incur would likely contain, covenants requiring us to maintain or adhere to certain financial ratios or limits and covenants that restrict our operations, which may include limitations on our ability to, among other things:
incur additional indebtedness;
pay dividends and make certain distributions, investments and other restricted payments;
create certain liens or encumbrances;
enter into transactions with our affiliates;
redeem our common stock; and
engage in certain merger, consolidation or asset sale transactions.
Complying with these covenants could adversely affect our ability to respond to changes in our business and manage our operations. In addition, these covenants could affect our ability to invest capital in our new stores and fund capital expenditures for existing stores, including the costs associated with the conversion of certain stores existing before fiscal 2009 to our current prototype new store size of approximately 7,500 square feet.stores. Our ability to comply with these covenants and other provisions in the revolving credit facility and any future debt instruments may be affected by changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory developments, or other events beyond our control. A failure by us to comply with the financial ratios and restrictive covenants contained in our revolving credit facility and any future debt instruments could result in an event of default. Upon the occurrence of an event of default, the lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in our revolving credit facility and any future debt instruments. In addition, if we are in default, we may be unable to borrow additional amounts under any such facilities to the extent that they would otherwise be available and our ability to obtain future financing may also be impacted negatively. If the indebtedness under our revolving credit facility and any future debt instruments were to be accelerated, our future financial condition could be materially adversely affected.
Regulations related to conflict minerals could adversely impact our business.
The Securities and Exchange Commission has promulgated final rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding disclosure of the use of tin, tantalum, tungsten and gold, known as conflict minerals, included in components of products either manufactured by public companies or for which public companies have contracted to manufacture. These new rules require due diligence to determine whether such minerals originated from the Democratic Republic of Congo (the “DRC”) or an adjoining country and whether such minerals helped finance the armed conflict in the DRC. While we do not manufacture products, we may in the future contract to manufacture products. Accordingly, there will be costs associated with complying with these disclosure requirements, including costs to determine the origin of conflict minerals used in any products we are deemed to contract to manufacture. In addition, the implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. Also, we may face reputational challenges if the due diligence procedures we implement do not enable us to verify the origins for all conflict minerals or to determine that such minerals are DRC conflict-free.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile or may decline regardless of our operating performance.
Shares of our common stock were sold in our IPO in July 2012 at a price of $17.00 per share, and our common stock has subsequently traded as high as $55.28 and as low as $25.00 during the period from our IPO to January 31, 2015.
An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price of our common stock. In addition, broad market and industry factors, most of which we cannot control, may harm the price of our common stock, regardless of our actual operating performance. Factors that could cause fluctuation in the price of our common stock may include, among other things:
actual or anticipated fluctuations in quarterly operating results or other operating metrics, such as comparable store sales, that may be used by the investment community;
changes in financial estimates by us or by any securities analysts who might cover our stock;
speculation about our business in the press or the investment community;
conditions or trends affecting our industry or the economy generally;
stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the retail industry;
announcements by us or our competitors of new product offerings, significant acquisitions, strategic partnerships or divestitures;
our entry into new markets;
timing of new store openings;
percentage of sales from new stores versus established stores;
additions or departures of key personnel;
actual or anticipated sales of our common stock, including sales by our directors, officers or significant shareholders;
significant developments relating to our relationships with business partners, vendors and distributors;
customer purchases of new products from us and our competitors;
investor perceptions of the retail industry in general and our Company in particular;
major catastrophic events;
volatility in our stock price, which may lead to higher share-based compensation expense under applicable accounting standards; and
changes in accounting standards, policies, guidance, interpretation or principles.principles, for example, the adoption of Financial Accounting Standards Board (“FASB”) ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," which involves employee share-based payment accounting and the volatility of the effective tax rate.
In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. For example, we and certain of our current and former senior officers are currentlyhad been parties to a securities class action lawsuit filed against us, purportedly on behalf of a class of our investors who purchased our publicly traded securities between June 5, 2014 and December 4, 2014.which was dismissed. This type of litigation, even if it does not result in liability for us, could result in substantial costs to us and divert management's attention and resources.
Your percentage ownership in us may be diluted by future equity issuances, which could reduce your influence over matters on which shareholders vote.
Our board of directors has the authority, without action or vote of our shareholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, shares issuable upon the vesting of restricted stock units or performance-based restricted stock units, shares that may be issued to satisfy our obligations under our equity incentive plan or shares of our authorized but unissued preferred stock. We initially reserved 7,600,000 shares of common stock under our equity incentive plan for future issuances and, as of January 31, 2015, 1,700,885February 3, 2018, 1,324,698 shares of our common stock are issuable upon the exercise of options outstanding, the vesting of restricted stock units and the vesting of performance-based restricted stock units.units under that plan. We also initially reserved 500,000 shares of common stock under our employee stock purchase plan for future issuances, and as of January 31, 2015, 7,910February 3, 2018, 22,480 shares of our common stock have been issued.issued under that plan. Exercises of these options or issuances of common stock or preferred stock could reduce your influence over matters on which our shareholders vote and, in the case of issuances of preferred stock, likely could result in your interest in us being subject to the prior rights of holders of that preferred stock.
We do not expect to pay any cash dividends for the foreseeable future.
For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, including under agreements for indebtedness we may incur, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, if you purchase shares, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.
If securities or industry analysts do not publish research or continue to publish or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts ceases coverage of our Company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if our operating results do not meet the expectations of the investor community, or one or more of the analysts who cover our Company downgrade our stock, our stock price could decline.
Anti-takeover provisions could delay and discourage takeover attempts that shareholders may consider to be favorable.
Certain provisions of our amended and restated articles of incorporation and amended and restated bylaws and applicable provisions of Pennsylvania law may make it more difficult or impossible for a third party to acquire control of us or effect a change in our board of directors and management.
In particular, these provisions, among other things:
provide that only the chairman of the board of directors, the chief executive officer or a majority of the board of directors may call special meetings of the shareholders;
classify our board of directors into three separate classes with staggered terms;
provide for supermajority approval requirements for amending or repealing provisions in our amended and restated articles of incorporation and amended and restated bylaws;
establish certain advance notice procedures for nominations of candidates for election as directors and for shareholder proposals to be considered at shareholders’ meetings; and
permit the board of directors, without further action of the shareholders, to issue and fix the terms of preferred stock, which may have rights senior to those of the common stock.
In addition, anti-takeover provisions in Pennsylvania law could make it more difficult for a third party to acquire control of us. These provisions could adversely affect the market price of our common stock and could reduce the amount that shareholders might receive if we are sold. For example, Pennsylvania law may restrict a third party's ability to obtain control of us and may prevent shareholders from receiving a premium for their shares of our common stock. Pennsylvania law also provides that our shareholders are not entitled by statute to propose amendments to our amended and restated articles of incorporation.
These and other provisions of Pennsylvania law and our amended and restated articles of incorporation and amended and restated bylaws could delay, defer or prevent us from experiencing a change of control or changes in our board of directors and management and may adversely affect our shareholders' voting and other rights. Any delay or prevention of a change of control transaction or changes in our board of directors and management could deter potential acquirers or prevent the completion of a transaction in which our shareholders could receive a substantial premium over the then current market price for their shares of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We currently do not own any real property. OurIn September 2016, we signed a fifteen-year lease for a new corporate headquarters are locatedlocation in Philadelphia, Pennsylvania to accommodate our current and are leased under aanticipated future growth. We currently occupy approximately 117,000 square feet of office space and will expand into approximately 50,000 square feet of additional office space by no later than 2020. The lease agreement expiringexpires in 2022,early 2033 with three successive options to renew for two successive five-year periods. additional term up to approximately fifteen years. In connection with our move to our new corporate headquarters, we paid a termination fee pursuant to the terms of the lease for our previous corporate headquarters.
Our approximately 421,000 square foot distribution center located in New Castle, Delaware is leased under a lease agreement expiring in 2016 with options to renew for two successive five-year periods. Our approximately 605,000600,000 square foot distribution center in Olive Branch, Mississippi is leased under a lease agreement expiring in 2022 with options to renew for three successive five-year periods. During fiscal 2014,In June 2015, we signed a lease foropened a new distribution center in Pedricktown, New Jersey which we expect to be fully operational during fiscal 2015.support our anticipated growth. We will initiallycurrently occupy approximately 700,000800,000 square feet at this distribution center and will expand to approximately one million square feet.feet by 2019. The lease agreement which we expect to begin in fiscal 2015, will expireexpires in 2025 with options to renew for three successive five-year periods. We are planning to lease or build new distribution centers that will open in the Southeast in 2019, the Southwest in 2020, and the Midwest in 2021 to support our growth objectives.
At the end of fiscal 20142017, there were 366625 Five Below store locations in 2132 states. All of our stores are leased from third parties, and theparties. These leases typically have ten-year terms with additional five-year renewal options, and many provide us with the option to terminate early under specified conditions. In addition to future minimum lease payments, some of our store leases provide for additional rental payments based on a percentage of net sales if sales at the respective stores exceed specified levels, as well as the payment of common area maintenance charges, real property insurance and real estate taxes. Many of our lease agreements have defined escalating rent provisions over the initial term and any extensions.
ITEM 3. LEGAL PROCEEDINGS
On January 9, 2015, a putative class action was filed against Five Below, Inc. and certain of our current and former senior officers in the United States District Court for the Eastern District of Pennsylvania, purportedly on behalf of a class of our investors who purchased our publicly traded securities between June 5, 2014 and December 4, 2014. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder in connection with various public statements made by us. In addition, on February 25, 2015, a shareholder derivative complaint was filed on behalf of Five Below, as nominal defendant, asserting claims against certain of our directors in the United States District Court for the District of Rhode Island. The complaint in this action alleges various violations of state law, including breach of fiduciary duties, arising from the alleged federal securities violations asserted in the securities class action. We intend to vigorously defend against these actions, which we believe to be without merit. The potential impact of these actions, which seek unspecified damages, attorneys’ fees and expenses, is uncertain.
In addition, we are subject to various proceedings, lawsuits, disputes, and claims arising in the ordinary course of our business. Many of these actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us from time to time include commercial, intellectual property, customer, and employment actions, including class action lawsuits. The plaintiffs in some actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages, and some are covered in part by insurance. We cannot predict with assurance the outcome of actions brought against us. Accordingly, adverse developments, settlements, or resolutions may occur and negatively impact income in the quarter of such development, settlement or resolution. If a potential loss arising from these lawsuits, claims and pending actions is probable and reasonably estimable, we record the estimated liability based on circumstances and assumptions existing at the time. Although the outcome of these and other claims cannot be predicted with certainty, management does not believe that the ultimate resolution of these matters will have a material adverse effect on our financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock has beenis listed on the NASDAQ Global Select Market under the symbol “FIVE” since our IPO in July 2012, which had a price of $17.00 per share.“FIVE.” The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported by the NASDAQ Global Select Market:
|
| | | | | | |
| Fiscal 2014 | High | Low |
| First Quarter (February 2, 2014 - May 3, 2014) | $ | 44.35 |
| $ | 33.94 |
|
| Second Quarter (May 4, 2014 - August 2, 2014) | $ | 40.81 |
| $ | 34.23 |
|
| Third Quarter (August 3, 2014 - November 1, 2014) | $ | 43.73 |
| $ | 35.14 |
|
| Fourth Quarter (November 2, 2014 - January 31, 2015) | $ | 47.89 |
| $ | 32.01 |
|
|
| | | | | | |
| Fiscal 2017 | High | Low |
| First Quarter (January 29, 2017 - April 29, 2017) | $ | 49.86 |
| $ | 37.14 |
|
| Second Quarter (April 30, 2017 - July 29, 2017) | $ | 54.13 |
| $ | 44.30 |
|
| Third Quarter (July 30, 2017 - October 28, 2017) | $ | 58.07 |
| $ | 46.00 |
|
| Fourth Quarter (October 29, 2017 - February 3, 2018) | $ | 73.55 |
| $ | 54.82 |
|
|
| | | | | | |
| Fiscal 2013 | High | Low |
| First Quarter (February 3, 2013 - May 4, 2013) | $ | 43.04 |
| $ | 34.62 |
|
| Second Quarter (May 5, 2013 - August 3, 2013) | $ | 42.37 |
| $ | 35.20 |
|
| Third Quarter (August 4, 2013 - November 2, 2013) | $ | 51.00 |
| $ | 36.40 |
|
| Fourth Quarter (November 3, 2013 - February 1, 2014) | $ | 55.28 |
| $ | 35.58 |
|
|
| | | | | | |
| Fiscal 2016 | High | Low |
| First Quarter (January 31, 2016 - April 30, 2016) | $ | 43.42 |
| $ | 32.03 |
|
| Second Quarter (May 1, 2016 - July 30, 2016) | $ | 52.70 |
| $ | 36.76 |
|
| Third Quarter (July 31, 2016 - October 29, 2016) | $ | 51.20 |
| $ | 35.22 |
|
| Fourth Quarter (October 30, 2016 - January 28, 2017) | $ | 45.32 |
| $ | 35.03 |
|
On January 30, 2015February 2, 2018 (the last trading day of fiscal 20142017), the last reported sale price on the NASDAQ Global Select Market of our common stock was $33.32$62.94 per share. As of March 16, 2015,9, 2018, we had approximately 16,86660,374 holders of record of our common stock.
Performance Graph
This performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act"), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any future filing under the Securities Act of 1933 or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.
The following graph compares the cumulative total shareholder return on our common stock from July 19, 2012 (the date our common stock commenced trading on the NASDAQ Global Select Market) through January 31, 2015February 3, 2018, with the return on (i) the NASDAQ Global Market Composite Index and (ii) the NASDAQ US Benchmark Retail Index over the same period. This graph assumes an initial investment of $100 and assumes the reinvestment of dividends, if any. Such returns are based on historical results and are not intended to suggest future performance.
|
| | | | | | | | | | | | |
| | 7/19/2012 | 7/27/2012 | 10/26/2012 | 2/1/2013 | 5/3/2013 | 8/2/2013 | 11/1/2013 | 1/31/2014 | 5/2/2014 | 8/1/2014 | 10/31/2014 | 1/30/2015 |
| FIVE BELOW, INC. | $100.00 | $111.90 | $126.00 | $140.00 | $136.80 | $148.20 | $189.40 | $138.30 | $150.30 | $134.70 | $150.50 | $125.70 |
| NASDAQ GLOBAL MARKET COMPOSITE INDEX | $100.00 | $99.70 | $100.70 | $107.20 | $113.90 | $124.40 | $132.20 | $138.40 | $139.00 | $146.80 | $156.10 | $156.30 |
| NASDAQ US BENCHMARK RETAIL INDEX | $100.00 | $101.30 | $103.90 | $111.00 | $120.60 | $130.70 | $136.00 | $132.70 | $135.80 | $136.60 | $146.80 | $161.50 |
Securities Authorized for Issuance under Equity Compensation PlansSee Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding securities authorized for issuance under our equity compensation plans. |
| | | | | | | |
| | 7/29/2012 | 2/1/2013 | 1/31/2014 | 1/30/2015 | 1/29/2016 | 1/27/2017 | 2/2/2018 |
| FIVE BELOW, INC. | $100.00 | $140.00 | $138.30 | $125.70 | $132.90 | $141.90 | $237.50 |
| NASDAQ GLOBAL MARKET COMPOSITE INDEX | $100.00 | $107.20 | $138.40 | $156.30 | $155.60 | $190.90 | $244.10 |
| NASDAQ US BENCHMARK RETAIL INDEX | $100.00 | $111.00 | $132.70 | $161.50 | $168.00 | $182.50 | $242.80 |
Dividends
On May 15, 2012, we declared and subsequently paid on May 16, 2012 a special dividend of $2.02 per share on shares of our common stock and on an as-converted basis on shares of our then outstanding Series A 8% Convertible Preferred Stock totaling $99.5 million, which we refer to as the 2012 Dividend.
Other than the 2012 Dividend, duringDuring the past twofive fiscal years, we have not declared, and currently do not plan to declare in the foreseeable future, dividends on shares of our common stock. We currently intend to retain any future earnings for use in the operation and expansion of our business. Any further determination to pay dividends on our capital stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors considers relevant. In addition, the terms of our revolving credit facility contain restrictions on our ability to pay dividends.
Recent SalesIssuer Purchases of UnregisteredEquity Securities
There were no reportable repurchases of our common stock during the fourth fiscal quarter of 2014.2017.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial and other data as of and for the periods indicated. The selected financial data for fiscal 2014, 20132017, 2016 and 20122015 and selected consolidated balance sheet data as of January 31, 2015February 3, 2018 and February 1, 2014January 28, 2017 have been derived from our consolidated financial statements audited by KPMG LLP, our independent registered public accounting firm, included elsewhere in this Annual Report. The selected financial data for the fiscal years ended January 28, 2012, which we refer to as2014 and fiscal 2011, and January 29, 2011, which we refer to as fiscal 2010,2013, and the selected balance sheet data as of January 30, 2016, February 1, 2015, and February 2, 2013, January 28, 2012, and January 29, 2011,2014, have been derived from our audited consolidated financial statements that have not been included in this Annual Report. The historical results presented below are not necessarily indicative of the results to be expected for any future period. You should read this selected financial data in conjunction with the consolidated financial statements and accompanying notes and the information under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report.
We operate on a fiscal calendar that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31st of the following year. The reporting periods contained in the following table consist of 53 weeks of operations in fiscal 2017 and 52 weeks of operations in each of fiscal 2016, fiscal 20142015, 2013, 20112014, and 2010 and 53 weeks of operations in fiscal 2012.2013, respectively.
| | | | Fiscal Year | Fiscal Year |
| 2014 | | 2013 | | 2012 | | 2011 | | 2010 | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
(in millions, except share and per share data) | Consolidated Statements of Operations Data (1): | | | | | | | | | | | | | | | | | | |
| Net sales | $ | 680.2 |
| | $ | 535.4 |
| | $ | 418.8 |
| | $ | 297.1 |
| | $ | 197.2 |
| $ | 1,278.2 |
| | $ | 1,000.4 |
| | $ | 832.0 |
| | $ | 680.2 |
| | $ | 535.4 |
|
| Cost of goods sold | 442.4 |
| | 347.4 |
| | 269.0 |
| | 192.3 |
| | 131.0 |
| 814.8 |
| | 643.4 |
| | 540.0 |
| | 442.4 |
| | 347.4 |
|
| Gross profit | 237.8 |
| | 188.0 |
| | 149.8 |
| | 104.9 |
| | 66.1 |
| 463.4 |
| | 357.0 |
| | 291.9 |
| | 237.8 |
| | 188.0 |
|
Selling, general and administrative expenses (2) | 160.8 |
| | 134.3 |
| | 112.2 |
| | 78.6 |
| | 54.3 |
| 306.0 |
| | 243.1 |
| | 199.0 |
| | 160.8 |
| | 134.3 |
|
| Operating income | 77.0 |
| | 53.7 |
| | 37.7 |
| | 26.2 |
| | 11.8 |
| 157.4 |
| | 114.0 |
| | 92.9 |
| | 77.0 |
| | 53.7 |
|
| Interest expense, net | 0.1 |
| | 1.5 |
| | 2.4 |
| | — |
| | — |
| |
| Interest income, net | | 1.5 |
| | 0.3 |
| | — |
| | 0.1 |
| | 1.5 |
|
| Loss on debt extinguishment | 0.2 |
| | 0.3 |
| | 1.6 |
| | — |
| | — |
| — |
| | — |
| | — |
| | 0.2 |
| | 0.3 |
|
| Other income | — |
| | — |
| | (0.4 | ) | | — |
| | — |
| |
| Other expense | | — |
| | — |
| | 0.3 |
| | — |
| | — |
|
| Income before income taxes | 76.7 |
| | 52.0 |
| | 34.1 |
| | 26.2 |
| | 11.8 |
| 158.8 |
| | 114.3 |
| | 92.7 |
| | 76.7 |
| | 52.0 |
|
| Income tax expense | 28.6 |
| | 19.8 |
| | 14.1 |
| | 10.2 |
| | 4.8 |
| 56.4 |
| | 42.4 |
| | 35.0 |
| | 28.6 |
| | 19.8 |
|
| Net income | 48.0 |
| | 32.1 |
| | 20.0 |
| | 16.1 |
| | 7.0 |
| 102.5 |
| | 71.8 |
| | 57.7 |
| | 48.0 |
| | 32.1 |
|
| Dividend paid to preferred and unvested restricted shareholders | — |
| | — |
| | (65.4 | ) | | — |
| | — |
| |
| Series A 8% Convertible Preferred Stock cumulative dividends | — |
| | — |
| | — |
| | (15.9 | ) | | (4.5 | ) | |
| Accretion of Redeemable Convertible Preferred Stock | — |
| | — |
| | — |
| | — |
| | (3.3 | ) | |
| Net income attributable to participating securities | — |
| | (0.5 | ) | | — |
| | (0.1 | ) | | — |
| — |
| | — |
| | — |
| | — |
| | (0.5 | ) |
| Net income (loss) attributable to common shareholders | $ | 48.0 |
| | $ | 31.7 |
| | $ | (45.4 | ) | | $ | 0.1 |
| | $ | (0.8 | ) | |
| Net income attributable to common shareholders | | $ | 102.5 |
| | $ | 71.8 |
| | $ | 57.7 |
| | $ | 48.0 |
| | $ | 31.7 |
|
| Per Share Data: | | | | | | | | | | | | | | | | | | |
Basic income (loss) per common share (3) | $ | 0.89 |
| | $ | 0.59 |
| | $ | (1.28 | ) | | $ | — |
| | $ | (0.08 | ) | |
Diluted income (loss) per common share (3) | $ | 0.88 |
| | $ | 0.59 |
| | $ | (1.28 | ) | | $ | — |
| | $ | (0.08 | ) | |
| Dividends declared and paid per common share | $ | — |
| | $ | — |
| | $ | 2.02 |
| | $ | — |
| | $ | 13.24 |
| |
Basic income per common share (3) | | $ | 1.86 |
| | $ | 1.31 |
| | $ | 1.06 |
| | $ | 0.89 |
| | $ | 0.59 |
|
Diluted income per common share (3) | | $ | 1.84 |
| | $ | 1.30 |
| | $ | 1.05 |
| | $ | 0.88 |
| | $ | 0.59 |
|
| Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | |
| Basic shares | 54,219,801 |
| | 53,294,805 |
| | 35,444,200 |
| | 15,903,599 |
| | 9,672,195 |
| 55,208,246 |
| | 54,845,708 |
| | 54,513,622 |
| | 54,219,801 |
| | 53,294,805 |
|
| Diluted shares | 54,573,855 |
| | 53,741,860 |
| | 35,444,200 |
| | 15,904,108 |
| | 9,672,195 |
| 55,561,472 |
| | 55,128,870 |
| | 54,793,301 |
| | 54,573,855 |
| | 53,741,860 |
|
| | | | Fiscal Year | Fiscal Year |
| 2014 | | 2013 | | 2012 | | 2011 | | 2010 | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
(in millions, except total stores data) | Consolidated Statements of Cash Flows Data (1): | | | | | | | | | | | | | | | | | | |
| Net cash provided by (used in): | | | | | | | | | | | | | | | | | | |
| Operating activities | $ | 61.4 |
| | $ | 31.2 |
| | $ | 30.4 |
| | $ | 46.7 |
| | $ | 15.0 |
| $ | 167.4 |
| | $ | 106.6 |
| | $ | 87.9 |
| | $ | 61.4 |
| | $ | 31.2 |
|
| Investing activities | $ | (32.3 | ) | | $ | (25.9 | ) | | $ | (22.9 | ) | | $ | (18.6 | ) | | $ | (14.9 | ) | $ | (139.2 | ) | | $ | (86.8 | ) | | $ | (99.4 | ) | | $ | (32.3 | ) | | $ | (25.9 | ) |
| Financing activities | $ | (16.1 | ) | | $ | (11.2 | ) | | $ | 7.3 |
| | $ | 1.0 |
| | $ | (0.4 | ) | $ | 8.4 |
| | $ | 3.1 |
| | $ | 1.4 |
| | $ | (16.1 | ) | | $ | (11.2 | ) |
Other Operating and Financial Data (1): | | | | | | | | | | | | | | | | | | |
| Total stores at end of period | 366 |
| | 304 |
| | 244 |
| | 192 |
| | 142 |
| 625 |
| | 522 |
| | 437 |
| | 366 |
| | 304 |
|
| Comparable store sales growth | 3.4 | % | | 4.0 | % | | 7.1 | % | | 7.9 | % | | 15.6 | % | |
| Comparable sales growth | | 6.5 | % | | 2.0 | % | | 3.4 | % | | 3.4 | % | | 4.0 | % |
Average net sales per store (4) | $ | 1.9 |
| | $ | 1.9 |
| | $ | 1.8 |
| | $ | 1.7 |
| | $ | 1.5 |
| $ | 2.2 |
| | $ | 2.0 |
| | $ | 2.0 |
| | $ | 1.9 |
| | $ | 1.9 |
|
| Capital expenditures | $ | 32.3 |
| | $ | 25.9 |
| | $ | 22.9 |
| | $ | 18.6 |
| | $ | 14.9 |
| $ | 67.8 |
| | $ | 44.8 |
| | $ | 53.1 |
| | $ | 32.3 |
| | $ | 25.9 |
|
Consolidated Balance Sheet Data (1): | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 63.2 |
| | $ | 50.2 |
| | $ | 56.1 |
| | $ | 41.3 |
| | $ | 12.2 |
| $ | 112.7 |
| | $ | 76.1 |
| | $ | 53.1 |
| | $ | 63.2 |
| | $ | 50.2 |
|
| Short-term investment securities | | 132.0 |
| | 77.8 |
| | 46.3 |
| | — |
| | — |
|
| Total current assets | 207.6 |
| | 160.9 |
| | 129.7 |
| | 92.2 |
| | 45.9 |
| 479.4 |
| | 339.8 |
| | 264.7 |
| | 199.0 |
| | 156.3 |
|
| Total assets | 294.9 |
| | 232.1 |
| | 189.7 |
| | 134.5 |
| | 76.6 |
| 695.7 |
| | 500.5 |
| | 393.3 |
| | 294.1 |
| | 232.1 |
|
| Total current liabilities | 79.4 |
| | 79.7 |
| | 68.8 |
| | 49.9 |
| | 18.2 |
| 164.5 |
| | 116.6 |
| | 102.2 |
| | 79.4 |
| | 79.7 |
|
Total long-term debt, excluding current portion (5) | — |
| | — |
| | 19.5 |
| | 0.3 |
| | 0.3 |
| |
| Total liabilities | 120.6 |
| | 115.2 |
| | 118.9 |
| | 72.4 |
| | 33.5 |
| 237.2 |
| | 169.1 |
| | 148.8 |
| | 119.9 |
| | 115.2 |
|
| Series A 8% Convertible Preferred Stock | — |
| | — |
| | — |
| | 191.9 |
| | 191.9 |
| |
| Total shareholders’ equity (deficit) | $ | 174.3 |
| | $ | 116.9 |
| | $ | 70.7 |
| | $ | (129.8 | ) | | $ | (148.8 | ) | |
| Total shareholders’ equity | | $ | 458.6 |
| | $ | 331.4 |
| | $ | 244.5 |
| | $ | 174.3 |
| | $ | 116.9 |
|
| |
| (1) | Components may not add to total due to rounding. |
| |
| (2) | Fiscal 2014 2013 and 20122013 includes $0.9 million $6.1 million and $10.5$6.1 million of share-based compensation expense that relates to the cancellation of certain stock options, in exchange for the grant of restricted shares and on-going expense recognition of the awards over the remaining vesting period. In addition, fiscal 2013 and 2012 each includeincludes $1.0 million of expenses related to legal, accounting, and other fees in connection with secondary public offerings. Fiscal 2011 includes $6.1 million of non-contractual executive bonus expense and fiscal 2010 includes $5.3 million of expense related to the 2010 Transaction. |
| |
| (3) | Please see Note 2 in our consolidated financial statements included elsewhere in this Annual Report for an explanation of per share calculations. |
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| (4) | Only includes stores open during the full fiscal year. |
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(5) | We repaid $19.5 million of principal on the term loan facility in February 2014, subsequent to the end of fiscal 2013, which is classified as a current liability and not included in the long-term balance as of the end of fiscal 2013. |
28
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with “Selected Financial and Other Data,” and the consolidated financial statements and related notes included elsewhere in this Annual Report. The statements in this discussion regarding expectations of our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Part I, Item 1A “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.
We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31 of the following year. References to "fiscal year 2018" or "fiscal 2018" refer to the period from February 4, 2018 to February 2, 2019, which consists of a 52-week fiscal year. References to "fiscal year 2017" or "fiscal 2017" refer to the period from January 29, 2017 to February 3, 2018, which consists of a 53-week fiscal year. References to "fiscal year 2016" or "fiscal 2016" refer to the period from January 31, 2016 to January 28, 2017, which consists of a 52-week fiscal year. References to “fiscal year 2015” or “fiscal 2015” refer to the period from February 1, 2015 to January 30, 2016, which consists of a 52-week fiscal year. References to “fiscal year 2014” or “fiscal 2014” refer to the period from February 2, 2014 to January 31, 2015, which consists of a 52-week fiscal year.References to “fiscal year 2013” or “fiscal 2013” refer to the period from February 3, 2013 to February 1, 2014, which consists of a 52-week fiscal year. References to “fiscal year 2012” or “fiscal 2012” refer to the period from January 29, 2012 to February 2, 2013, which consists of a 53-week fiscal year. Historical results are not necessarily indicative of the results to be expected for any future period and results for any interim period may not necessarily be indicative of the results that may be expected for a full year.
Overview
Five Below is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the teen and pre-teen customer. We offer a dynamic, edited assortment of exciting products, all priced at $5 and below, including select brands and licensed merchandise across our category worlds. As of January 31, 2015,February 3, 2018, we operated 366625 stores in 2132 states.
Five Below was founded in 2002 by David Schlessinger and Thomas Vellios, who recognized a market need for a fun and affordable shopping destination aimed at teens and pre-teens aspiring to be young adults. In July 2014, Joel Anderson joined the Five Below senior management team. In December 2014, Joel Anderson was appointed as Chief Executive Officer and Thomas Vellios was appointed as Executive Chairman, both effective February 1, 2015. David Schlessinger continues to serveAugust 2016, we commenced selling merchandise on the boardinternet, through our fivebelow.com e-commerce website. We launched our e-commerce operation as an additional channel to service our customers. All e-commerce sales, which includes shipping and handling revenue, are included in net sales and beginning with the third fiscal quarter of directors2016, are included in comparable sales. Our e-commerce expenses will have components classified as Chairman Emeritus.both cost of goods sold and selling, general and administrative expenses.
We believe that our business model has resulted in strong financial performance irrespective of the economic environment. Our comparable store sales increased by 6.5% in fiscal 2017, 2.0% in fiscal 2016 and 3.4% in fiscal 2014, 4.0% in fiscal 2013 and 7.1% in fiscal 2012.2015. Between fiscal 20122015 and fiscal 2014,2017, our net sales increased from $418.8$832.0 million to $680.2$1,278.2 million, representing a compounded annual growth rate of 27.4%24.0%. Over the same period, our operating income increased from $37.7$92.9 million to $77.0$157.4 million, representing a compounded annual growth rate of 43.0%30.1%. In addition, we expanded our store base from 244437 stores at the end of fiscal 20122015 to 366625 stores at the end of fiscal 2014.2017. We plan to open approximately 70125 new stores in fiscal 20152018.
We expect to continue our strong growth in the future. By offering trend-right merchandise at a differentiated price point of $5 and below, our stores have been successful in varying geographic regions, population densities and real estate settings. We operate stores in 2132 states in the Northeast, South, Midwest and MidwestWest regions of the United States. We are primarily located in power, community and lifestyle shopping centers across a variety of urban, suburban and semi-rural markets with trade areas including at least 100,000 people in the specified market. We believe we have the opportunity to expand our store base in the United States from 366625 locations as of January 31, 2015,February 3, 2018 to more than 2,0002,500 locations over time. Our ability to open profitable new stores depends on many factors, including our ability to identify suitable markets and sites; negotiate leases with acceptable terms; achieve brand awareness in the new markets; efficiently source and distribute additional merchandise; and achieve sufficient levels of cash flow and financing to support our expansion.
On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted. The TCJA includes a numbers of changes to existing U.S. tax laws that impact us, most notably a reduction of the U.S. corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. We will continue to analyze additional information and guidance related to the TCJA as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. See discussion below under "Income Tax Expense" for further information about the tax benefits and expenses that we recognized this year. As a result of the TCJA, we expect that the effective tax rate in fiscal 2018 will be approximately 24.5%. In fiscal 2018 and future years, we may invest a portion of any savings generated by the TCJA into expenses that could significantly increase and impact the comparability between periods of Cost of Goods Sold and Gross Profit, Selling, General and Administrative Expenses and Operating Income.
We have a proven and highly profitable store model that has produced consistent financial results and returns and our new stores have achieved average payback periods of less than one year. Our new store model assumes a store size of approximately 7,5008,000 square feet that achieves annual sales of approximately $1.6 million in the first full year of operation. Our new store model also assumes an average new store investment of approximately $0.3 million. Our new store investment includes our store build-out (net of tenant allowances), inventory (net of payables) and cash pre-opening expenses.
Our planned store expansion will place increased demands on our operational, managerial, administrative and other resources. Managing our growth effectively will require us to continue to maintain adequate distribution capacity, enhance our store management systems, financial and management controls, information systems and other operational system capabilities.
In addition, we will be required to hire, train and retain store management and other qualified personnel. For further information, see Part I, Item 1A “Risk Factors-Risk Relating to our Business and Industry.”
Over the past eightfive years we have invested a significant amount of capital in infrastructure and systems necessary to support our future growth and we expect to incur additional capital expenditures related to expansion of our infrastructure and systems in future periods. In fiscal 2010, we expanded our New Castle, Delaware distribution center. In fiscal 2011, we relocated our corporate headquarters and upgraded our warehouse management and information systems. In fiscal 2013, we opened our second distribution center in Olive Branch, Mississippi and expanded our corporate headquarters to support our growth. During fiscal 2014,In June 2015, we signed a lease foropened a new distribution center in Pedricktown, New Jersey to support our anticipated growth, which we expect to be fully operational during fiscal 2015 and eventually replace our New Castle
facility.growth. We will initially occupy approximately 700,000800,000 square feet in our Pedricktown, New Jersey distribution center and will expand to approximately one million square feet. Thefeet by 2019. We are planning to lease agreement, which we expector build new distribution centers that will open in the Southeast in 2019, the Southwest in 2020, and the Midwest in 2021 to begin insupport our growth objectives. In fiscal 2015, we invested in a new ERP and began the multi-year implementation of the ERP, which is designed to enhance functionality and provide timely information to the Company's management team related to the operation of the business. In September 2016, we signed a 15-year lease for a new corporate headquarters location in Philadelphia, Pennsylvania to accommodate our current and anticipated future growth. We currently occupy approximately 117,000 square feet of office space and will expire in 2025 with options to renew for three successive five-year periods. Delays in opening this new distribution center could adversely affect our future operationsexpand into approximately 50,000 square feet of additional office space by slowing store growth, which could in turn reduce sales growth. In addition, any distribution-related construction or expansion projects entail risks which could cause delays and cost overruns, such as: shortages of materials; shortages of skilled labor or work stoppages; unforeseen construction, scheduling, engineering, environmental or geological problems; weather interference; fires or other casualty losses; and unanticipated cost increases. The completion date and ultimate cost of this new distribution center, planned for fiscal 2015, could differ significantly from initial expectations due to construction-related or other reasons.no later than 2020. In addition, the timing and amount of investments in our infrastructure and systems could affect the comparability of our results of operations in future periods.
We continuously assess ways to maximize the productivity and efficiency of our existing facilities, infrastructure and systems. The timing and amount of investments in our facilities, infrastructure and systems could affect the comparability of our results of operations in future periods. The completion date and ultimate cost of future projects could differ significantly from initial expectations due to construction-related or other reasons.
We believe our business strategy will continue to offer significant opportunity, but it also presents risks and challenges. These risks and challenges include, but are not limited to, that we may not be able to effectively identify and respond to changing trends and customer preferences, that we may not be able to find desirable locations for new stores and that we may not be able to effectively manage our future growth. In addition, our financial results can be expected to be directly impacted by substantial increases in product costs due to commodity cost increases or general inflation which could lead to a reduction in our sales as well as greater margin pressure as costs may not be able to be passed on to consumers. To date, changes in commodity prices and general inflation have not materially impacted our business. In response to increasing commodity prices or general inflation, we seek to minimize the impact of such events by sourcing our merchandise from different vendors and changing our product mix. See Part I, Item 1A “Risk Factors” for a description of these and other important factors that could adversely impact us and our results of operations.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales, comparable store sales, cost of goods sold and gross profit, selling, general and administrative expenses and operating income.
Net Sales
Net sales constitute gross sales net of merchandise returns for damaged or defective goods. Net sales consist of sales from comparable stores, non-comparable stores, and non-comparable stores.e-commerce, which includes shipping and handling revenue. Revenue from the sale of gift cards is deferred and not included in net sales until the gift cards are redeemed to purchase merchandise.
Our business is seasonal and as a result, our net sales fluctuate from quarter to quarter. Net sales are usually highest in the fourth fiscal quarter due to the year-end holiday season.
Comparable Store Sales
Comparable store sales include net sales from stores that have been open for at least 15 full months from their opening date.date, and e-commerce sales. Comparable stores include the following:
Stores that have been remodeled while remaining open;
Stores that have been relocated within the same trade area, to a location that is not significantly different in size, in which the new store opens at about the same time as the old store closes; and
Stores that have expanded, but are not significantly different in size, within their current locations.
For stores that are relocated or expanded, the following periods are excluded when calculating comparable store sales:
The period beginning when the closing store receives its last merchandise delivery from one of our distribution centers through:
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| ▪ | the last day of the fiscal year in which the store was relocated or expanded (for stores that increased significantly in size); or |
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| ▪ | the last day of the fiscal month in which the store re-opens (for all other stores); and |
The period beginning on the first anniversary of the date the store received its last merchandise delivery from one of our distribution centers through the first anniversary of the date the store re-opened.
Comparable store sales exclude the 53rd week of sales for 53-week fiscal years. Fiscal 2017 comparable sales were calculated using a 52-week comparable period through the week ending January 27, 2018. In the 52-week fiscal year subsequent to a 53-week fiscal year, we exclude the sales in the non-comparable week from the same-store sales calculation.
There may be variations in the way in which some of our competitors and other retailers calculate comparable or “same store” sales. As a result, data in this Annual Report regarding our comparable store sales may not be comparable to similar data made available by other retailers. Non-comparable store sales are comprised of new store sales, sales for stores not open for a full 15 months, and sales from existing store relocation and expansion projects that were temporarily closed (or not receiving deliveries) and not included in comparable store sales.
Measuring the change in fiscal year-over-year comparable store sales allows us to evaluate how our store base is performing. Various factors affect comparable store sales, including:
consumer preferences, buying trends and overall economic trends;
our ability to identify and respond effectively to customer preferences and trends;
our ability to provide an assortment of high-quality, trend-right and everyday product offerings that generate new and repeat visits to our stores;
the customer experience we provide in our stores;stores and online;
the level of traffic near our locations in the power, community and lifestyle centers in which we operate;
competition;
changes in our merchandise mix;
pricing;
our ability to source and distribute products efficiently;
the timing of promotional events and holidays;
the timing of introduction of new merchandise and customer acceptance of new merchandise;
our opening of new stores in the vicinity of existing stores;
the number of items purchased per store visit; and
weather conditions.
Opening new stores is an important part of our growth strategy. As we continue to pursue our growth strategy, we expect that a significant percentage of our net sales will continue to come from new stores not included in comparable store sales. Accordingly, comparable store sales is only one measure we use to assess the success of our growth strategy.
Cost of Goods Sold and Gross Profit
Gross profit is equal to our net sales less our cost of goods sold. Gross margin is gross profit as a percentage of our net sales. Cost of goods sold reflects the direct costs of purchased merchandise and inbound freight, as well as shipping and handling costs, store occupancy, distribution and buying expenses. Shipping and handling costs include third-party fulfillment and shipping costs related to our e-commerce operations. Store occupancy costs include rent, common area maintenance, utilities and property taxes for all store locations. Distribution costs include costs for receiving, processing, warehousing and shipping of merchandise to or from our distribution centers and between store locations. Buying costs include compensation expense and other costs for our internal buying organization, including our merchandising and product development team and our planning and allocation group.
These costs are significant and can be expected to continue to increase as our company grows. The components of our cost of goods sold may not be comparable to the components of cost of goods sold or similar measures of our competitors and other retailers. As a result, data in this Annual Report regarding our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers.
The variable component of our cost of goods sold is higher in higher volume quarters because the variable component of our cost of goods sold generally increases as net sales increase. We regularly analyze the components of gross profit as well as gross margin. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns, and a significant increase in inventory shrinkage or inability to generate sufficient sales leverage on the store occupancy, distribution
and buying components of costs of goods sold could have an adverse impact on our gross profit and results of operations. Changes in the mix of our products may also impact our overall cost of goods sold.
Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses are composed of payroll and other compensation, marketing and advertising expense, depreciation and amortization expense and other selling and administrative expenses. SG&A expenses as a percentage of net sales are usually higher in lower sales volume quarters and lower in higher sales volume quarters.
The components of our SG&A expenses may not be comparable to those of other retailers. We expect that our SG&A expenses will increase in future periods due to our continuing store growth. In addition, any increase in future share-based grants or modifications will increase our share-based compensation expense included in SG&A.
Operating Income
Operating income equals gross profit less SG&A expenses. Operating income excludes interest expense or income, loss on debt extinguishment and income tax expense or benefit. We use operating income as an indicator of the productivity of our business and our ability to manage SG&A expenses. Operating income percentage measures operating income as a percentage of our net sales.
Results of Consolidated Operations
The following tables summarize key components of our results of consolidated operations for the periods indicated, both in dollars and as a percentage of our net sales. | | | | Fiscal Year | Fiscal Year |
| 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
(in millions, except total stores) | Consolidated Statements of Operations Data (1): | | | | | | | | | | |
| Net sales | $ | 680.2 |
| | $ | 535.4 |
| | $ | 418.8 |
| $ | 1,278.2 |
| | $ | 1,000.4 |
| | $ | 832.0 |
|
| Cost of goods sold | 442.4 |
| | 347.4 |
| | 269.0 |
| 814.8 |
| | 643.4 |
| | 540.0 |
|
| Gross profit | 237.8 |
| | 188.0 |
| | 149.8 |
| 463.4 |
| | 357.0 |
| | 291.9 |
|
Selling, general and administrative expenses (2) | 160.8 |
| | 134.3 |
| | 112.2 |
| |
| Selling, general and administrative expenses | | 306.0 |
| | 243.1 |
| | 199.0 |
|
| Operating income | 77.0 |
| | 53.7 |
| | 37.7 |
| 157.4 |
| | 114.0 |
| | 92.9 |
|
| Interest expense, net | 0.1 |
| | 1.5 |
| | 2.4 |
| |
| Loss on debt extinguishment | 0.2 |
| | 0.3 |
| | 1.6 |
| |
| Other income | — |
| | — |
| | (0.4 | ) | |
| Interest income, net | | 1.5 |
| | 0.3 |
| | — |
|
| Other expense | | — |
| | — |
| | 0.3 |
|
| Income before income taxes | 76.7 |
| | 52.0 |
| | 34.1 |
| 158.8 |
| | 114.3 |
| | 92.7 |
|
| Income tax expense | 28.6 |
| | 19.8 |
| | 14.1 |
| 56.4 |
| | 42.4 |
| | 35.0 |
|
| Net income | $ | 48.0 |
| | $ | 32.1 |
| | $ | 20.0 |
| $ | 102.5 |
| | $ | 71.8 |
| | $ | 57.7 |
|
Percentage of Net Sales (1): | | | | | | | | | | |
| Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of goods sold | 65.0 | % | | 64.9 | % | | 64.2 | % | 63.7 | % | | 64.3 | % | | 64.9 | % |
| Gross profit | 35.0 | % | | 35.1 | % | | 35.8 | % | 36.3 | % | | 35.7 | % | | 35.1 | % |
Selling, general and administrative expenses (2) | 23.6 | % | | 25.1 | % | | 26.8 | % | |
| Selling, general and administrative expenses | | 23.9 | % | | 24.3 | % | | 23.9 | % |
| Operating income | 11.3 | % | | 10.0 | % | | 9.0 | % | 12.3 | % | | 11.4 | % | | 11.2 | % |
| Interest expense, net | — | % | | 0.3 | % | | 0.6 | % | |
| Loss on debt extinguishment | — | % | | — | % | | 0.4 | % | |
| Other income | — | % | | — | % | | (0.1 | )% | |
| Interest income, net | | 0.1 | % | | — | % | | — | % |
| Other expense | | — | % | | — | % | | — | % |
| Income before income taxes | 11.3 | % | | 9.7 | % | | 8.1 | % | 12.4 | % | | 11.4 | % | | 11.1 | % |
| Income tax expense | 4.2 | % | | 3.7 | % | | 3.4 | % | 4.4 | % | | 4.2 | % | | 4.2 | % |
| Net income | 7.1 | % | | 6.0 | % | | 4.8 | % | 8.0 | % | | 7.2 | % | | 6.9 | % |
| Operational Data: | | | | | | | | | | |
| Total stores at end of period | 366 |
| | 304 |
| | 244 |
| 625 |
| | 522 |
| | 437 |
|
| Comparable stores sales growth | 3.4 | % | | 4.0 | % | | 7.1 | % | |
Average net sales per store (3) | $ | 1.9 |
| | $ | 1.9 |
| | $ | 1.8 |
| |
| Comparable sales growth | | 6.5 | % | | 2.0 | % | | 3.4 | % |
Average net sales per store (2) | | $ | 2.2 |
| | $ | 2.0 |
| �� | $ | 2.0 |
|
| |
| (1) | Components may not add to total due to rounding. |
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| (2) | Fiscal 2014, 2013 and 2012 includes $0.9 million, $6.1 million and $10.5 million of share-based compensation expense that relates to the cancellation of certain stock options, in exchange for the grant of restricted shares and on-going expense recognition of the awards over the remaining vesting period. In addition, fiscal 2013 and 2012 each include $1.0 million of expenses related to legal, accounting, and other fees in connection with secondary public offerings. |
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(3) | Only includes stores open during the full fiscal year. |
Fiscal Year 20142017 Compared to Fiscal Year 20132016
Net Sales
Net sales increased to $680.2$1,278.2 million in fiscal year 20142017 from $535.4$1,000.4 million in fiscal year 2013,2016, an increase of $144.8$277.8 million, or 27.0%27.8%. The increase was the result of a non-comparable store sales increase of $128.3$217.3 million and a comparable store sales increase of $16.5$60.5 million. In fiscal year 2014,2017, we opened 62103 net new stores compared to 6085 net new stores in fiscal year 2013.2016. The increase in non-comparable store sales was primarily driven by new stores that opened in fiscal 2017 and the number of stores that opened in fiscal 20132016 but have not been open for 15 full months.months and includes approximately $15.7 million of sales contributed by the 53rd week in fiscal 2017.
Comparable store sales increased 3.4%6.5% for fiscal year 20142017 compared to fiscal year 2013.2016. This increase resulted from an increase of approximately 2.0%5.8% in the average dollar valuenumber of transactions and an increase of approximately 1.4%0.7% in the numberaverage dollar value of transactions in our stores.transactions.
Cost of Goods Sold and Gross Profit
Cost of goods sold increased to $442.4$814.8 million in fiscal year 20142017 from $347.4$643.4 million in fiscal year 2013,2016, an increase of $95.0$171.4 million, or 27.4%26.6%. The increase in cost of goods sold was primarily the result of an increase in the merchandise costs of goods resulting from an increase in sales. Also contributing to the increase in cost of goods sold was an increase in store occupancy costs resulting from new store openings.
Gross profit increased to $463.4 million in fiscal year 2017 from $357.0 million in fiscal year 2016, an increase of $106.4 million, or 29.8%. Gross margin increased to 36.3% for fiscal year 2017 from 35.7% in fiscal year 2016, an increase of approximately 60 basis points. The increase in gross margin was primarily the result of decreases as a percentage of sales in store occupancy costs and merchandise cost of goods sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $306.0 million in fiscal year 2017 from $243.1 million in fiscal year 2016, an increase of $62.9 million, or 25.9%. As a percentage of net sales, selling, general and administrative expenses decreased approximately 40 basis points to 23.9% in fiscal year 2017 compared to 24.3% in fiscal year 2016. The increase in selling, general and administrative expenses was the result of increases of $42.0 million in store-related expenses to support new store growth and our marketing initiatives and $20.9 million of corporate-related expenses.
Income Tax Expense
Income tax expense increased to $56.4 million in fiscal year 2017 from $42.4 million in fiscal year 2016, an increase of $14.0 million, or approximately 33.0%. This increase in income tax expense was primarily the result of a $44.6 million increase in pre-tax net income. Our effective tax rate for fiscal year 2017 was 35.5% compared to 37.1% in fiscal year 2016. The decrease in our effective tax rate was primarily driven by discrete items, which include the impact of the adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," with respect to the requirement to recognize excess income tax benefits or deficiencies as income tax benefit or expense in the consolidated statements of operations rather than as additional paid-in capital in the consolidated balance sheets, and the impact of tax reform as a result of the Tax Cuts and Jobs Act ("TCJA").
The TCJA includes a number of changes to existing U.S. tax laws that impact us, most notably a reduction of the U.S. corporate tax rate from 35% to 21%, for tax years beginning after December 31, 2017. We recorded an additional expense of $1.5 million in deferred income tax expense for the remeasurement of our net deferred tax asset at the 21% tax rate. Additionally, and in accordance with Section 15 of the Internal Revenue Code, we utilized a blended rate of 33.7% for our fiscal 2017 tax year, by applying a prorated percentage of the number of days prior to and subsequent to the January 1, 2018 effective date as compared with the 35% for the 2016 tax year. The effect of this blended rate change is a benefit of $2.0 million. The TCJA also provides for acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning in 2018, including additional limitations on deductibility of executive compensation and employee meal benefits. As a result of the TCJA, we expect that the effective tax rate in fiscal 2018 will be approximately 24.5%.
The net $0.5 million benefit represents what we believe is the impact of the TCJA in the current year. As the benefit is based on currently available information and interpretations, which are continuing to evolve, the benefit should be considered provisional. We will continue to analyze additional information and guidance related to the TCJA as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. The final impacts may differ from the recorded amounts as of February 3, 2018, and we will continue to refine such amounts within the measurement period provided by Staff Accounting Bulletin No. 118.
Net Income
As a result of the foregoing, net income increased to $102.5 million in fiscal year 2017 from $71.8 million in fiscal year 2016, an increase of approximately $30.7 million, or 42.6%.
Fiscal Year 2016 Compared to Fiscal Year 2015
Net Sales
Net sales increased to $1,000.4 million in fiscal year 2016 from $832.0 million in fiscal year 2015, an increase of $168.4 million, or 20.2%. The increase was the result of a non-comparable sales increase of $153.3 million and a comparable sales increase of $15.1 million. In fiscal year 2016, we opened 85 net new stores compared to 71 net new stores in fiscal year 2015. The increase in non-comparable sales was primarily driven by new stores that opened in fiscal 2016 and the number of stores that opened in fiscal 2015 but have not been open for 15 full months.
Comparable sales increased 2.0% for fiscal year 2016 compared to fiscal year 2015. This increase resulted from an increase of approximately 2.4% in the average dollar value of transactions partially offset by a decrease of approximately 0.4% in the number of transactions.
Cost of Goods Sold and Gross Profit
Cost of goods sold increased to $643.4 million in fiscal year 2016 from $540.0 million in fiscal year 2015, an increase of $103.4 million, or 19.1%. The increase in cost of goods sold was primarily the result of an increase in the merchandise costs of goods resulting from an increase in sales. Also contributing to the increase in cost of goods sold was an increase in store occupancy costs resulting from new store openings and an increase in distribution costs, primarily due to the increase in net sales.
Gross profit increased to $237.8$357.0 million in fiscal year 20142016 from $188.0$291.9 million in fiscal year 2013,2015, an increase of $49.8$65.1 million, or 26.5%22.3%. Gross margin decreasedincreased to 35.0%35.7% for fiscal year 20142016 from 35.1% in fiscal year 2013, a decrease2015, an increase of approximately 1060 basis points. The decreaseincrease in gross margin was primarily driven by an increasethe result of decreases as a percentage of sales in store occupancymerchandise cost of goods sold and distribution costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $160.8$243.1 million in fiscal year 20142016 from $134.3$199.0 million in fiscal year 2013,2015, an increase of $26.5$44.1 million, or 19.7%22.2%. As a percentage of net sales, SG&Aselling, general and administrative expenses decreasedincreased approximately 15040 basis points to 23.6%24.3% in fiscal year 20142016 compared to 25.1%23.9% in fiscal year 2013.2015. The increase in SG&A expenseselling, general and administrative expenses was primarily the result of increases of $24.6$32.5 million in store-related expenses to support new store growth and $6.4our marketing initiatives and $11.6 million of corporate-related expenses, partially offset by a decrease of $3.5 million inwhich includes share-based compensation expense and $1.0 million of fees related to our secondary public offering that was incurred during fiscal year 2013. The decrease in share-based compensation expense was primarily driven by the decrease of $5.2 million related to the cancellation of certain stock options in exchange for the grant of restricted shares in March 2012. The remaining expense and vesting related to the cancellation of certain stock options in exchange for the grant of restricted shares from March 2012 was recognized during the first quarter of fiscal 2014. This decrease in share-based compensation expense was partially offset by new equity grants in fiscal 2014. In fiscal 2015, we expect to incur incremental costs related to the leadership investments we made in fiscal 2014 and costs related to the transition to the new distribution center.expense.
Interest Expense, Net
Interest expense, net decreased to $0.1 million in fiscal year 2014 from $1.5 million of interest expense, net in fiscal year 2013, a decrease of $1.4 million. The decrease in interest expense resulted mainly from the decrease in the outstanding balance of our Term Loan Facility (see -“Liquidity and Capital Resources-Term Loan Facility” section below). In February 2014, we repaid the remaining principal balance outstanding under the Term Loan Facility of $19.5 million.
Loss on Debt Extinguishment
Loss on debt extinguishment was $0.2 million in fiscal year 2014 and was due to the $19.5 million repayment of the remaining principal balance outstanding on the $100.0 million Term Loan Facility in February 2014. Loss on debt extinguishment was $0.3 million in fiscal year 2013 and was due to a $15.0 million payment of principal on the $100.0 million Term Loan Facility in May 2013.
Income Tax Expense
Income tax expense increased to $28.6$42.4 million in fiscal year 20142016 from $19.8$35.0 million in fiscal year 2013,2015, an increase of $8.8$7.4 million, or approximately 44.5%21.3%. This increase in income tax expense was primarily the result of a $24.7$21.6 million increase in pre-tax net income. Our effective tax rate for fiscal year 20142016 was 37.4%37.1% compared to 38.1%37.7% in fiscal year 2013. Our2015. The decrease in our effective tax rate for fiscal year 2014 was lower than the comparable period as a result of changes in the mix of pretax income across state jurisdictions and the Company's operating entities as a result of the Restructuring.
Net Income
As a result of the foregoing, net income increased to $48.0 million in fiscal year 2014 from $32.1 million in fiscal year 2013, an increase of approximately $15.9 million, or 49.4%.
Fiscal Year 2013 Compared to Fiscal Year 2012
Net Sales
Net sales increased to $535.4 million in fiscal year 2013, which consisted of a 52-week fiscal year, from $418.8 million in fiscal year 2012, which consisted of a 53-week fiscal year, an increase of $116.6 million, or 27.8%. The increase was the result of a non-comparable store sales increase of $102.0 million and a comparable store sales increase of $14.6 million. In fiscal year 2013, we opened 60 net new stores compared to 52 new stores in fiscal year 2012. The increase in non-comparable store sales was primarily driven by new stores and the number of stores that opened in fiscal 2012 but have not been open for 15 full months.
Comparable store sales increased 4.0% for fiscal year 2013 compared to fiscal year 2012. This increase resulted from an increase of approximately 4.8% in the number of transactions in our stores offset by a decrease in the average dollar value of transactions of approximately 0.8%.
Cost of Goods Sold and Gross Profit
Cost of goods sold increased to $347.4 million in fiscal year 2013 from $269.0 million in fiscal year 2012, an increase of $78.4 million, or 29.1%. The increase in cost of goods sold was primarily the result of a $57.0 million increase in the merchandise costs of goods resulting from an increase in sales, and a $12.2 million increase in store occupancy costs resulting from new store openings and a $7.0 million increase in distribution costs, primarily due to the increase in sales as well as the opening of a second distribution center.
Gross profit increased to $188.0 million in fiscal year 2013 from $149.8 million in fiscal year 2012, an increase of $38.2 million, or 25.5%. Gross margin decreased to 35.1% for fiscal year 2013 from 35.8% in fiscal year 2012, a decrease of approximately 70 basis points. The decrease in gross margin was primarily the result of an increase of approximately 60 basis points in distribution costs due to the opening of a second distribution center.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $134.3 million in fiscal year 2013 from $112.2 million in fiscal year 2012, an increase of $22.1 million, or 19.7%. As a percentage of net sales, SG&A expenses decreased 170 basis points to 25.1% in fiscal year 2013 compared to 26.8% in fiscal year 2012. The increase in SG&A expense was primarily the result of increases of $21.0 million in store-related expenses to support new store growth and $4.5 million of corporate-related expenses, partially offset by a decrease of $3.4 million in share-based compensation expense primarily related to the cancellation of certain stock options in exchange for the grant of restricted shares in March 2012. The remaining expense related to the cancellation of certain stock options in exchange for the grant of restricted shares from March 2012 was recognized in March 2014, when these shares became fully vested.
Interest Expense, Net
Interest expense, net decreased to $1.5 million in fiscal year 2013 from $2.4 million of interest expense, net in fiscal year 2012, a decrease of $0.9 million. The decrease in interest expense resulted mainly from the decrease in the outstanding balance of our Term Loan Facility (see -“Liquidity and Capital Resources-Term Loan Facility” section below).
Loss on Debt Extinguishment
Loss on debt extinguishment decreased to $0.3 million in fiscal year 2013 from $1.6 million in fiscal year 2012, a decrease of $1.3 million. The decrease in the loss on debt extinguishment is due to the $15.0 million repayment on the $100.0 million Term Loan Facility during fiscal year 2013 compared to the $65.5 million of repayments that were made during fiscal year 2012.
Income Tax Expense
Income tax expense increased to $19.8 million in fiscal year 2013 from $14.1 million in fiscal year 2012, an increase of $5.7 million, or approximately 40.8%. This increase in income tax expense was primarily the result of a $17.9 million increase in pre-tax net income. Our effective tax rate for fiscal year 2013 was 38.1% compared to 41.3% in fiscal year 2012. Our
effective tax rate for fiscal year 2013 was lower than the comparable period as a result of changes in the mix of pretax income across state jurisdictions and the Company's operating entities as a result of the Restructuring.discrete items.
Net Income
As a result of the foregoing, net income increased to $32.1$71.8 million in fiscal year 20132016 from $20.0$57.7 million in fiscal year 20122015, an increase of approximately $12.1$14.1 million, or 60.5%24.5%.
Seasonality
Our business is seasonal in nature with the highest level of net sales and net income generated in the fourth fiscal quarter due to the year-end holiday season and, therefore, operating results for any fiscal quarter are not necessarily indicative of results for the full fiscal year. To prepare for the holiday season, we must order and keep in stock more merchandise than we carry during other parts of the year. We expect inventory levels, along with an increase in accounts payable and accrued expenses, generally to reach their highest levels in the third and fourth fiscal quarters in anticipation of the increased net sales during the year-end holiday season. As a result of this seasonality, and generally because of variation in consumer spending habits, we experience fluctuations in net sales, net income and working capital requirements during the year.
Liquidity and Capital Resources
Overview
Our primary sourcessource of liquidity areis cash flows from operations, historical equity financings and borrowings under our Revolving Credit Facility (defined in “-Line of Credit”).operations. Our primary cash needs are for capital expenditures and working capital. During fiscal 2012, we also entered into a Term Loan Facility (defined in “-Term Loan Facility”) and used the proceeds to pay the 2012 Dividend in May 2012. As of January 31, 2015, we had no balance outstanding under the Term Loan Facility as we repaid the remaining principal balance outstanding under the Term Loan Facility in February 2014.
Capital expenditures typically vary depending on the timing of new store openings and infrastructure-related investments. We plan to make capital expenditures of approximately $56$137 million in fiscal 2015,2018, which exclude the impact of tenant allowances, and which we expect to fund from cash generated from operations. We expect to devoteincur approximately $22$38 million of our capital expenditure budget in fiscal 20152018 to construct and open 70approximately 125 new stores, with the remainder projected to be spent on our distribution centers, including the new distribution center in Pedricktown, New Jersey, corporate infrastructure and store relocations and remodels.remodels, our new corporate headquarters, and corporate infrastructure.
Our primary working capital requirements are for the purchase of store inventory and payment of payroll, rent, other store operating costs and distribution costs. Our working capital requirements fluctuate during the year, rising in the third and fourth fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak, year-end holiday shopping season in the fourth fiscal quarter. Fluctuations in working capital are also driven by the timing of new store openings.
Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with cash on hand, net cash provided by operating activities and borrowings under our Amended Revolving Credit Facility and Revolving Credit Facility. When we have used our Amended Revolving Credit Facility and Revolving Credit Facility, the amount of indebtedness outstanding under it has tended to be the highest in the beginning of the fourth quarter of each fiscal year. To the extent that we have drawn on the facility, we have paid down the borrowings before the end of the fiscal year with cash generated during our peak selling season in the fourth quarter. During the fourth quarter of fiscal 2014, we borrowed approximately $7.0 millionWe did not have any direct borrowings under our Amended Revolving Credit Facility which we repaid beforeduring fiscal year 2017.
On March 20, 2018, our Board of Directors approved a share repurchase program authorizing the endrepurchase of up to $100 million of our stock through March 31, 2021, on the quarter and incurred minimal interest.
In connection with the Restructuring, on June 12, 2013, we amended and restated the Loan and Security Agreement (definedopen market, in “-Line of Credit”) and certain other ancillary documents to our Revolving Credit Facility in order to, among other things, allow us to form and capitalize the Subsidiary and make the Subsidiary a partyprivately negotiated transactions, or otherwise. There can be no assurances that any such repurchases will be completed, or as to the Loan and Security Agreement as a guarantortiming or amount of our obligations thereunder. The Subsidiary also acceded to the credit agreement and certain ancillary documents to our Term Loan Facility as a guarantor of our obligations thereunder.any repurchases.
Based on our growth plans, we believe that our cash position which includes our cash equivalents and short-term investments, net cash provided by operating activities and availability under our Amended Revolving Credit Facility will be adequate to finance our planned capital expenditures, authorized share repurchases and working capital requirements and debt service over the next 12 months and for the foreseeable future thereafter. If cash flows from operations and borrowings under our Amended Revolving Credit Facility are not sufficient or available to meet our requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance that equity or debt financing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to our then-current shareholders.
Cash Flows
A summary of our cash flows from operating, investing and financing activities is presented in the following table (in millions):
| | | | Fiscal | Fiscal Year |
| 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| | Net cash provided by operating activities | $ | 61.4 |
| | $ | 31.2 |
| | $ | 30.4 |
| $ | 167.4 |
| | $ | 106.6 |
| | $ | 87.9 |
|
| Net cash used in investing activities | (32.3 | ) | | (25.9 | ) | | (22.9 | ) | (139.2 | ) | | (86.8 | ) | | (99.4 | ) |
| Net cash (used in) provided by financing activities | (16.1 | ) | | (11.2 | ) | | 7.3 |
| |
| Net cash provided by financing activities | | 8.4 |
| | 3.1 |
| | 1.4 |
|
Net increase (decrease) during period in cash and cash equivalents (1) | $ | 13.0 |
| | $ | (5.9 | ) | | $ | 14.8 |
| $ | 36.6 |
| | $ | 23.0 |
| | $ | (10.1 | ) |
(1) Components may not add to total due to rounding.
Cash Provided by Operating Activities
Net cash provided by operating activities for fiscal 20142017 was $61.4$167.4 million, an increase of $30.2$60.8 million compared to fiscal 2013. The increase was primarily due to an increase in operating cash flows from store performance. During fiscal 2014, we added 62 new stores and expect to add approximately 70 new stores in fiscal 2015.
Net cash provided by operating activities for fiscal 2013 was $31.2 million, an increase of $0.8 million compared to fiscal 2012.2016. The increase was primarily due to an increase in operating cash flows from store performance partially offset by an increase in income taxes paid of $14.2 million.paid. During fiscal 2013,2017, we added 60103 net new stores and expect to add approximately 62125 new stores in fiscal 2014.2018.
Net cash provided by operating activities for fiscal 2016 was $106.6 million, an increase of $18.7 million compared to fiscal 2015. The increase was primarily due to an increase in operating cash flows from store performance and a decrease in income taxes paid offset by changes in overall working capital. During fiscal 2016, we added 85 net new stores.
Cash Used in Investing Activities
Net cash used in investing activities for fiscal 20142017 was $32.3$139.2 million, an increase of $6.4$52.4 million compared to fiscal 2013 related solely to capital expenditures.2016. The increase in capital expenditures was primarily for our new store construction, our distribution facilitiesdue to increases in net purchases of investment securities and our corporate infrastructure.
Net cash used in investing activities for fiscal 2013 was $25.9 million, an increase of $3.0 million compared to fiscal 2012 related solely to capital expenditures. The increase in capital expenditures was primarily for our new store construction, our corporate infrastructure, and our distribution facilities.
Net cash used in investing activities for fiscal 2016 was $86.8 million, a decrease of $12.6 million compared to fiscal 2015. The decrease was primarily due to decreases in capital expenditures and net purchases of investment securities. The decrease in capital expenditures was primarily due to cash outflows related to our new distribution center in Pedricktown, New Jersey during fiscal 2015.
Cash (Used in) Provided by Financing Activities
Net cash used inprovided by financing activities for fiscal year 20142017 was $16.1$8.4 million, an increase of $4.9$5.2 million compared to net cash used in financing activities of $11.2 million in fiscal year 2013.2016. The increase in net cash used in financing activities was primarily the result of increases in the $19.5 million principal repayment onproceeds from the Term Loan Facilityexercise of options to purchase common stock and vesting of restricted and performance-based restricted stock units and a decrease in fiscal year 2014 comparedthe common shares withheld for taxes offset by a decrease in excess tax benefits related to exercises of stock options and the $15.0 million principal repayment onvesting of restricted stock units and performance-based restricted stock units driven by the Term Loan Facility during fiscal year 2013. Asimpact of January 31, 2015, there was no balance outstanding under the Term Loan Facility.adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," with respect to excess income tax benefits and deficiencies being classified as an operating activity rather than a financing activity.
Net cash used inprovided by financing activities for fiscal year 20132016 was $11.2$3.1 million, an increase of $18.5$1.7 million compared to net cash provided by financing activities of $7.3 million in fiscal year 2012.2015. The increase in net cash used in financing activities was primarily the result of the $15.0 million principal repayment on the Term Loan Facilityincreases in fiscal year 2013 compared to $100.0 million ofthe proceeds from our Term Loan Facilitythe exercise of options and $73.2 millionexcess tax benefits related to exercises of net proceeds from our initial public offering,stock options and the vesting of restricted stock units and performance-based restricted stock units, partially offset by $99.5 million of dividend payments, and the $65.5 million of principal repayments on the Term Loan Facility during fiscal year 2012.an increase in common shares withheld for taxes.
Term Loan Facility
On May 16, 2012, we entered into a $100.0 million Term Loan Facility with Goldman Sachs Bank USA as administrative agent for a syndicate of lenders (the “Term Loan Facility”). We used the net proceeds from the Term Loan Facility and cash on hand to pay a dividend on our common and preferred stock, totaling $99.5 million. In February 2014, we repaid the remaining principal balance outstanding under the Term Loan Facility of $19.5 million.
Line of Credit
On August 18, 2006,May 10, 2017, we entered into a loanFourth Amended and security agreementRestated Loan and Security Agreement (the “Loan“Amended Loan and Security Agreement”) that included, among Five Below Inc., Five Below Merchandising, Inc. and Wells Fargo Bank, National Association. The Amended Loan and Security Agreement amends and restates the Third Amended and Restated Loan and Security Agreement, dated June 12, 2013, among Five Below Inc., Five Below Merchandising, Inc. and Wells Fargo Bank, National Association, which governed the Revolving Credit Facility.
The Amended Loan and Security Agreement includes a revolving line of credit within the amount of up to $20.0 million (the “Amended Revolving Credit Facility”). Pursuant to the Amended Loan and Security Agreement, advances under the Amended Revolving Credit Facility are no longer tied to a borrowing base.base; however, we are required to maintain eligible inventory at all times in an amount equal to at least $100.0 million. The Loan and Security Agreement has been amended and/or restated several times, the latest on June 12, 2013 (as amended and restated, the “Revolving Credit Facility”), generally to extend the maturity date, increase maximum borrowings, adjust the applicable interest rates, permit the formation and capitalization of subsidiaries, make the Subsidiary a party to the agreement as a guarantor of our obligations and modify certain definitions.
TheAmended Revolving Credit Facility allows maximum borrowings of $20.0 million with advances tied to a borrowing base and expires on the earliest to occur of (i) May 16, 201710, 2022 or (ii) upon the occurrence of an event of default. The Amended Revolving Credit Facility may be increased to $30.0up to $50.0 million, uponsubject to certain conditions. The Amended Revolving Credit Facility also includes a $5.0$20.0 million sub limit for the issuance of letters of credit.
The borrowing base is 90% of eligible credit card receivables plus 90% ofAmended Loan and Security Agreement reduces the net recovery percentage of eligible inventory less established reserves.
The Revolving Credit Facility provides for interest rate payable on borrowings to be, at our option, ata per annum rate equal to (a) a prime rate plus a margin of (i) 0.75%if excess availability is greater than or equal to 75%, (ii) 1.0% if excess availability is less than 75%but greater than or equal to 33% or (iii) 1.25%if excess availability is less than 33% or (b) a LIBOR-based rate plus a margin of (i) 1.75% if excess availability is greater than or1.00%. Letter of credit fees are equal to 75%, (ii)2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%.the interest rate payable on LIBOR-based loans. The Revolving Credit Facility further provides for ainterest rate and letter of credit fee equalfees under the Amended Loan and Security Agreement are subject to the LIBOR-based rate plus (i) 1.75% if excess availability is greater than or equal to 75%, (ii)an increase of 2.00%if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. The Revolving Credit Facility also contains an unused credit facility fee of 0.375% per annum and is subject to a servicing feeupon an event of approximately $12.0 thousand per year.
The Revolving Credit Facility includes a covenant which requires us to maintain minimum excess collateral availability of no less than the greater of (i) 10%of the then effective maximum credit and (ii)$3.0 million.default.
The Revolving Credit Facility also includesAmended Loan and Security Agreement removes restrictions related to our ability to pay or make dividends and distributions or repurchase our stock, but the Amended Loan and Security Agreement continues to include other customary negative and affirmative covenants including, among others,other things, limitations on our ability to (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or other restricted payments; (vi) engage in mergers or consolidations; or (vii)(vi) change our business.
Additionally,The Amended Loan and Security Agreement also removes the provisions that required us to make prepayments on outstanding Amended Revolving Credit Facility is subject to paymentbalances upon the receipt of certain proceeds, including those from the sale of certain assets and is subject to an increase in the interest rate on borrowings and the letter of credit fee of 2.0% upon an event of default.assets. Amounts under the Amended Revolving Credit Facility may become due upon certain events of default including, among others,other things, our failure to comply with the Amended Revolving Credit Facility’s covenants, bankruptcy, default on certain other indebtedness or a change in control.
During fiscal 2014, we borrowed approximately $7.0 millionUnder the Amended Loan and Security Agreement, all obligations under ourthe Amended Revolving Credit Facility during the fourth quarter, which we repaid before the endcontinue to be guaranteed by our subsidiary and are secured by substantially all of the quarterour and incurred minimal interest. During fiscal 2013, we had no borrowings or interest expense under the Revolving Credit Facility. our subsidiary's assets.
As of January 31, 2015 and February 1, 2014,3, 2018, we had approximately $20.0 million available on the line of credit. As of January 28, 2017, the Company had approximately $20.0 million available on the line of credit of which $19.7 million was available and $0.3 million was issued on an outstanding letter of credit obligation.
All obligations under the Amended Revolving Credit Facility are secured by substantially all of our assets and are guaranteed by the Subsidiary.our subsidiary. As of January 31, 2015,February 3, 2018, we were in compliance with the covenants applicable to us under the Amended Revolving Credit Facility.
Stock Split
On July 17, 2012, we amended our articles of incorporation to reflect a 0.3460-for-1 reverse stock split of our common stock. The amendment also changed the authorized shares of our common stock to 120,000,000 shares. Concurrent with the reverse stock split, we adjusted (i) the conversion price of our Series A 8% Convertible Preferred Stock, (ii) the number of shares subject to and the exercise price of our outstanding stock option awards under our equity incentive plan and (iii) the number of shares subject to and the exercise price of our outstanding warrants to equitably reflect the split. All common stock share and per-share data presented in this Annual Report gives effect to the reverse stock split and the change in authorized shares and have been adjusted retroactively for all periods presented.
Initial Public Offering
On July 24, 2012, we completed our IPO of 11,057,692 shares of common stock at a price of $17.00 per share. The common stock was listed on The NASDAQ Global Select Market under the symbol “FIVE.” The shares sold in the IPO were registered under the Securities Act, pursuant to our Registration Statement on Form S-1 (File No. 333-180780), which was declared effective by the Securities and Exchange Commission on July 18, 2012. Of the 11,057,692 shares sold in the IPO, we issued 4,807,692 shares, and 6,250,000 shares were sold by selling shareholders, including 1,442,308 shares sold pursuant to the exercise in full of the underwriters’ over-allotment option. We did not receive any proceeds from shares sold by the selling shareholders. We received proceeds of approximately $73.2 million, net of approximately $8.5 million in underwriting discounts and legal, accounting and other fees incurred in connection with the IPO. Of the $73.2 million net proceeds received from the IPO, approximately $65.3 million and $0.7 million, respectively, were used to repay principal and interest under our Term Loan Facility that existed as of the date of the IPO. The remaining net proceeds of the IPO were used for general corporate purposes, including working capital.
Secondary Public Offerings
On February 4, 2013, we completed a secondary public offering of 13,012,250 shares of common stock at a price of $35.65 per share. The shares sold in the secondary public offering were registered under the Securities Act, pursuant to our Registration Statements on Form S-1 (File No. 333-186043 and File No. 333-186275), which were declared effective by the Securities and Exchange Commission on January 29, 2013. All of the shares sold in the secondary public offering were sold by selling shareholders and we did not receive any proceeds. We did incur fees of approximately $1.0 million related to legal, accounting, and other fees in connection with the secondary public offering in fiscal 2012, which are included in selling, general and administrative expenses in the fiscal 2012 consolidated statement of operations.
On July 1, 2013, we completed a secondary public offering of 6,900,000 shares of common stock at a price of $36.00 per share. The shares sold in the secondary public offering were registered under the Securities Act, pursuant to our registration statement on Form S-1 (File No. 333-188578), which was declared effective by the Securities and Exchange Commission on June 26, 2013. All of the shares sold in the secondary public offering were sold by selling shareholders and we did not receive any proceeds. We incurred fees of approximately $1.0 million related to legal, accounting and other fees in connection with the secondary public offering in fiscal 2013, which are included in selling, general and administrative expenses in the fiscal 2013 consolidated statement of operations.
On September 23, 2013, we completed a secondary public stock offering of 7,100,000 shares of common stock at a price of $46.65 per share. The shares sold in the secondary public offering were registered under the Securities Act pursuant to our registration statement on Form S-3 (File 333-191210), which was declared effective by the Securities and Exchange Commission on September 17, 2013. All of the shares sold in the secondary public offering were sold by selling shareholders, and we did not receive any proceeds. The selling shareholders agreed to bear all of the offering expenses related to legal, accounting and other fees in connection with the secondary public offering.
Critical Accounting Policies and Estimates
We have identified the policies below as critical to our business operations and understanding of our consolidated results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect our reported and expected financial results. Our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. For a detailed discussion on the application of these and other accounting policies, see Note 1 in our annual consolidated financial statements included elsewhere in this Annual Report.
Inventories
Inventories consist of finished goods purchased for resale, including freight, and are stated at the lower of cost or marketand net realizable value, at the individual product level. Cost is determined on a weighted average cost method which approximates a FIFO (first-in, first-out) basis.method. The market value used in the lower of cost or market analysis is subject to the effects of consumer demands, customer preferences and the broader economy. The effects of the previously listed criteria are not controllable by management. Our management reviews inventory levels in order to identify obsolete and slow-moving merchandise as these factors can indicate a decline in the market value of inventory on hand. Inventory cost is reduced when the selling price less costs of disposal is below cost. We accrue an estimate for inventory shrink for the period between the last physical count and the balance sheet date. The shrink estimate can be affected by changes in merchandise mix and changes in actual shrink trends.
These estimates are derived using available data and our historical experience. Our estimates may be impacted by changes in certain underlying assumptions and may not be indicative of future activity.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Assets are grouped and evaluated for
impairment at the lowest level of which there are identifiable cash flows, which is generally at a store level. Assets are reviewed for impairment using factors including, but not limited to, our future operating plans and projected cash flows. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, then an impairment charge is recognized as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is based on discounted future cash flows of the asset using a discount rate commensurate with the risk. In the event of a store closure, we will record an impairment charge, if appropriate, or accelerate depreciation over the revised useful life of the asset. Based on the analysis performed, our management believes that there was no impairment of long-lived assets for each of the 20142017, 20132016 and 20122015 fiscal years. The impairment loss analysis requires management to apply judgment and make estimates.
Income Taxes
Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
We record a valuation allowance to reduce our deferred tax assets when uncertainty regarding their realizability exists. In assessing the realizability of deferred tax assets, our management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Our management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted. The TCJA includes a numbers of changes to existing U.S. tax laws that impact us, most notably a reduction of the U.S. corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. We will continue to analyze additional information and guidance related to the TCJA as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. In fiscal 2018 and future years, we may invest a portion of any savings generated by the TCJA into expenses that could significantly increase and impact the comparability between periods of Cost of Goods Sold and Gross Profit, Selling, General and Administrative Expenses and Operating Income.
Share-Based Compensation
Our share-based compensation expense is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense on a straight-line basis over the employee's requisite service period (generally the vesting period of the equity grant).
We recognize compensation expense based on the estimated grant date fair value of restricted stock awardsunits ("RSU") and useperformance-based restricted stock units ("PSU"). RSU and PSU vest in accordance with vesting conditions set by the compensation committee of our board of directors. RSU's granted to date have vesting periods ranging from less than one year to five years from the date of grant. PSU's granted to date have vesting periods ranging from one year to five years from the date of grant, including grants that have a cumulative three year performance period, subject to satisfaction of the applicable performance goals established for the respective grant. We periodically assess the probability of achievement of the performance criteria and adjusts the amount of compensation expense accordingly. Compensation is recognized over the vesting period and adjusted for the probability of achievement of the performance criteria.
We recognize compensation expense based on the Black-Scholes option-pricing model for grants of stock options. The determination of the grant date fair value of options using an option-pricing model is affected by a number of assumptions, such as our common stock fair value, our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends. As a result, if any of the inputs or assumptions used in the Black-Scholes model change significantly, share-based compensation for future awards may differ materially compared with the awards granted previously.
We account for share-based compensation for non-employee stock options by using the Black-Scholes option-pricing model and record expense as the options vest. Non-employee options subject to vesting are required to be periodically revalued over their service period, which is generally the same as the vesting period.
There are significant judgments and estimates inherent in the determination of fair value of share-based awards. These judgments and estimates include determinations of an appropriate valuation method and the selection of appropriate inputs to be used in the valuation model. The use of alternative assumptions, including expected term, volatility, risk-free interest rate and dividend yield, could cause share-based compensation to differ significantly from what has been recorded in the past.
Future share-based compensation cost will increase when we grant additional equity awards. Modifications, cancellations or repurchases of awards may require us to accelerate any remaining unearned share-based compensation cost or incur additional cost.
Prior to our IPO, we were a private company with no active public market for our common stock. Therefore, prior to the IPO, in connection with each grant of equity, the fair value of the common stock underlying the awards was determined by our board of directors, which intended all stock options granted to be exercisable at a price per share not less than the per share fair value of our common stock underlying those stock options on the date of grant. We determined the estimated per share fair
value of our common stock using contemporaneous valuations consistent with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, or the Practice Aid. In conducting these valuations, we considered all objective and subjective factors that we believed to be relevant, including our best estimate of our business condition, prospects and operating performance at the valuation date. Management, with the assistance of a third-party valuation firm engaged by us, used a range of factors, assumptions and methodologies to perform the valuations. The significant factors included:
the fact that we were a private retail company with illiquid securities;
our historical operating results;
our discounted future cash flows, based on our projected operating results;
the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an initial public offering or sale of our company, given prevailing market conditions;
valuation of comparable public companies at the time of grant;
the U.S. and global capital market conditions; and
outlook for our industry at the time of grant.
After review of the fair value analysis, our board of directors authorized the use of at least that fair value as the value for restricted shares granted and the exercise price for options granted on the date of that valuation report.
To determine the estimated fair value of our common stock in relation to stock grants prior to our IPO, we conducted valuation analyses with the assistance of a third-party valuation firm that had experience in the retail industry. We considered three enterprise value allocation methods outlined in the Practice Aid. The Practice Aid discussed three “top-down” methods that establish the fair value of the enterprise and then allocate this value among the various classes of equity. These methods are referred to as: (i) the current-value method, (ii) the option-pricing method and (iii) the probability-weighted expected return method, or PWERM. For our valuations, we used the PWERM for three discrete scenarios: continuation as a private company (i.e., no liquidity event), initial public offering, and strategic sale or merger. Management determined the likelihood of these various outcomes to further support the selection of this method.
Under the PWERM, the value of our common stock was estimated based upon an analysis of future enterprise values under the aforementioned scenarios. The future enterprise values were allocated among the various equity classes expected to be outstanding at the various liquidity events based on the rights and preferences of each class. The future value of the common stock under each liquidation event was then discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an indication of value for the common stock. For the continue as a private company scenario, discounts for lack of marketability and lack of control, to account for the illiquidity of the common stock and a minority holding, were applied to the indicated common stock value to determine the fair value of the common stock. As of each valuation date described below, the probability of an exit via an initial public offering or strategic sale or merger was considered significantly more likely than remaining a private company. As such, a lower probability was assigned to the continue as a private company scenario at each valuation date based on management's best estimate. Moreover, the exit via an initial public offering scenario was considered to be significantly more likely than an exit via a strategic sale or merger. Each of the liquidity event dates determined by management was weighted based on the likelihood of the initial public offering timing at these dates.
After consideration of conventional valuation approaches, we concluded that the income and market approach were most appropriate to determine the fair value of our common stock under the continuation as a private company scenario. The income approach is a valuation technique that provides an estimation of the fair value of a business based upon the cash flows that it can be expected to generate over time. The market approach is a valuation technique that provides an estimation of fair value based on market prices of publicly traded companies. With regard to weighting the conclusions that were reached by applying the income and market approaches, we considered the quality and the reliability of the data underlying each indication of value at each valuation date. Based on management's analysis of the underlying data, the weighting of value between the income and market approaches was adjusted to provide the most reliable indication of value. It was our opinion that while both approaches provide reliable value indications, the income approach was considered to provide a slightly more reliable indication of value because it assumed that a hypothetical investor in our securities would place more importance on the projected operations and forecasted future financial performance given the above average growth trajectory. Therefore, primary emphasis and weighting was placed on the income approach under the continue as a private company scenario.
Under the initial public offering scenario, the fair value of our common shares was based upon transactions of publicly traded companies (“guideline companies”) engaged in a line (or lines) of business similar to us (the “public company method”). In conjunction with guidance from our Board of Directors and independent valuation firm, a search for guideline companies was made which revealed numerous publicly-traded companies in the “discount stores” and “teen brands” retail industry. Beginning with our November 2011 valuation, guideline companies in the “high growth” retail industry were included in our
analysis to better compare the nature of our business with other comparable companies. Though the selected guideline companies differed in some respects from our business, they were generally influenced by similar business and economic conditions and were considered to offer alternative investment opportunities. The application of the public company method utilized market multiples based on current market prices together with historical and forecasted financial data of the publicly traded guideline companies. Selected market multiples derived in the analysis were then applied to our historical or projected financial results to arrive at indications of value.
Subsequent to the date of our IPO, the fair value of restricted stock awards are based on the closing price of our common stock on the grant date and the fair value of stock options are based on the Black-Scholes option-pricing model utilizing the closing price of our common stock on the grant date as the fair value of common stock in the model. We utilize the simplified method to estimate the expected term of the option. The expected volatility incorporates historical and implied volatility of similar entities whose share prices are publicly available. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update thatASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 clarifies the principles for recognizing revenue from contracts with customers. The update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers: Deferral of the Effective Date." ASU 2015-14 deferred the effective date of ASU 2014-09 to fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim periods within those annual periods. In the first six months of fiscal 2016, the FASB issued guidance clarifying the interpretation of certain principles of ASU 2014-09. On the effective date, we will adopt the provisions of ASU 2014-09 on a modified retrospective basis through an immaterial cumulative adjustment that will impact the opening balance of retained earnings related to the recognition of gift card breakage. These estimates may be refined as we finalize the implementation effort required to adopt the standard. In order to determine the impact of ASU 2014-09, our assessment included a detailed review of our revenue streams and a comparison of our historical accounting policies and practices to the new standard.
In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 requires that lease arrangements longer than 12 months result in an entity recognizing an asset and a liability. The updated guidance is effective for the interim and annual periods beginning on or after December 15, 2016.2018, and early adoption is permitted. The standard requires use of the modified retrospective transition approach. While we are currently evaluating this standard, given the significant amount of leases that we are party to, we expect this standard will have a significant impact on our consolidated financial statements from the recognition of right to use assets and related liabilities. We plan to adopt this standard in the first quarter of fiscal 2019, coinciding with the standard’s effective date.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 affects all entities that issue share-based payment awards to their employees. This accounting standards update allows for a “full retrospective” adoption, meaning the update is applied to all periods presented, or a “modified retrospective” adoption, meaning the update is applied onlymakes several modifications to the most current period presentedaccounting for employee share-based payment transactions, including the requirement that the excess income tax benefits or deficiencies that arise when the tax consequences of share-based compensation differ from amounts previously recognized in the financial statements. Early adoption isconsolidated statement of operations be recognized as income tax benefit or expense in the consolidated statement of operations rather than as additional paid-in capital in the consolidated balance sheet. The guidance also clarifies the classification of components of share-based awards on the consolidated statement of cash flows such that excess income tax benefits should not permitted. The Company is currently evaluatingbe presented separately from other income taxes in the impact that the update will have on its financial position, resultsconsolidated statement of operations, cash flows and, thus, should be classified as an operating activity rather than a financing activity as they are under the current guidance. ASU 2016-09 is effective for financial statement disclosures.statements issued for annual reporting periods beginning after December 15, 2016 and interim periods within those years. We adopted this standard prospectively in the first quarter of fiscal 2017. This standard will result in a decrease or increase to our effective tax rate, net income, and earnings per share based upon the requirement to recognize the excess income tax benefits or deficiencies in the consolidated statements of operations and change our earnings per share calculation to exclude excess tax benefits previously assumed under the treasury stock method. No changes were required related to the classification of employee taxes paid for withheld shares in our consolidated statements of cash flows since we have historically classified these within financing cash flows.
Contractual Obligations
The following table summarizes, as of January 31, 2015February 3, 2018, our minimum rental commitments under operating lease agreements including assumed extensions, minimum payments for long-term debt and other obligations in future periods:
| | | (In millions) | Payments Due By Period | Payments Due By Period |
Total (1) | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | Total (1) | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Operating lease obligations (2) | $ | 539.6 |
| | $ | 64.7 |
| | $ | 129.5 |
| | $ | 125.4 |
| | $ | 220.0 |
| $ | 948.0 |
| | $ | 117.6 |
| | $ | 244.1 |
| | $ | 220.4 |
| | $ | 365.9 |
|
Purchase obligations (3) | 2.9 |
| | 2.9 |
| | — |
| | — |
| | — |
| 4.9 |
| | 4.9 |
| | — |
| | — |
| | — |
|
| Total | $ | 542.5 |
| | $ | 67.6 |
| | $ | 129.5 |
| | $ | 125.4 |
| | $ | 220.0 |
| $ | 952.9 |
| | $ | 122.5 |
| | $ | 244.1 |
| | $ | 220.4 |
| | $ | 365.9 |
|
| |
| (1) | The amounts in this table exclude obligations under employment agreements. For a discussion of the compensation of our executive officers, see Part III, Item 11 “Executive Compensation”. |
| |
| (2) | Our store leases generally have initial lease terms of 10 years and include renewal options on substantially the same terms and conditions as the original lease. Also included in operating leases are our leases for the corporate office, distribution centers and distribution centers. We signed a lease for a new distribution center in Pedricktown, New Jersey, which we expect to begin in fiscal 2015, that has future minimum lease payments of approximately $44.6 million and expires in 2025.other. |
| |
| (3) | Purchase obligations are primarily for materials that will be used in the construction of new stores and purchase commitments for infrastructure and systems that will be used by the corporate office and distribution centers. |
From February 1, 20154, 2018 to March 26, 201522, 2018, we committed to 1015 new store leases with terms of 10 years that have future minimum lease payments of approximately $24.2$28.9 million.
Off Balance Sheet Arrangements
For the fiscal year ended January 31, 2015February 3, 2018, except for operating leases entered into in the normal course of business, we were not party to any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, net sales, expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our principal market risk relates to interest rate sensitivity, which is the risk that future changes in interest rates will reduce our net income or net assets. We have short-term investment securities that are interest-bearing securities and if there are changes in interest rates, those changes would affect the interest income we earn on these investments and, therefore, impact our cash flows and results of operations. However, due to the short term nature of our investment portfolio, we do not believe an immediate 100 basis point increase or decrease in interest rates would have a material effect on the fair market value of our portfolio, and accordingly we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.
We also have an Amended Revolving Credit Facility which includes a revolving line of credit, with advances tied to a borrowing base, which bears interest at a variable rate. Because our Amended Revolving Credit Facility bears interest at a variable rate, we will be exposed to market risks relating to changes in interest rates.
As of January 31, 2015,February 3, 2018, we had no borrowings outstanding underapproximately $20 million available on the Revolving Credit Facility.line of credit. The Amended Revolving Credit Facility provides forreduces the interest rate payable on borrowings to be, at the Company'sour option, ata per annum rate equal to (a) a prime rate plus a margin of (i) 0.75%if excess availability is greater than or equal to 75%, (ii) 1.0% if excess availability is less than 75%but greater than or equal to 33% or (iii) 1.25%if excess availability is less than 33% or (b) a LIBOR-based rate plus a margin of (i) 1.75% if excess availability is greater than or1.00%. Letter of credit fees are equal to 75%, (ii)2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%.the interest rate payable on LIBOR-based loans. The interest rate and letter of credit fees under the Amended Revolving Credit Facility further provides for a letterare subject to an increase of credit fee equal to the LIBOR-based rate plus (i) 1.75% if excess availability is greater than or equal to 75%, (ii) 2.00%if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. per annum upon an event of default. We do not use derivative financial instruments for speculative or trading purposes, but this does not preclude our adoption of specific hedging strategies in the future.
Impact of Inflation
Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. We cannot assure you, however, that our results of operations and financial condition will not be materially impacted by inflation in the future.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIVE BELOW, INC.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
TheTo the Shareholders and Board of Directors and Shareholders
Five Below, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Five Below, Inc. and subsidiary(the “Company”) as of February 3, 2018 and January 31, 2015 and February 1, 2014, and28, 2017, the related consolidated statements of operations, changes in convertible preferred stock and shareholders’ equity, (deficit), and cash flows for each of the fiscal years in the three-year period ended February 3, 2018, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February 3, 2018 and January 31, 2015. 28, 2017, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended February 3, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of February 3, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 22, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Five Below, Inc. and subsidiary as of January 31, 2015 and February 1, 2014, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended January 31, 2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Five Below, Inc.’s internal control over financial reporting as of January 31, 2015, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 26, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
We have served as the Company's auditor since 2002.
Philadelphia, Pennsylvania
March 26, 201522, 2018
FIVE BELOW, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
| | | | January 31, 2015 | | February 1, 2014 | February 3, 2018 | | January 28, 2017 |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 63,186 |
| | $ | 50,184 |
| $ | 112,669 |
| | $ | 76,088 |
|
| Short-term investment securities | | 131,958 |
| | 77,791 |
|
| Inventories | 115,652 |
| | 89,377 |
| 187,037 |
| | 154,448 |
|
| Prepaid income taxes | 1,939 |
| | 1,497 |
| 2,264 |
| | 1,552 |
|
| Deferred income taxes | 8,623 |
| | 4,586 |
| |
| Prepaid expenses and other current assets | 18,180 |
| | 15,255 |
| 45,434 |
| | 29,910 |
|
| Total current assets | 207,580 |
| | 160,899 |
| 479,362 |
| | 339,789 |
|
| Property and equipment, net | 86,998 |
| | 70,381 |
| 180,349 |
| | 138,376 |
|
| Deferred income taxes | — |
| | 232 |
| 6,676 |
| | 11,039 |
|
| Long-term investment securities | | 27,702 |
| | 10,514 |
|
| Other assets | 284 |
| | 542 |
| 1,619 |
| | 818 |
|
| $ | 294,862 |
| | $ | 232,054 |
| $ | 695,708 |
| | $ | 500,536 |
|
| | | | | | |
| Liabilities and Shareholders’ Equity | | | | | | |
| Current liabilities: | | | | | | |
| Line of credit | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
|
| Current portion of note payable | — |
| | 19,500 |
| |
| Accounts payable | 39,222 |
| | 34,013 |
| 73,033 |
| | 51,178 |
|
| Income taxes payable | 14,442 |
| | 6,007 |
| 25,275 |
| | 23,939 |
|
| Accrued salaries and wages | 5,275 |
| | 2,672 |
| 22,906 |
| | 10,794 |
|
| Other accrued expenses | 20,462 |
| | 17,550 |
| 43,246 |
| | 30,652 |
|
| Total current liabilities | 79,401 |
| | 79,742 |
| 164,460 |
| | 116,563 |
|
| Deferred rent and other | 40,450 |
| | 35,439 |
| 72,690 |
| | 52,568 |
|
| Deferred income taxes | 742 |
| | — |
| |
| Total liabilities | 120,593 |
| | 115,181 |
| 237,150 |
| | 169,131 |
|
| Commitments and contingencies (note 4) |
|
| |
|
|
|
| |
|
|
Shareholders’ equity:
| | | | | | |
| Common stock, $0.01 par value. Authorized 120,000,000 shares; issued and outstanding 54,420,228 and 54,190,724 shares, respectively. | 544 |
| | 542 |
| |
| Common stock, $0.01 par value. Authorized 120,000,000 shares; issued and outstanding 55,438,089 and 54,904,954 shares, respectively. | | 554 |
| | 549 |
|
| Additional paid-in capital | 293,992 |
| | 284,622 |
| 346,300 |
| | 321,603 |
|
| Accumulated deficit | (120,267 | ) | | (168,291 | ) | |
| Retained earnings | | 111,704 |
| | 9,253 |
|
| Total shareholders’ equity | 174,269 |
| | 116,873 |
| 458,558 |
| | 331,405 |
|
| | $ | 294,862 |
| | $ | 232,054 |
| $ | 695,708 |
| | $ | 500,536 |
|
See accompanying notes to consolidated financial statements.
FIVE BELOW, INC.
Consolidated Statements of Operations
(in thousands, except share and per share data)
| | | | Fiscal Year | Fiscal Year |
| 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Net sales | $ | 680,218 |
| | $ | 535,402 |
| | $ | 418,825 |
| $ | 1,278,208 |
| | $ | 1,000,410 |
| | $ | 831,954 |
|
| Cost of goods sold | 442,427 |
| | 347,386 |
| | 268,989 |
| 814,795 |
| | 643,373 |
| | 540,020 |
|
| Gross profit | 237,791 |
| | 188,016 |
| | 149,836 |
| 463,413 |
| | 357,037 |
| | 291,934 |
|
| Selling, general and administrative expenses | 160,775 |
| | 134,279 |
| | 112,182 |
| 306,022 |
| | 243,075 |
| | 198,993 |
|
| Operating income | 77,016 |
| | 53,737 |
| | 37,654 |
| 157,391 |
| | 113,962 |
| | 92,941 |
|
| Interest expense, net | 125 |
| | 1,513 |
| | 2,374 |
| |
| Loss on debt extinguishment | 244 |
| | 266 |
| | 1,594 |
| |
| Other income | (12 | ) | | — |
| | (408 | ) | |
| Interest income, net | | 1,458 |
| | 299 |
| | 40 |
|
| Other expense | | — |
| | — |
| | 325 |
|
| Income before income taxes | 76,659 |
| | 51,958 |
| | 34,094 |
| 158,849 |
| | 114,261 |
| | 92,656 |
|
| Income tax expense | 28,635 |
| | 19,816 |
| | 14,069 |
| 56,398 |
| | 42,421 |
| | 34,976 |
|
| Net income | 48,024 |
| | 32,142 |
| | 20,025 |
| $ | 102,451 |
| | $ | 71,840 |
| | $ | 57,680 |
|
| Dividend paid to preferred and unvested restricted shareholders | — |
| | — |
| | (65,403 | ) | |
| Net income attributable to participating securities | (20 | ) | | (465 | ) | | — |
| |
| Net income (loss) attributable to common shareholders | $ | 48,004 |
| | $ | 31,677 |
| | $ | (45,378 | ) | |
| Basic income (loss) per common share | $ | 0.89 |
| | $ | 0.59 |
| | $ | (1.28 | ) | |
| Diluted income (loss) per common share | $ | 0.88 |
| | $ | 0.59 |
| | $ | (1.28 | ) | |
| Dividends declared and paid per common share | $ | — |
| | $ | — |
| | $ | 2.02 |
| |
| Basic income per common share | | $ | 1.86 |
| | $ | 1.31 |
| | $ | 1.06 |
|
| Diluted income per common share | | $ | 1.84 |
| | $ | 1.30 |
| | $ | 1.05 |
|
| Weighted average shares outstanding: |
| |
| |
|
| |
| |
|
| Basic shares | 54,219,801 |
| | 53,294,805 |
| | 35,444,200 |
| 55,208,246 |
| | 54,845,708 |
| | 54,513,622 |
|
| Diluted shares | 54,573,855 |
| | 53,741,860 |
| | 35,444,200 |
| 55,561,472 |
| | 55,128,870 |
| | 54,793,301 |
|
See accompanying notes to consolidated financial statements.
FIVE BELOW, INC.
Consolidated Statements of Changes in Convertible Preferred Stock and Shareholders’ Equity (Deficit)
(in thousands, except share and per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Series A 8% Convertible Preferred Stock | | Shareholders’ Equity (Deficit) |
| | Common stock | | Additional paid-in capital | | Accumulated deficit | | Total shareholders’ equity (deficit) |
| |
| | Shares | | Amount | | Shares | | Amount | |
| | Balance, January 28, 2012 | 89,291,773 |
| | $ | 191,855 |
| | 16,248,797 |
| | $ | 162 |
| | $ | 3,691 |
| | $ | (133,612 | ) | | $ | (129,759 | ) |
| | Issuance of warrants to purchase common stock to professional service providers | — |
| | — |
| | — |
| | — |
| | 43 |
| | — |
| | 43 |
|
| | Share-based compensation expense | — |
| | — |
| | 2,027,678 |
| | 20 |
| | 12,122 |
| | — |
| | 12,142 |
|
| | Exercise of options and warrants to purchase common stock | — |
| | — |
| | 31,898 |
| | 1 |
| | 238 |
| | — |
| | 239 |
|
| | Vesting of restricted shares related to stock option exercises | — |
| | — |
| | — |
| | — |
| | 802 |
| | — |
| | 802 |
|
| | Repurchase of unvested restricted shares related to stock option exercises | — |
| | — |
| | (30,221 | ) | | — |
| | 3 |
| | — |
| | 3 |
|
| | Conversion of preferred stock | (89,291,773 | ) | | (191,855 | ) | | 30,894,953 |
| | 309 |
| | 191,546 |
| | — |
| | 191,855 |
|
| | Issuance of common stock, net of issuance costs of $8,533 | — |
| | — |
| | 4,807,692 |
| | 48 |
| | 73,150 |
| | — |
| | 73,198 |
|
| | Dividend paid to shareholders | — |
| | — |
| | — |
| | — |
| | (12,605 | ) | | (86,846 | ) | | (99,451 | ) |
| | Excess tax benefit related to restricted shares and exercises of stock options and warrants | — |
| | — |
| | — |
| | — |
| | 1,647 |
| | — |
| | 1,647 |
|
| | Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 20,025 |
| | 20,025 |
|
| | Balance, February 2, 2013 | — |
| | — |
| | 53,980,797 |
| | 540 |
| | 270,637 |
| | (200,433 | ) | | 70,744 |
|
| | Share-based compensation expense | — |
| | — |
| | 10,069 |
| | — |
| | 9,854 |
| | — |
| | 9,854 |
|
| | Exercise of options to purchase common stock | — |
| | — |
| | 196,941 |
| | 2 |
| | 1,482 |
| | — |
| | 1,484 |
|
| | Vesting of restricted shares related to stock option exercises | — |
| | — |
| | — |
| | — |
| | 239 |
| | — |
| | 239 |
|
| | Repurchase of unvested restricted shares related to stock option exercises | — |
| | — |
| | (648 | ) | | — |
| | — |
| | — |
| | — |
|
| | Excess tax benefit related to exercises of stock options | — |
| | — |
| | — |
| | — |
| | 2,262 |
| | — |
| | 2,262 |
|
| | Issuance of common stock to employees under employee stock purchase plan | — |
| | — |
| | 3,565 |
| | — |
| | 148 |
| | — |
| | 148 |
|
| | Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 32,142 |
| | 32,142 |
|
| | Balance, February 1, 2014 | — |
| | — |
| | 54,190,724 |
| | 542 |
| | 284,622 |
| | (168,291 | ) | | 116,873 |
|
| | Share-based compensation expense | — |
| | — |
| | — |
| | — |
| | 5,757 |
| | — |
| | 5,757 |
|
| | Issuance of unrestricted stock awards
| — |
| | — |
| | 4,324 |
| | — |
| | 160 |
| | — |
| | 160 |
|
| | Exercise of options to purchase common stock | — |
| | — |
| | 207,809 |
| | 2 |
| | 1,479 |
| | — |
| | 1,481 |
|
| | Vesting of restricted shares
| — |
| | — |
| | — |
| | — |
| | 61 |
| | — |
| | 61 |
|
| | Vesting of restricted stock units | — |
| | — |
| | 22,286 |
| | — |
| | — |
| | — |
| | — |
|
| | Purchase and retirement of treasury shares | — |
| | — |
| | (9,173 | ) | | — |
| | (314 | ) | | — |
| | (314 | ) |
| | Repurchase of unvested restricted shares related to stock option exercises
| — |
| | — |
| | (87 | ) | | — |
| | (1 | ) | | — |
| | (1 | ) |
| | Excess tax benefit related to exercises of stock options | — |
| | — |
| | — |
| | — |
| | 2,049 |
| | — |
| | 2,049 |
|
| | Issuance of common stock to employees under employee stock purchase plan | — |
| | — |
| | 4,345 |
| | — |
| | 179 |
| | — |
| | 179 |
|
| | Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 48,024 |
| | 48,024 |
|
| | Balance, January 31, 2015 | — |
| | $ | — |
| | 54,420,228 |
| | $ | 544 |
| | $ | 293,992 |
| | $ | (120,267 | ) | | $ | 174,269 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | | Common stock | | Additional paid-in capital | | Retained earnings (accumulated deficit) | | Total shareholders’ equity |
| |
| | Shares | | Amount | |
| | Balance, February 1, 2015 | 54,420,228 |
| | $ | 544 |
| | $ | 293,992 |
| | $ | (120,267 | ) | | $ | 174,269 |
|
| | Share-based compensation expense | — |
| | — |
| | 10,876 |
| | — |
| | 10,876 |
|
| | Issuance of unrestricted stock awards
| 7,947 |
| | — |
| | 280 |
| | — |
| | 280 |
|
| | Exercise of options to purchase common stock
| 115,364 |
| | 2 |
| | 910 |
| | — |
| | 912 |
|
| | Vesting of restricted stock units | 51,546 |
| | — |
| | — |
| | — |
| | — |
|
| | Common shares withheld for taxes | (9,462 | ) | | — |
| | (322 | ) | | — |
| | (322 | ) |
| | Excess tax benefit related to exercises of stock options | — |
| | — |
| | 608 |
| | — |
| | 608 |
|
| | Issuance of common stock to employees under employee stock purchase plan | 5,018 |
| | — |
| | 178 |
| | — |
| | 178 |
|
| | Net income | — |
| | | | — |
| | 57,680 |
| | 57,680 |
|
| | Balance, January 30, 2016 | 54,590,641 |
| | 546 |
| | 306,522 |
| | (62,587 | ) | | 244,481 |
|
| | Share-based compensation expense | — |
| | — |
| | 11,655 |
| | — |
| | 11,655 |
|
| | Issuance of unrestricted stock awards
| 6,781 |
| | — |
| | 280 |
| | | | 280 |
|
| | Exercise of options to purchase common stock
| 225,767 |
| | 2 |
| | 3,287 |
| | — |
| | 3,289 |
|
| | Vesting of restricted stock units | 123,428 |
| | 1 |
| | — |
| | — |
| | 1 |
|
| | Common shares withheld for taxes | (46,750 | ) | | — |
| | (1,904 | ) | | — |
| | (1,904 | ) |
| | Excess tax benefit related to exercises of stock options, vesting of restricted stock units, and vesting of performance-based restricted stock units | — |
| | — |
| | 1,555 |
| | — |
| | 1,555 |
|
| | Issuance of common stock to employees under employee stock purchase plan | 5,087 |
| | — |
| | 208 |
| | — |
| | 208 |
|
| | Net income | — |
| | — |
| | — |
| | 71,840 |
| | 71,840 |
|
| | Balance, January 28, 2017 | 54,904,954 |
| | 549 |
| | 321,603 |
| | 9,253 |
| | 331,405 |
|
| | Share-based compensation expense | — |
| | — |
| | 16,114 |
| | — |
| | 16,114 |
|
| | Issuance of unrestricted stock awards
| 4,464 |
| | — |
| | 238 |
| | — |
| | 238 |
|
| | Exercise of options to purchase common stock | 327,980 |
| | 3 |
| | 9,598 |
| | — |
| | 9,601 |
|
| | Vesting of restricted stock units and performance-based restricted stock units | 229,553 |
| | 2 |
| | — |
| | — |
| | 2 |
|
| | Common shares withheld for taxes | (33,327 | ) | | — |
| | (1,504 | ) | | — |
| | (1,504 | ) |
| | Issuance of common stock to employees under employee stock purchase plan | 4,465 |
| | — |
| | 251 |
| | — |
| | 251 |
|
| | Net income | — |
| | — |
| | — |
| | 102,451 |
| | 102,451 |
|
| | Balance, February 3, 2018 | 55,438,089 |
| | $ | 554 |
| | $ | 346,300 |
| | $ | 111,704 |
| | $ | 458,558 |
|
See accompanying notes to consolidated financial statements.
FIVE BELOW, INC.
Consolidated Statements of Cash Flows
| | | | Fiscal Year | Fiscal Year |
| 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Operating activities: | | | | | | | | | | |
| Net income | $ | 48,024 |
| | $ | 32,142 |
| | $ | 20,025 |
| $ | 102,451 |
| | $ | 71,840 |
| | $ | 57,680 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| | | | |
|
| Depreciation and amortization | 17,202 |
| | 13,469 |
| | 9,599 |
| 33,241 |
| | 26,631 |
| | 22,227 |
|
| Gain on conversion of note payable | — |
| | — |
| | (200 | ) | |
| Loss on debt extinguishment | 244 |
| | 266 |
| | 1,594 |
| |
| Loss on disposal of property and equipment | 175 |
| | 515 |
| | 58 |
| |
| Amortization of deferred financing costs | 25 |
| | 251 |
| | 455 |
| |
| Warrant expense related to professional service providers for services rendered | — |
| | — |
| | 43 |
| |
| Share-based compensation expense | 5,931 |
| | 10,092 |
| | 12,324 |
| 16,373 |
| | 11,953 |
| | 11,172 |
|
| Deferred income tax (benefit) expense | (3,063 | ) | | (5,074 | ) | | 3,812 |
| |
| Deferred income tax expense (benefit) | | 4,363 |
| | (2,532 | ) | | (626 | ) |
| Other non-cash expenses | | 138 |
| | 109 |
| | 59 |
|
| Changes in operating assets and liabilities: |
| |
| |
|
| |
| |
|
| Inventories | | (32,589 | ) | | (6,079 | ) | | (32,718 | ) |
| Prepaid income taxes | (442 | ) | | (1,461 | ) | | (36 | ) | (1,277 | ) | | (211 | ) | | 598 |
|
| Inventories | (26,275 | ) | | (28,546 | ) | | (22,041 | ) | |
| Prepaid expenses and other assets | (2,936 | ) | | (3,597 | ) | | (4,133 | ) | (16,366 | ) | | (14,875 | ) | | 2,561 |
|
| Accounts payable | 3,060 |
| | 4,083 |
| | 3,369 |
| 19,809 |
| | (5,451 | ) | | 17,578 |
|
| Income taxes payable | 8,435 |
| | (1,076 | ) | | (2,056 | ) | 1,902 |
| | 11,997 |
| | (2,500 | ) |
| Accrued salaries and wages | 2,603 |
| | (1,532 | ) | | (5,050 | ) | 12,112 |
| | 3,133 |
| | 2,386 |
|
| Deferred rent | 5,669 |
| | 8,384 |
| | 7,723 |
| 15,886 |
| | 7,855 |
| | 6,398 |
|
| Other accrued expenses | 2,778 |
| | 3,271 |
| | 4,877 |
| 11,338 |
| | 2,252 |
| | 3,098 |
|
| Net cash provided by operating activities | 61,430 |
| | 31,187 |
| | 30,363 |
| 167,381 |
| | 106,622 |
| | 87,913 |
|
| Investing activities: | | |
| |
| | |
| |
|
| Purchases of investment securities | | (234,856 | ) | | (119,746 | ) | | (46,335 | ) |
| Sales, maturities, and redemptions of investment securities | | 163,501 |
| | 77,776 |
| | — |
|
| Capital expenditures | (32,322 | ) | | (25,931 | ) | | (22,890 | ) | (67,795 | ) | | (44,794 | ) | | (53,059 | ) |
| Net cash used in investing activities | (32,322 | ) | | (25,931 | ) | | (22,890 | ) | (139,150 | ) | | (86,764 | ) | | (99,394 | ) |
| Financing activities: | | |
| |
| | |
| |
|
| Borrowing on note payable under Term Loan Facility | — |
| | — |
| | 100,000 |
| |
| Repayment of note payable under Term Loan Facility | (19,500 | ) | | (15,000 | ) | | (65,500 | ) | |
| Borrowing on note payable under Revolving Credit Facility | 7,000 |
|
| — |
| | — |
| |
| Repayment of note payable under Revolving Credit Facility | (7,000 | ) |
| — |
| | — |
| |
| Cash paid for debt financing costs | — |
| | (40 | ) | | (2,751 | ) | |
| Repayment of other note payable | — |
| | — |
| | (50 | ) | |
| Net proceeds from issuance of common stock | 179 |
| | 148 |
| | 73,198 |
| 251 |
| | 208 |
| | 178 |
|
Proceeds from exercise of warrants and options to purchase common stock
| 1,481 |
| | 1,484 |
| | 239 |
| |
| Repurchase of common stock | (314 | ) | | — |
| | — |
| |
| Repurchase of unvested restricted shares related to stock option exercises | (1 | ) | | (7 | ) | | (17 | ) | |
| Dividends paid to shareholders | — |
| | — |
| | (99,451 | ) | |
| Excess tax benefit related to restricted shares and exercise of stock options and warrants | 2,049 |
| | 2,262 |
| | 1,647 |
| |
| Net cash (used in) provided by financing activities | (16,106 | ) | | (11,153 | ) | | 7,315 |
| |
Proceeds from exercise of options to purchase common stock and vesting of restricted and performance-based restricted stock units
| | 9,603 |
| | 3,290 |
| | 912 |
|
| Common shares withheld for taxes | | (1,504 | ) | | (1,904 | ) | | (322 | ) |
| Excess tax benefit related to exercises of stock options and vesting of restricted and performance-based restricted stock units | | — |
| | 1,555 |
| | 608 |
|
| Net cash provided by financing activities | | 8,350 |
| | 3,149 |
| | 1,376 |
|
| Net increase (decrease) in cash and cash equivalents | 13,002 |
| | (5,897 | ) | | 14,788 |
| 36,581 |
| | 23,007 |
| | (10,105 | ) |
| Cash and cash equivalents at beginning of year | 50,184 |
| | 56,081 |
| | 41,293 |
| 76,088 |
| | 53,081 |
| | 63,186 |
|
| Cash and cash equivalents at end of year | $ | 63,186 |
| | $ | 50,184 |
| | $ | 56,081 |
| $ | 112,669 |
| | $ | 76,088 |
| | $ | 53,081 |
|
| Supplemental disclosures of cash flow information: |
| |
| |
|
| |
| |
|
| Interest paid | $ | 129 |
| | $ | 1,259 |
| | $ | 2,056 |
| $ | 4 |
| | $ | 10 |
| | $ | 25 |
|
| Income taxes paid | $ | 21,587 |
| | $ | 25,039 |
| | $ | 10,803 |
| $ | 51,405 |
| | $ | 31,762 |
| | $ | 36,897 |
|
| Non-cash investing activities | | | | | | | | | | |
| (Decrease) increase in accrued purchases of property and equipment | $ | (1,673 | ) | | $ | 606 |
| | $ | (3,770 | ) | |
| Increase in accounts payable and accrued purchases of property and equipment | | $ | 3,093 |
| | $ | 511 |
| | $ | 1,986 |
|
See accompanying notes to consolidated financial statements.
Five Below, Inc.FIVE BELOW, INC.
Notes to Consolidated Financial Statements
| |
| (1) | Summary of Significant Accounting Policies |
| |
| (a) | Description of Business |
Five Below, Inc. (collectively with its wholly owned subsidiary as the "Company") is a specialty value retailer offering merchandise targeted at the teen and pre-teen demographic. The Company offers an edited assortment of products, priced at $5 and below. The Company’s edited assortment of products includes select brands and licensed merchandise. The Company believes its merchandise is readily available and that there are a number of potential vendors that could be utilized, if necessary, under approximately the same terms the Company is currently receiving; thus, it is not dependent on a single vendor or a group of vendors.
The Company is incorporated in the Commonwealth of Pennsylvania and, as of January 31, 2015,February 3, 2018, operated in 2132 states that include Pennsylvania, New Jersey, Delaware, Maryland, Virginia, Massachusetts, New Hampshire, West Virginia, North Carolina, New York, Connecticut, Rhode Island, Ohio, Illinois, Indiana, Michigan, Missouri, Georgia, Texas, Tennessee, Maine, Alabama, Kentucky, Kansas, Florida, South Carolina, Mississippi, Louisiana, Wisconsin, Oklahoma, Minnesota and Maine.California. As of February 3, 2018 and January 31, 2015 and February 1, 2014,28, 2017, the Company operated 366625 stores and 304522 stores, respectively, each operating under the name “Five Below.”
On June 12, 2013,Below”, and in August 2016, the Company completed an internal business restructuring pursuant to whichcommenced selling merchandise on the Company formed Five Below Merchandising, Inc., a wholly-owned subsidiary (the “Subsidiary”), and transferred to the Subsidiary assets, operations and employees related tointernet, through the Company's merchandising operations (the “Restructuring”). Following the Restructuring, the Subsidiary purchases and sells to the Company certain goods for sale at the Company's retail locations, and the Company provides to the Subsidiary back office support, office space and other services, in each case, pursuant to agreements between the Company and the Subsidiary. fivebelow.com e-commerce website.
The Company's consolidated financial statements include the accounts of Five Below, Inc. and the Subsidiary.its subsidiary (Five Below Merchandising, Inc.). All intercompany transactions and accounts are eliminated in the consolidation of the Company's and Subsidiary'ssubsidiary's financial statements.
The Company operates on a 52/53-week fiscal year ending on the Saturday closest to January 31. References to “fiscal"fiscal year 2014”2017" or “fiscal 2014”"fiscal 2017" refer to the period from January 29, 2017 to February 2, 20143, 2018, which consists of a 53-week fiscal year. References to "fiscal year 2016" or "fiscal 2016" refer to the period from January 31, 2016 to January 31, 2015 and28, 2017, which consists of a 52-week fiscal year. References to “fiscal year 2013”2015” or “fiscal 2013”2015” refer to the period from February 3, 20131, 2015 to February 1, 2014 andJanuary 30, 2016, which consists of a 52-week fiscal year. References to “fiscal year 2012” or “fiscal 2012” refer to the period from January 29, 2012 to February 2, 2013 and consists of a 53-week fiscal year.
| |
| (c) | Cash and Cash Equivalents |
The Company considers all highly liquid investments purchased with a maturity date of three months or less when purchased to be cash equivalents. Our cash equivalents consist of credit and debit card transactions andreceivables, money market funds, corporate bonds and municipal bonds, which are classified as cash and cash equivalents in the accompanying consolidated balance sheets. The majority of payments due from banks for third-party credit card and debit card transactions resulting from customer purchases at the Company’s retail stores process within 24 to 48 hours, except for transactions occurring on a Friday, which are generally processed the following Monday. Amounts due from banks for these transactions classified as cash equivalents totaled $3.1$6.0 million and $2.3$4.3 million as of January 31, 2015February 3, 2018 and February 1, 2014January 28, 2017, respectively. Book overdrafts, which are outstanding checks in excess of funds on deposit, are recorded within accounts payable in the accompanying consolidated balance sheets and within operating activities in the accompanying consolidated statements of cash flows. As of February 3, 2018 and January 31, 2015 and February 1, 2014,28, 2017, the Company had cash and cash equivalents of $63.2$91.2 million and $50.2 million. The Company’s cash accounts are primarily maintained with one financial institution.$36.3 million, respectively.
| |
| (d) | Fair Value of Financial Instruments |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation at the measurement date:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Inputs, other than Level 1, that are either directly or indirectly observable.
Level 3: Unobservable inputs developed using the Company’s estimates and assumptions which reflect those that market participants would use.
The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement.
The Company’s financial instruments consist primarily of cash equivalents, short-term and long-term investment securities, accounts payable, and borrowings under a line of credit (as defined in note 3). The Company believes that: (1) the carrying value of cash equivalents and accounts payable are representative of their respective fair value due to the short-term nature of these instruments; and (2) the carrying value of the any current or future borrowings under the line of credit approximates their fair value because the line of credit’s interest rates vary with market interest rates. Under the fair value hierarchy, the fair market values of the investments in corporate bonds are level 1 while the investments in municipal bonds are level 2. The fair market values of level 2 investments are determined by management with the assistance of a third party pricing service. Since quoted prices in active markets for identical assets are not available, these prices are determined by the third party pricing service using observable market information such as quotes from less active markets and quoted prices of similar securities.
As of February 3, 2018 and January 31, 201528, 2017, the Company's short-term and February 1, 2014,long-term investment securities are classified as held-to-maturity since the Company had cash equivalents of $43.1 millionhas the intent and $2.3 million, respectively. The Company’s cash equivalentsability to hold the investments to maturity. Such securities are carried at amortized cost plus accrued interest and consist of creditthe following (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | As of February 3, 2018 |
| | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Market Value |
| Short-term: | | | | | | | | |
| Corporate bonds | | $ | 117,373 |
| | $ | — |
| | $ | 177 |
| | $ | 117,196 |
|
| Municipal bonds | | 14,585 |
| | — |
| | — |
| | 14,585 |
|
| Total | | $ | 131,958 |
| | $ | — |
| | $ | 177 |
| | $ | 131,781 |
|
| | | | | | | | | |
| Long-term: | | | | | | | | |
| Corporate bonds | | $ | 25,465 |
| | $ | — |
| | $ | 170 |
| | $ | 25,295 |
|
| Municipal bonds | | 2,237 |
| | — |
| | 2 |
| | 2,235 |
|
| Total | | $ | 27,702 |
| | $ | — |
| | $ | 172 |
| | $ | 27,530 |
|
|
| | | | | | | | | | | | | | | | |
| | | As of January 28, 2017 |
| | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Market Value |
| Short-term: | | | | | | | | |
| Corporate bonds | | $ | 45,558 |
| | $ | — |
| | $ | 98 |
| | $ | 45,460 |
|
| Municipal bonds | | 32,233 |
| | — |
| | 14 |
| | 32,219 |
|
| Total | | $ | 77,791 |
| | $ | — |
| | $ | 112 |
| | $ | 77,679 |
|
| | | | | | | | | |
| Long-term: | | | | | | | | |
| Corporate bonds | | $ | 6,265 |
| | $ | — |
| | $ | 11 |
| | $ | 6,254 |
|
| Municipal bonds | | 4,249 |
| | 8 |
| | — |
| | 4,257 |
|
| Total | | $ | 10,514 |
| | $ | 8 |
| | $ | 11 |
| | $ | 10,511 |
|
Short-term investment securities as of February 3, 2018 and debit card receivablesJanuary 28, 2017 all mature in one year or less. Long-term investment securities as of February 3, 2018 and money market funds. Fair value for cash equivalents were determined based on Level 1 inputs.January 28, 2017 all mature after one year but in less than three years.
Inventories consist of finished goods purchased for resale, including freight, and are stated at the lower of cost or marketand net realizable value, at the individual product level. Cost is determined on a weighted average cost method which approximates a FIFO (first-in, first-out) basis due to the nature of the Company's inventory.method. Management of the Company reviews inventory levels in order to identify slow-moving merchandise and uses markdowns to clear merchandise. Inventory cost is reduced when the selling price less costs of disposal is below cost. The Company accrues an estimate for inventory shrink for the period between the last physical count and the balance sheet date. The shrink estimate can be affected by changes in merchandise mix and changes in actual shrink trends.
| |
| (f) | Prepaid Expenses and Other Current Assets |
Prepaid expenses in fiscal 2017 and fiscal 2016 were $17.8 million and $13.5 million, respectively. Other current assets in fiscal 2017 and fiscal 2016 were $27.6 million and $16.4 million, respectively.
| |
| (g) | Property and Equipment |
Property and equipment are stated at cost. Additions and improvements are capitalized, while repairs and maintenance are charged to expense as incurred.
Depreciation and amortization is recorded using the straight-line method over the shorter of the estimated useful lives of the assets or the terms of the respective leases, if applicable. The estimated useful lives are three to ten years for furniture and fixtures and computers and equipment. Store leasehold improvements are amortized over the shorter of the useful life or the lease term plus assumed extensions, which is generally 10 years. Leasehold improvements located in the distribution centers and the new corporate headquarters are amortized over the shorter of the useful life or the lease term. Depreciation and amortization expense for property and equipment, which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations, was $17.2$33.2 million, $13.5$26.6 million and $9.6$22.2 million in fiscal 20142017, fiscal 20132016 and fiscal 20122015, respectively.
Property and equipment, net, consists of the following (in thousands):
| | | | January 31, 2015 | | February 1, 2014 | February 3, 2018 | | January 28, 2017 |
| Furniture and fixtures | $ | 54,933 |
| | $ | 44,112 |
| $ | 114,394 |
| | $ | 96,491 |
|
| Leasehold improvements | 64,109 |
| | 51,736 |
| 133,460 |
| | 96,075 |
|
| Computers and equipment | 20,017 |
| | 15,903 |
| 44,923 |
| | 36,159 |
|
| Construction in process | 7,324 |
| | 2,627 |
| 15,251 |
| | 9,851 |
|
| Property and equipment, gross | 146,383 |
| | 114,378 |
| 308,028 |
| | 238,576 |
|
| Less: Accumulated depreciation and amortization | (59,385 | ) | | (43,997 | ) | (127,679 | ) | | (100,200 | ) |
| Property and equipment, net | $ | 86,998 |
| | $ | 70,381 |
| $ | 180,349 |
| | $ | 138,376 |
|
| |
(g)(h) | Impairment of Long-Lived Assets |
Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, then an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Based on its Company's most recent analysis, management believes that no impairment of long-lived assets exists as offor the period ended January 31, 2015February 3, 2018.
| |
(h)(i) | Deferred Financing Costs |
Deferred financing costs (note 3) are amortized to interest expense over the term of the related credit agreement. Amortization expense in fiscal 2014, 2017, fiscal 2013 and fiscal 2012 was $24.7 thousand, $0.3 million and $0.5 million, respectively. In connection with the repayments of the $100.0 million term loan facility in the amounts of $19.5 million, $15.0 million and $65.5 million in fiscal 2014, fiscal 20132016 and fiscal 2012, respectively, we wrote-off approximately $0.2 million, $0.3 million2015 was $40.4 thousand, $27.0 thousand, and $1.6 million$27.0 thousand, respectively. As of deferred financing costs in fiscal 2014, fiscal 2013February 3, 2018 and fiscal 2012, respectively, which is included in lossJanuary 28, 2017, the Company had an immaterial balance remaining on debt extinguishment in the accompanying consolidated statements of operations.balance sheet.
The Company leases store locations, distribution centers, the corporate headquarters and equipment used in its operations and evaluates and classifies its leases as operating or capital leases for financial reporting purposes. Any assets held under a capital lease are included in property and equipment, net. As of February 3, 2018 and January 31, 2015 and February 1, 2014,28, 2017, the Company had no material capital leases.
Operating lease expense is recorded on a straight-line basis over the lease term. At the inception of a lease, the Company determines the lease term, which includes periods under the exercise of renewal options that are reasonably assured. Renewal options are exercised at the Company's sole discretion. TheIn September 2016, the Company signed a 15 year lease for a new corporate headquarters is leased under alocation in Philadelphia, Pennsylvania. The Company currently occupies approximately 117,000 square feet of office space and will expand into approximately 50,000 square feet of additional office space by no later than 2020. The lease agreement expiringexpires in 2022,early 2033 with three successive options to renew for two successive five-year periods. The distribution center located in New Castle, Delaware is leased under a lease agreement expiring in 2016 with optionsadditional term up to renew for two successive five-year periods.approximately fifteen years. The distribution center in Olive Branch, Mississippi is leased under a lease agreement expiring in 2022 with options to renew for three successive five-year periods. The new distribution center in Pedricktown, New Jersey is leased under a lease agreement which we expect to begin in fiscal 2015 and to expireexpiring in 2025 with options to renew for three successive five-year periods. Generally, the Company’s store leases have expected lease terms of ten years, which are comprised of an initial term of ten years or an initial term of five years and one assumed five-yearfive-year extension, resulting in a ten-yearten-year life. The expected lease term is used to determine whether a lease is capital or operating and to calculate straight-line rent expense.
Substantially all of the Company's leases include options that allow the Company to renew or extend the lease term beyond the initial lease period, subject to terms and conditions agreed upon at the inception of the lease. Such terms and conditions include rental rates agreed upon at the inception of the lease that could represent below or above market rental rates later in the life of the lease, depending upon market conditions at the time of such renewal or extension. In addition, the Company's leases may include early termination options.
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(j)(k) | Deferred Rent and Other |
Certain of the Company’s operating leases contain either rent holidays and/or predetermined fixed escalations of minimum rentalsrental payments during the original and/or extended lease terms. For these leases, the Company recognizes the related rent expense on a straight-line basis over the life of the lease and records the difference between the amounts charged to operations and amounts paid as deferred rent. The life of the lease is the initial term plus assumed extensions. The Company also receives certain lease incentives in conjunction with entering into operating leases. These lease incentives are recorded as deferred rent at the beginning of the lease term and recognized as a reduction of rent expense over the lease term. In addition, certain of the Company’s leases contain future contingent increases in rents. Such increases in rent expense are recorded in the period in which such contingent increases to the rents take place.
The following table summarizes the Company's deferred rent and other long-term liabilities balances (in thousands):
| | | | January 31, 2015 | | February 1, 2014 | February 3, 2018 | | January 28, 2017 |
| Current: | | | | | | |
Deferred rent (1) | $ | 3,711 |
| | $ | 2,965 |
| $ | 5,707 |
| | $ | 5,519 |
|
| Total current liabilities | $ | 3,711 |
| | $ | 2,965 |
| $ | 5,707 |
| | $ | 5,519 |
|
| | | | | | | |
| Long-term: | | | | | | |
| Deferred rent | $ | 40,122 |
| | $ | 35,198 |
| $ | 72,547 |
| | $ | 52,372 |
|
| Other | 328 |
| | 241 |
| 143 |
| | 196 |
|
| Total long-term liabilities | $ | 40,450 |
| | $ | 35,439 |
| $ | 72,690 |
| | $ | 52,568 |
|
| |
| (1) | The current portion of deferred rent is included in the other accrued expenses line item in the accompanying |
consolidated balance sheets.
| |
(k)(l) | Share-basedShare-Based Compensation |
The Company measures the cost of employee services received in exchange for share-based compensation based on the grant date fair value of the employee stock award. Incremental compensation costs arising from subsequent modifications of awards after the grant date must also be recognized. The Company recognizes compensation expense generally on a straight-line basis over the vesting period for the entire award based on the estimated grant date fair value of restricted stock awards,units ("RSU") and usingperformance-based restricted stock units ("PSU") and uses the Black-Scholes option-pricing model for grants of stock options which are both recorded on a straight-line basis over the vesting period for the entire award.options. Share-based compensation cost recognized and included in expenses for fiscal 20142017, fiscal 20132016 and fiscal 20122015, was $5.9$16.4 million, $10.112.0 million and $12.311.2 million, respectively. Fiscal 2012 was impacted by additional compensation expense of $5.4 million related to certain modifications of outstanding options (note 6).
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(l)(m) | Revenue Recognition |
Revenue is recognized at the point of sale. Returns are accepted under certain conditions within 14 days of purchase. Returns subsequent to the period end are immaterial; accordingly, no reserve has been recorded. Gift card sales to customers are initially recorded as liabilities and recognized as sales upon redemption for merchandise. Sales tax collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, excluded from sales in the accompanying consolidated statements of operations.
In May 2014, the Financial Accounting Standards Board issued an accounting standards update that clarifies the principles for recognizing revenue from contracts with customers. The update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance is effective for the interim and annual periods beginning on or after December 15, 2016. The update allows for a “full retrospective” adoption, meaning the update is applied to all periods presented, or a “modified retrospective” adoption, meaning the update is applied only to the most current period presented in the financial statements. Early adoption is not permitted. The Company is currently evaluating the impact that the update will have on its financial position, results of operations, cash flows and financial statement disclosures.
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(m)(n) | Shipping and Handling Revenues and Costs |
The Company includes all shipping and handling revenue from e-commerce sales in net sales. Shipping and handling costs, which are included in cost of goods sold in the accompanying consolidated statements of operations, include third-party fulfillment and shipping costs related to the Company's e-commerce operations.
Cost of goods sold reflects the direct costs of purchased merchandise and inbound freight, as well as store occupancy, distribution and buying expenses. Store occupancy costs include rent, common area maintenance, utilities and property taxes for all store locations. Distribution costs include costs for receiving, processing, warehousing and shipping of merchandise to or from the Company's distribution centers and between store locations. Buying costs include compensation expense for the Company's internal buying organization.
| |
(n)(p) | Selling, General and Administrative Expenses |
Selling, general and administrative expenses include payroll and other compensation, marketing and advertising expense, depreciation and amortization expense, and other selling and administrative expenses.
The Company receives various incentives in the form of allowances, free product and promotional funds from its vendors based on product purchases and advertising activities. The amounts received are subject to changes in market conditions, vendor marketing strategies and changes in the profitability or sell-through of the related merchandise for the Company. Merchandise allowances are recorded in cost of goods and recognized in the period the related merchandise is sold. Marketing allowances are recorded in selling, general and administrative expenses and are recognized in the period the related advertising occurs to the extent the allowance is a reimbursement that is specific and incremental, and identifiable costs have been incurred by the Company to sell the vendor’s products. To the extent these conditions are not met, these allowances are recorded as merchandise allowances.
| |
(p)(r) | Store Pre-Opening Costs |
Costs incurred between completion of a new store location’s construction and its opening (pre-opening costs) are charged to expense as incurred. Pre-opening costs were $4.6$6.2 million, $4.35.1 million and $3.54.9 million in fiscal 20142017, fiscal 20132016, and fiscal 20122015, respectively, and are recorded in the accompanying consolidated statements of operations based on the nature of the expense.
Advertising costs are charged to expense the first time the advertising takes place. Advertising expenses were $19.3$30.8 million, $15.6$27.4 million and $12.0$22.2 million in fiscal 2014,2017, fiscal 20132016 and fiscal 2012,2015, respectively, and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
The Company records a valuation allowance to reduce its deferred tax assets when uncertainty regarding their realizability exists. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted. The TCJA includes a numbers of changes to existing U.S. tax laws that impact us, most notably a reduction of the U.S. corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. We will continue to analyze additional information and guidance related to the TCJA as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. In fiscal 2018 and future years, we may invest a portion of any savings generated by the TCJA into expenses that could significantly increase and impact the comparability between periods of Cost of Goods Sold and Gross Profit, Selling, General and Administrative Expenses and Operating Income.
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(s)(u) | Commitments and Contingencies |
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
The preparation of consolidated financial statements requires management of the Company to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include valuation allowances for inventories, income taxes and share-based compensation expense.
| |
| (w) | Recently Issued Accounting Standards |
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 clarifies the principles for recognizing revenue from contracts with customers. The update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers: Deferral of the Effective Date." ASU 2015-14 deferred the effective date of ASU 2014-09 to fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim periods within those annual periods. In the first six months of fiscal 2016, the FASB issued guidance clarifying the interpretation of certain principles of ASU 2014-09. On the effective date, the Company will adopt the provisions of ASU 2014-09 on a modified retrospective basis through an immaterial cumulative adjustment that will impact the opening balance of retained earnings related to the recognition of gift card breakage. These estimates may be refined as the Company finalizes the implementation effort required to adopt the standard. In order to determine the impact of ASU 2014-09, the Company's assessment included a detailed review of its revenue streams and a comparison of its historical accounting policies and practices to the new standard.
In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 requires that lease arrangements longer than 12 months result in an entity recognizing an asset and a liability. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The standard requires use of the modified retrospective transition approach. While the Company is currently evaluating this standard, given the significant amount of leases the Company is party to, the Company expects this standard will have a significant impact on the Company's consolidated financial statements from the recognition of right of use assets and related liabilities. The Company plans to adopt this standard in the first quarter of fiscal 2019, coinciding with the standard’s effective date.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 affects all entities that issue share-based payment awards to their employees. This accounting standards update makes several modifications to the accounting for employee share-based payment transactions, including the requirement that the excess income tax benefits or deficiencies that arise when the tax consequences of share-based compensation differ from amounts previously recognized in the consolidated statement of operations be recognized as income tax benefit or expense in the consolidated statement of operations rather than as additional paid-in capital in the consolidated balance sheets. The guidance also clarifies the classification of components of share-based awards on the consolidated statement of cash flows such that excess income tax benefits should not be presented separately from other income taxes in the consolidated statement of cash flows and, thus, should be classified as an operating activity rather than a financing activity as they are under the current guidance. ASU 2016-09 is effective for financial statements issued for annual reporting periods beginning after December 15, 2016 and interim periods within those years. The Company adopted this standard prospectively in the first quarter of fiscal 2017. This standard will result in a decrease or increase to the Company's effective tax rate, net income, and earnings per share based upon the requirement to recognize the excess income tax benefits or deficiencies in the consolidated statements of operations and change the Company's earnings per share calculation to exclude excess tax benefits previously assumed under the treasury stock method. No changes were required related to the classification of employee taxes paid for withheld shares in the Company's consolidated statements of cash flows since the Company has historically classified these within financing cash flows.
| |
| (2) | Income (Loss) Per Common Share |
Basic income (loss) per common share amounts are calculated using the weighted-average number of common shares outstanding for the period. Diluted income (loss) per common share amounts are calculated using the weighted-average number of common shares outstanding for the period and include the dilutive impact of preferred stock using the if-converted method
and exercise of stock options and warrants as well as assumed lapse of restrictions on restricted stock awards and shares currently available for purchase under the Company's Employee Stock Purchase Plan, using the treasury stock method. Performance-based restricted stock units are considered contingently issuable shares for diluted income per common share purposes and the dilutive impact, if any, is not included in the weighted-average shares until the performance conditions are met.
The two-class method is used to calculate basic and diluted income (loss) per common share since the Company's preferred and certain restricted stock were participating securities. The two-class method is an earnings allocation formula that determines income per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under the two-class method, basic income (loss) per common share is computed by dividing net income (loss) attributable to common shares after allocation of income to participating securities by the weighted-average number of common shares outstanding during the year. Diluted income (loss) per common share is computed using the more dilutive of the two-class method or the if-converted method. In periods of net loss, no effect is given to participating securities since they do not contractually participate in the losses of the Company. The two-class method is the more dilutive method for fiscal 2014, fiscal 2013 and fiscal 2012. As of January 31, 2015, the Company no longer has any outstanding participating securities.
The following table reconciles net income (loss) and the weighted average common shares outstanding used in the computations of basic and diluted income (loss) per common share (in thousands, except for share and per share data):
| | | | Fiscal Year | Fiscal Year |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Numerator: | | | | | | | | | | |
| Net income | $ | 48,024 |
| | $ | 32,142 |
| | $ | 20,025 |
| $ | 102,451 |
| | $ | 71,840 |
| | $ | 57,680 |
|
| Dividend paid to preferred shareholders | — |
| | — |
| | (62,504 | ) | |
| Dividend paid to unvested restricted shareholders | — |
| | — |
| | (2,899 | ) | |
| Net income attributable to participating securities | (20 | ) | | (465 | ) | | — |
| |
| Net income (loss) attributable to common shareholders | $ | 48,004 |
| | $ | 31,677 |
| | $ | (45,378 | ) | |
| Denominator: | | | | | | | | | | |
| Weighted average common shares outstanding - basic | 54,219,801 |
| | 53,294,805 |
| | 35,444,200 |
| 55,208,246 |
| | 54,845,708 |
| | 54,513,622 |
|
| Dilutive impact of options, restricted stock units, and employee stock purchase plan | 354,054 |
| | 447,055 |
| | — |
| 353,226 |
| | 283,162 |
| | 279,679 |
|
| Weighted average common shares outstanding - diluted | 54,573,855 |
| | 53,741,860 |
| | 35,444,200 |
| 55,561,472 |
| | 55,128,870 |
| | 54,793,301 |
|
| Per common share: | | | | | | | | | | |
| Basic income (loss) per common share | $ | 0.89 |
| | $ | 0.59 |
| | $ | (1.28 | ) | |
| Diluted income (loss) per common share | $ | 0.88 |
| | $ | 0.59 |
| | $ | (1.28 | ) | |
| Basic income per common share | | $ | 1.86 |
| | $ | 1.31 |
| | $ | 1.06 |
|
| Diluted income per common share | | $ | 1.84 |
| | $ | 1.30 |
| | $ | 1.05 |
|
For fiscal 2014 and fiscal 2013, $20.0 thousand and $0.5 million respectively, of net income was attributable to participating securities, as the two-class method was more dilutive, and the remainder was attributable to common shareholders. For fiscal 2012, as the Company was in a net loss position after recognition of the payment of dividends, the net losses were solely attributable to common shareholders.
The effects of the assumed exercise of stock options outstanding as of February 3, 2018, January 31, 201528, 2017 and January 30, 2016 for 593,77366,624, 164,440 and 710,153 shares of common stock, respectively, were excluded from the fiscal 20142017, fiscal 2016 and fiscal 2015 calculation of diluted net income per common share as their impact would have been anti-dilutive.
The effects of non-vested restricted stock units outstanding as of February 3, 2018, January 31, 201528, 2017 and January 30, 2016 for 3,93013,323, 3,600 and 6,500 shares of common stock, respectively, were excluded from the fiscal 20142017, fiscal 2016 and fiscal 2015 calculation of diluted net income per common share as their impact would have been anti-dilutive.
The effects of the assumed exercise of stock options outstanding as of February 1, 2014 for 388,197 shares of common stock were excluded from the fiscal 2013 calculation of diluted net income per share as their impact would have been anti-dilutive.
The effects of the assumed exercise of the combined stock options and warrants and vesting of restricted share awards outstanding as of February 2, 2013 of 2,573,490, and the impact of shares to be issued under the Company's Employee Stock Purchase Plan, which is minor, were excluded from the fiscal 2012 calculation of diluted net loss as the effect would be anti-dilutive due to a net loss to common shareholders.
The aforementioned excluded shares do not reflect the impact of any incremental repurchases under the treasury stock method.
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| (3) | Financing Transactions and Line of Credit |
Financing Transactions
On May 16, 2012, the Company entered into a $100.0 million term loan facility with Goldman Sachs Bank USA as administrative agent for a syndicate of lenders (the “Term Loan Facility”). The Company used the net proceeds from the Term Loan Facility and cash on hand to pay a dividend on all outstanding shares of the Company's common stock and Preferred Stock totaling $99.5 million. On the same day, the Company amended and restated its existing senior secured Revolving Credit Facility with Wells Fargo Bank, National Association, which is defined below under “—Line of Credit.” The Company refers to the Term Loan Facility, the amendment and restatement of the Revolving Credit Facility and related transactions as the “Financing Transactions.” On June 12, 2013 in connection with the Restructuring, the Subsidiary acceded to the credit agreement and certain ancillary documents to the Company's Term Loan Facility as a guarantor of the Company's obligations thereunder.
In July 2012, the Company repaid $65.3 million of principal on the Term Loan Facility and $0.7 million of interest. In October 2012 and May 2013, the Company repaid $0.3 million and $15.0 million, respectively, of principal on the Term Loan Facility. In February 2014, the Company repaid the remaining principal balance outstanding under the Term Loan Facility of $19.5 million. As of January 31, 2015, there was no principal balance outstanding under the Term Loan Facility.
In connection with the $65.5 million, $15.0 million and $19.5 million of principal repayments on the Term Loan Facility in fiscal 2012, fiscal 2013, and fiscal 2014, respectively, approximately $1.6 million, $0.3 million and $0.2 million of the deferred financing costs were written off and included in loss on debt extinguishment in the consolidated statements of operations, respectively.
During fiscal 2014, fiscal 2013 and fiscal 2012 the Company recorded $0.1 million, $1.5 million and 2.4 million, respectively, in interest expense, including amortization of deferred financing fees of $24.7 thousand, $0.3 million and $0.5 million, respectively.
The Company had approximately $0.1 million and $0.2 million of remaining deferred financing fees as of January 31, 2015 and February 1, 2014, respectively.
Line of Credit
On August 18, 2006, the Company entered into a Loan and Security Agreement (the "Loan and Security Agreement") with Wachovia Bank National Association (predecessor in interest to Wells Fargo Bank, National Association)Association that included a revolving line of credit with advances tied to a borrowing base. The Loan and Security Agreement was amended and/or restated several times, the latest on June 12, 2013 (as amended and restated, the "Revolving Credit Facility"), generally to extend the maturity date, increase maximum borrowings, adjust the applicable interest rates, permit the formation and capitalization of the Subsidiary, and make the Subsidiary a party to the Loan and Security Agreement as a guarantor of the Company's obligations, and modify certain definitions..
The Revolving Credit Facility allows maximum borrowings of $20.0 million with advances tied to a borrowing base and expires on the earliest to occur of (i) May 16, 2017 or (ii) upon the occurrence of an event of default. The Revolving Credit Facility may be increased to $30.0 million upon certain conditions. The Revolving Credit Facility includes a $5.0 million sub-limit for the issuance of letters of credit. The borrowing base is 90% of eligible credit card receivables plus 90% of the net recovery percentage of eligible inventory less established reserves. The Company incurred deferred financing costs of $50.0 thousand in May 2012 in connection with the Revolving Credit Facility and such costs are being amortized over the remaining term of the Revolving Credit Facility.
The Revolving Credit Facility provides for interest on borrowings, at the Company's option, at (a) a prime rate plus a margin of (i) 0.75% if excess availability is greater than or equal to 75%, (ii) 1.0% if excess availability is less than 75% but greater than or equal to 33% or (iii) 1.25% if excess availability is less than 33% or (b) a LIBOR-based rate plus a margin of (i) 1.75% if excess availability is greater than or equal to 75%, (ii) 2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. The Revolving Credit Facility further provides for a letter of credit fee equal to the LIBOR-based rate plus (i) 1.75% if excess availability is greater than or equal to 75%, (ii) 2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. The Revolving Credit Facility also contains an unused credit facility fee of 0.375% per annum and is subject to a servicing fee of approximately $12.0 thousand per year.
The Revolving Credit Facility includes a covenant which requires the Company to maintain minimum excess collateral availability of no less than the greater of (i) 10% of the then effective maximum credit and (ii) $3.0 million.
The Revolving Credit Facility also includes customary negative and affirmative covenants including, among others, limitations on the Company's ability to (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or other restricted payments; (vi) engage in mergers or consolidations; or (vii) change the Company's business.
Additionally, the Revolving Credit Facility is subject to payment upon the receipt of certain proceeds, including those from the sale of certain assets, and is subject to an increase in the interest rate on borrowings and the letter of credit fee of 2.0% upon an event of default. Amounts under the Revolving Credit Facility may become due upon certain events of default
including, among others, failure to comply with the Revolving Credit Facility’s covenants, bankruptcy, default on certain other indebtedness or a change in control.
On May 10, 2017, the Company entered into a Fourth Amended and Restated Loan and Security Agreement (the “Amended Loan and Security Agreement”), among the Company, Five Below Merchandising, Inc. and Wells Fargo Bank, National Association. The Amended Loan and Security Agreement amends and restates the Third Amended and Restated Loan and Security Agreement, dated June 12, 2013, among the Company, Five Below Merchandising, Inc. and Wells Fargo Bank, National Association, which governed the Revolving Credit Facility.
The Amended Loan and Security Agreement includes a revolving line of credit in the amount of up to $20.0 million (the “Amended Revolving Credit Facility”). Pursuant to the Amended Loan and Security Agreement, advances under the Amended Revolving Credit Facility are no longer tied to a borrowing base; however, the Company is required to maintain eligible inventory at all times in an amount equal to at least $100.0 million. The Amended Revolving Credit Facility expires on the earliest to occur of (i) May 10, 2022 or (ii) an event of default. The Amended Revolving Credit Facility may be increased to up to $50.0 million, subject to certain conditions. The Amended Revolving Credit Facility also includes a $20.0 million sub limit for the issuance of letters of credit.
The Amended Loan and Security Agreement reduces the interest rate payable on borrowings to be, at the Company’s option, a per annum rate equal to (a) a prime rate or (b) a LIBOR-based rate plus a margin of 1.00%. Letter of credit fees are equal to the interest rate payable on LIBOR-based loans. The interest rate and letter of credit fees under the Amended Loan and Security Agreement are subject to an increase of 2.00% per annum upon an event of default.
The Amended Loan and Security Agreement removes restrictions on the Company’s ability to pay or make dividends and distributions or repurchase its stock, but the Amended Loan and Security Agreement continues to include other customary negative and affirmative covenants including, among other things, limitations on the Company’s ability to (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) engage in mergers or consolidations; or (vi) change its business.
The Amended Loan and Security Agreement also removes the provisions that required the Company to make prepayments on outstanding Amended Revolving Credit Facility balances upon the receipt of certain proceeds, including those from the sale of certain assets. Amounts under the Amended Revolving Credit Facility may become due upon certain events of default including, among other things, the Company’s failure to comply with the Amended Revolving Credit Facility’s covenants, bankruptcy, default on certain other indebtedness or a change in control.
Under the Amended Loan and Security Agreement, all obligations under the Amended Revolving Credit Facility continue to be guaranteed by Five Below Merchandising, Inc., a wholly-owned subsidiary of the Company, and are secured by substantially all of the assets of the Company and Five Below Merchandising, Inc.
During fiscal 2014, we borrowed approximately $7.0 million2017 the Company had no borrowings or interest expense under ourthe Amended Revolving Credit Facility during the fourth quarter, which we repaid before the end of the quarter and incurred minimal interest.Facility. During fiscal 20132016 and fiscal 2012,2015, the Company had no borrowings or interest expense under the Revolving Credit Facility.
As of February 3, 2018 and January 31, 2015 and February 1, 2014,30, 2016, the Company had approximately $20.0 million available on the line of credit. As of February 2, 2013,January 28, 2017, the Company had approximately $20.0 million available on the line of credit of which $19.7 million was available and $0.3 million was issued but undrawn on an outstanding letter of credit obligation.
All obligations under the Amended Revolving Credit Facility and Revolving Credit Facility are secured by substantially all of the Company's assets and are guaranteed by the Subsidiary. As ofJanuary 31, 2015February 3, 2018 and February 1, 2014January 28, 2017, the Company was in compliance with the covenants applicable to it under the Amended Revolving Credit Facility and Revolving Credit Facility.
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| (4) | Commitments and Contingencies |
Commitments
Leases
The Company leases property and equipment under non-cancelable operating leases. Certain retail store lease agreements provide for contingent rental payments if the store’s net sales exceed stated levels (percentage rents) and/or contain escalation clauses, which provide for increases in base rental payments for increases in future operating costs. Many of the Company’s leases provide for one or more renewal options for periods of five years. TheAs of February 3, 2018, the Company’s operating lease agreements, including assumed extensions, which are generally those that take the lease to a ten-year term, expire through fiscal 20242033.
The Company’s minimum rental commitments under operating lease agreements, including assumed extensions, as of January 31, 2015,February 3, 2018, are as follows (in thousands):
| | | Fiscal Year | Retail stores | | Corporate office and distribution centers | | Total | Retail stores | | Corporate office, distribution centers and other | | Total |
| | | | | �� | |
| 2015 | $ | 57,985 |
| | $ | 6,751 |
| | $ | 64,736 |
| |
| 2016 | 58,600 |
| | 6,744 |
| | 65,344 |
| |
| 2017 | 57,532 |
| | 6,603 |
| | 64,135 |
| |
| 2018 | 55,856 |
| | 7,128 |
| | 62,984 |
| $ | 109,199 |
| | $ | 8,372 |
| | $ | 117,571 |
|
| 2019 | 54,664 |
| | 7,748 |
| | 62,412 |
| 113,168 |
| | 9,469 |
| | 122,637 |
|
| 2020 | | 110,162 |
| | 11,277 |
| | 121,439 |
|
| 2021 | | 103,539 |
| | 11,362 |
| | 114,901 |
|
| 2022 | | 94,112 |
| | 11,402 |
| | 105,514 |
|
| Thereafter | 182,805 |
| | 37,195 |
| | 220,000 |
| 301,391 |
| | 64,547 |
| | 365,938 |
|
| | $ | 467,442 |
| | $ | 72,169 |
| | $ | 539,611 |
| $ | 831,571 |
| | $ | 116,429 |
| | $ | 948,000 |
|
Rent expense, including base and contingent rent under operating leases, was $53.6$98.2 million, $41.8$78.5 million and $32.8$66.0 million in fiscal 2014,2017, fiscal 20132016 and fiscal 2012,2015, respectively. Contingent rents were $0.5$0.6 million, $0.5 million and $0.50.6 million in fiscal 20142017, fiscal 20132016 and fiscal 20122015, respectively.
From February 1, 20154, 2018 to March 26, 201522, 2018, the Company committed to 1015 new store leases with terms of 10 years that have future minimum lease payments of approximately $24.2$28.9 million.
Other contractual commitments
The Company has employment agreements withan executive severance plan that is applicable to certain key employees that provide for, among other things, salary, bonus, severance, and change-in-control provisions. The severance and change of control provisions under these agreements provide for additional payments upon employee separation of up to approximately $5.7$7.2 million.
As of January 31, 2015February 3, 2018, the Company has other purchase commitments of approximately $2.9$4.9 million consisting of purchase agreements for materials that will be used in the construction of new stores.
Contingencies
Legal Matters
From time to time, the Company is involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcome of such actions will not have a material adverse effect on the Company’s financial condition or results of operations. On January 9, 2015, a putative class action was filed against Five Below, Inc. and certain of the Company's current and former senior officers in the United States District Court for the Eastern District of Pennsylvania, purportedly on behalf of a class of the Company's investors who purchased our publicly traded securities between June 5, 2014 and December 4, 2014. The complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder in connection with various public statements made by the Company. In addition, on February 25, 2015, a shareholder derivative complaint was filed on behalf of Five Below, as nominal defendant, and asserting claims against certain of the Company's directors in the United States District Court for the District of Rhode Island. The complaint in this action alleges various violations of state law, including breach of fiduciary duties, arising from the alleged federal securities violations asserted in the securities class action. The Company intends to vigorously defend against these actions, which the Company believes to be without merit. The potential impact of these actions, which seek unspecified damages, attorneys’ fees and expenses, is uncertain.
| |
| (5) | Shareholders’ Equity (Deficit) |
As of January 31, 2015,February 3, 2018, the Company is authorized to issue 120,000,000 shares of $0.01 par value common stock and 5,000,000 shares of $0.01 par value preferred stock. The holders of the common stock are entitled to one vote per share of common stock and are entitled to receive dividends if declared by the board of directors. The preferred stock may be issued from time to time in series as designated by the board of directors. The designations, powers, preferences, voting rights, privileges, options, conversion rights, and other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof shall be designated by the board of directors.
Preferred Stock
On October 14, 2010, the Company issued 89,291,773 shares of Series A 8% Convertible Preferred Stock for cash proceeds of $191.9 million, net of offering costs of $2.1 million.
The shares of Series A 8% Convertible Preferred Stock were entitled to receive cumulative dividends of 8% of their original issue price of $2.17 per share per year compounded annually and payable in cash when and if declared by the Company’s board of directors; however, the Company could not pay, unless otherwise consented to by the holders of Series A 8% Convertible Preferred Stock, any dividends on common stock unless an equal amount of dividends per share (on an as converted basis) was simultaneously paid to the holders of the Series A 8% Convertible Preferred Stock. Effective immediately prior to the closing of the Company's initial public offering (the "IPO") on July 24, 2012, all outstanding shares of Series A 8% Convertible Preferred Stock were converted into 30,894,953 shares of common stock and ceased to be entitled to the payment of any dividends that accrued on such shares as of the effective time of the conversion. The Series A 8% Convertible Preferred Stock was presented outside of shareholders’ equity since its redemption under certain circumstances was beyond the control of the Company’s management.
Common Stock
The Company and certain of its pre-IPO shareholders have entered intoare parties to an Amended and Restated Investor Rights Agreement, and a Second
Amended and Restated Shareholders Agreement, which providedprovides for, among others, certain registration, information, first refusal, co-sale, observer, bring along and board of director voting rights. The Second Amended and Restated Shareholders Agreement also provided for certain restrictions and obligations with respect to the stock of the Company held by the Company’s shareholders, including limits on the transfer of stock held by shareholders. The material provisions of the Second Amended and Restated Shareholders Agreement were terminated in connection with the Company’s IPO. In addition, in connection with the IPO, the parties amended the agreement to terminate all rights except forother things, certain registration rights, which requiresrequiring the Company to register shares of our common stock held by certainsuch shareholders in the event the Company registers for sale, either for the Company’s own account or for the account of others, shares of the Company’s common stock in certain offerings.
In March 2012, options to purchase 2,020,620 shares of common stock granted during fiscal 2010, including options to purchase 1,010,310 shares that were subject to time-based and performance-based vesting, were cancelled and an equal number of restricted shares were granted. One-third of the shares vested in March 2012, one-third of the shares vested in March 2013, and the remaining one-third vested in March 2014, which was the second anniversary of the grant.
In connection with the cancellation and grant, the Company recorded a total compensation expense of $17.4 million including $5.3 million which was recorded on the date of the modification and the remainder was recorded on a straight-line basis over the two-year vesting period.
On July 17, 2012, the Company amended its articles of incorporation to reflect a 0.3460-for-1 reverse stock split of its common stock. The amendment also changed the authorized shares of the Company’s common stock to 120,000,000 shares. Concurrent with the reverse stock split, the Company adjusted (i) the conversion price of its Series A 8% Convertible Preferred Stock, (ii) the number of shares subject to and the exercise price of its outstanding stock option awards under its equity incentive plan and (iii) the number of shares subject to and the exercise price of its outstanding warrants to equitably reflect the split. All common stock share and per-share data included in these consolidated financial statements give effect to the reverse stock split and the change in authorized shares and have been adjusted retroactively for all periods presented.
On July 24, 2012, the Company completed its IPO of 11,057,692 shares of common stock at a price of $17.00 per share. The common stock was listed on The NASDAQ Global Select Market under the symbol “FIVE.” The shares sold in the IPO were registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to the Company's Registration Statement on Form S-1 (File No. 333-180780), which was declared effective by the Securities and Exchange Commission ("SEC") on July 18, 2012. Of the 11,057,692 shares sold in the IPO, the Company issued 4,807,692 shares, and 6,250,000 shares were sold by selling shareholders, including 1,442,308 shares sold pursuant to the exercise in full of the underwriters’ over-allotment option. The Company did not receive any proceeds from shares sold by the selling shareholders. The Company received proceeds of approximately $73.2 million, net of approximately $8.5 million in underwriting discounts and legal, accounting and other fees incurred in connection with the IPO. Of the $73.2 million net proceeds received from the IPO, approximately $65.3 million and $0.7 million, respectively, were used to repay principal and interest under the Company's Term Loan Facility that existed as of the date of the IPO. The remaining net proceeds of the IPO were used for general corporate purposes, including working capital.
On September 27, 2012, the Company’s board of directors approved the Five Below, Inc. 2012 Employee Stock Purchase Plan (the “ESPP”), which remained subject to shareholder approval. The Company's shareholders approved the ESPP on May 30, 2013 at the Company's annual meeting of shareholders. The ESPP's effective date is retroactive to January 1, 2013 and is intended to be qualified as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code of 1986. The number of shares of common stock reserved for issuance, which is subject to other limitations, is 500,000 shares. The ESPP allows eligible employees the opportunity to purchase, subject to limitations, shares of the Company’s common stock through payroll deductions at a discount of 10% of the fair market value of such shares on the purchase date. In fiscal 2013,2017, the Company issued 3,5654,465 shares of common stock under the ESPP resulting in proceeds of approximately $0.1$0.3 million and recorded share-based compensation expense of $13.5$21.3 thousand in connection with the ESPP related to the amount of the discount. In fiscal 2014,2016, the Company issued 4,3455,087 shares of common stock under the ESPP resulting in proceeds of approximately $0.2 million and recorded share-based compensation expense of $16.4$19.0 thousand in connection with the ESPP related to the amount of the discount.
On February 4, 2013, In fiscal 2015, the Company completed a secondary public offering of 13,012,250issued 5,018 shares of common stock at a price of $35.65 per share. The shares sold in the secondary public offering were registered under the Securities Act, pursuant to the Company's registration statements on Form S-1 (File No. 333-186043ESPP resulting in proceeds of $0.2 million and File No. 333-186275), which were declared effective by the Securities and Exchange Commission on January 29, 2013. Allrecorded share-based compensation expense of the shares sold in the secondary public offering were sold by selling shareholders and the Company did not receive any proceeds. The Company incurred fees of approximately $1.0 million related to legal, accounting and other fees$16.5 thousand in connection with the secondary public offering, which are included in selling, general and administrative expenses in the consolidated statements of operations for fiscal 2012.
On July 1, 2013, the Company completed a secondary public offering of 6,900,000 shares of common stock at a price of $36.00 per share. The shares sold in the secondary public offering were registered under the Securities Act pursuantESPP related to the Company's registration statement on Form S-1 (File No. 333-188578), which was declared effective by the Securities and Exchange Commission on June 26, 2013. Allamount of the shares sold in the secondary public offering were sold by selling shareholders and the Company did not receive any proceeds. The Company incurred fees of approximately $1.0 million related to legal, accounting and other fees in connection with the secondary public offering, which are included in selling, general and administrative expenses in the consolidated statement of operations for fiscal 2014.
On September 23, 2013, the Company completed a secondary public stock offering of 7,100,000 shares of common stock at a price of $46.65 per share. The shares sold in the secondary public offering were registered under the Securities Act pursuant to the Company's registration statement on Form S-3 (File 333-191210), which was declared effective by the Securities and Exchange Commission on September 17, 2013. All of the shares sold in the secondary public offering were sold by selling shareholders, and the Company did not receive any proceeds. The selling shareholders agreed to bear all of the offering expenses related to legal, accounting and other fees in connection with the secondary public offering.
Dividends
On May 15, 2012, the Company declared and subsequently paid on May 16, 2012 a dividend of $2.02 per share on shares of common stock (including restricted shares) and on an as-converted basis on shares of Series A 8% Convertible Preferred Stock totaling approximately $99.5 million. Refer to note 6 for additional information regarding changes to outstanding stock options resulting from the dividend payment.discount.
| |
(6) | Share-Based Compensation |
(6) Share-Based Compensation
Equity Incentive Plan
Effective July 26, 2002,Pursuant to the Company adopted theCompany's 2002 Equity Incentive Plan (the “Plan”) pursuant to which, the Company’s board of directors may grant stock options, restricted shares and restricted stock units to officers, directors, key employees and professional service providers. The Plan, as amended, allows for the issuance of up to a total of 7,600,000 shares under the Plan. As of January 31, 2015, 4,031,938February 3, 2018, 3,367,530 stock options, restricted shares, or restricted stock units were available for grant.
On May 23, 2012, the Company’s board of directors, in accordance with the Plan’s documents, approved an equitable adjustment to all options outstanding on the date of the Company’s dividend declaration to reflect the dividend value received by the Company’s common and preferred shareholders. The exercise price of each outstanding option was reduced by $2.02. The adjustment did not result in additional compensation expense given the adjustment was required under the Plan’s documents and there was no increase in the fair value of the awards before and after payment of the dividend and adjustment of the awards.
Common Stock Options
All stock options have a term not greater than ten years. Stock options vest and become exercisable in whole or in part, in accordance with vesting conditions set by the Company’s board of directors. Options granted to date generally vest over four years from the date of grant.
Stock option activity under the Plan was as follows:
| | | | Options
outstanding | | Weighted
average
exercise
price | | Weighted
average
remaining
contractual
term | Options
outstanding | | Weighted
average
exercise
price | | Weighted
average
remaining
contractual
term |
| Balance as of January 28, 2012 | 2,627,955 |
| | 6.47 |
| | 9.0 | |
Balance as of January 31, 2015
| | 1,160,934 |
| | $ | 24.80 |
| | 8.0 |
| Granted | 687,416 |
| | 14.96 |
| | 116,894 |
| | 28.58 |
| |
| Forfeited | (98,048 | ) | | 9.14 |
| | (73,790 | ) | | 34.93 |
| |
| Cancelled (see note 5) | (2,020,620 | ) | | 6.30 |
| | |
| Exercised | (8,886 | ) | | 4.12 |
| | (115,364 | ) | | 7.90 |
| |
Balance as of February 2, 2013 (1) | 1,187,817 |
| | 10.43 |
| | 9.3 | |
Balance as of January 30, 2016
| | 1,088,674 |
| | 26.31 |
| | 7.5 |
| Granted | 554,500 |
| | 38.92 |
| | 51,611 |
| | 39.30 |
| |
| Forfeited | (205,456 | ) | | 20.23 |
| | (47,881 | ) | | 36.18 |
| |
| Cancelled | (35,300 | ) | | 30.19 |
| | |
| Exercised | (196,941 | ) | | 7.55 |
| | (225,767 | ) | | 14.55 |
| |
Balance as of February 1, 2014 (1) | 1,304,620 |
| | 20.90 |
| | 8.5 | |
Balance as of January 28, 2017
| | 866,637 |
| | 29.60 |
| | 6.7 |
| Granted | 253,973 |
| | 36.18 |
| | — |
| | — |
| |
| Forfeited | (169,850 | ) | | 31.75 |
| | (19,172 | ) | | 37.13 |
| |
| Cancelled | (20,000 | ) | | 39.41 |
| | |
| Exercised | (207,809 | ) | | 7.11 |
| | (327,980 | ) | | 29.27 |
| |
Balance as of January 31, 2015 (1) | 1,160,934 |
| | $ | 24.80 |
| | 8.0 | |
| Exercisable as of January 31, 2015 | 387,586 |
| | $ | 10.74 |
| | 7.0 | |
| Balance as of February 3, 2018 | | 519,485 |
| | 29.53 |
| | 5.9 |
| Exercisable as of February 3, 2018 | | 386,785 |
| | $ | 27.95 |
| | 5.4 |
(1)
The weighted-average exercise price as of January 31, 2015, February 1, 2014 and February 2, 2013, respectively, reflects the adjustment of $2.02 per share resulting from the dividend declared on May 15, 2012 as described above.
IncludedCompany did not grant any stock options in the options outstanding as of January 28, 2012 were options to purchase 1,010,310 shares of common stock, which vested incrementally only upon the achievement of certain performance targets including achieving targeted internal rates of return for the Company’s preferred shareholders or the Company achieving certain market capitalization levels subsequent to an initial public offering. In March 2012, options to purchase 2,020,620 shares of common stock granted during fiscal 2010, including the options that were to vest upon the achievement of performance targets, were cancelled and an equal number of restricted shares were granted (see note 5).
2017. The fair value of each option award granted to employees in fiscal 2016 and fiscal 2015, including outside directors, is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
| | | | Fiscal Year | Fiscal Year |
| 2014 | | 2013 | | 2012 | 2016 | | 2015 |
| Expected volatility | 47.9 | % | | 50.0 | % | | 50.0 | % | 47.6 | % | | 47.0 | % |
| Risk-free interest rate | 1.9 | % | | 1.4 | % | | 1.3 | % | 1.6 | % | | 1.8 | % |
| Expected life of options | 6.4 years |
| | 6.3 years |
| | 6.3 years |
| 6.4 years |
| | 6.4 years |
|
| Expected dividend yield | — | % | | — | % | | — | % | — | % | | — | % |
The Company uses the simplified method to estimate the expected term of the option. The expected volatility incorporates historical and implied volatility of similar entities whose share prices are publicly available. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
The per-share weighted average grant-date fair value of stock options granted to employees in fiscal 2014, 2016 and fiscal 20132015 was $18.89 and fiscal 2012 was $17.59, $18.90 and $7.42$13.67, respectively. The total intrinsic value of stock options exercised during fiscal 2014, 2017, fiscal 20132016 and fiscal 20122015 was $7.0$9.7 million, $7.2$6.4 million and $0.2$3.2 million,, respectively. The aggregate intrinsic value of stock options exercisable and stock options outstanding as of January 31, 2015February 3, 2018 was $8.8$13.5 million and $12.7$17.3 million, respectively. In fiscal 2014, 2017, fiscal 20132016 and fiscal 2012,2015, the Company received cash from the exercise of options of $1.5$9.6 million, $1.5$3.3 million $36.0 thousand, respectively, and $0.9 million, respectively. In fiscal 2016 and fiscal 2015 excess tax benefits from option exercises and vesting of estricted and performance-based restricted stock of $2.0 million, $2.3units were $1.6 million and $1.6$0.6 million,, respectively. Upon option exercise, wethe Company issued new shares of common stock.
Restricted Stock Units and Performance-Based Restricted Stock Units
All restricted stock units ("RSU") and performance-based restricted stock units ("PSU") vest in accordance with vesting conditions set by the compensation committee of the Company’s board of directors. RSU's granted to date have vesting periods ranging from less than one year to five years from the date of grant. PSU's granted to date vest 100% athave vesting periods ranging from one year to five years from the enddate of grant, including grants that have a cumulative three year performance period, subject to satisfaction of the applicable performance goals established for the respective grant. The Company periodically assesses the probability of achievement of the performance criteria and adjusts the amount of compensation expense accordingly. Compensation is recognized over the vesting period and adjusted for the probability of achievement of the performance criteria.
RSU and PSU activity under the planPlan was as follows:
| | | | Restricted Stock Units | | Performance-Based Restricted Stock Units | Restricted Stock Units | | Performance-Based Restricted Stock Units |
| | Number | | Weighted-Average Grant Date Fair Value | | Number | | Weighted-Average Grant Date Fair Value | Number | | Weighted-Average Grant Date Fair Value | | Number | | Weighted-Average Grant Date Fair Value |
| Non-vested balance as of February 1, 2014 | — |
| | $ | — |
| | — |
| | $ | — |
| |
Non-vested balance as of January 31, 2015
| | 147,770 |
| | $ | 35.95 |
| | 392,181 |
| | $ | 38.20 |
|
| Granted | 175,772 |
| | 35.84 |
| | 396,055 |
| | 38.20 |
| 115,248 |
| | 30.62 |
| | 85,282 |
| | 28.58 |
|
| Vested | (22,286 | ) | | 34.40 |
| | — |
| | — |
| (44,574 | ) | | 34.40 |
| | — |
| | — |
|
| Forfeited | (5,716 | ) | | 38.52 |
| | (3,874 | ) | | 38.71 |
| (6,762 | ) | | 33.01 |
| | — |
| | — |
|
| Non-vested balance as of January 31, 2015 | 147,770 |
| | $ | 35.95 |
| | 392,181 |
| | $ | 38.20 |
| |
Non-vested balance as of January 30, 2016
| | 211,682 |
| | 33.47 |
| | 477,463 |
| | 36.48 |
|
| Granted | | 127,787 |
| | 41.33 |
| | 127,160 |
| | 39.22 |
|
| Vested | | (46,168 | ) | | 37.95 |
| | (77,260 | ) | | 38.83 |
|
| Forfeited | | (18,125 | ) | | 34.84 |
| | (22,807 | ) | | 34.20 |
|
Non-vested balance as of January 28, 2017
| | 275,176 |
| | 36.27 |
| | 504,556 |
| | 36.91 |
|
| Granted | | 158,304 |
| | 40.52 |
| | 147,552 |
| | 39.65 |
|
| Vested | | (88,550 | ) | | 34.21 |
| | (141,003 | ) | | 38.15 |
|
| Forfeited | | (35,376 | ) | | 41.11 |
| | (15,446 | ) | | 35.20 |
|
| Non-vested balance as of February 3, 2018 | | 309,554 |
| | $ | 38.48 |
| | 495,659 |
| | $ | 37.43 |
|
In connection with the vesting of RSU's and PSU's during fiscal 2017, the Company withheld 33,327 shares with an aggregate value of $1.5 million in satisfaction of minimum tax withholding obligations due upon vesting. In connection with the vesting of RSU's during fiscal 2016, the year ended January 31,Company withheld 46,750 shares with an aggregate value of $1.9 million in satisfaction of minimum tax withholding obligations due upon vesting. In connection with the vesting of RSU's during fiscal 2015,, we purchased and immediately retired 9,173 the Company withheld 9,462 shares with an aggregate value of $0.3 million in satisfaction of minimum tax withholding obligations.obligations due upon vesting.
As of January 31, 2015February 3, 2018, there was $27.9$13.5 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements (including stock options, restricted stock units and performance-based restricted stock units) granted under the Plan. ThatThe cost is expected to be recognized over a weighted average vesting period of 3.32.2 years.
Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible.
As of January 31, 2015February 3, 2018, no valuation allowance has been provided for net deferred tax assets as management believes that it is more likely than not that the Company will realize all deferred tax assets as of January 31, 2015February 3, 2018.
On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted. The TCJA includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate tax rate from 35% to 21%, for tax years beginning after December 31, 2017. The Company recorded an additional expense of $1.5 million in deferred income tax expense for the remeasurement of the Company's net deferred tax asset at the 21% tax rate. Additionally, and in accordance with Section 15 of the Internal Revenue Code, the Company utilized a blended rate of 33.7% for the Company's fiscal 2017 tax year, by applying a prorated percentage of the number of days prior to and subsequent to the January 1, 2018 effective date as compared with the 35% for the 2016 tax year. The effect of this blended rate change is a benefit of $2.0 million. The TCJA also provides for acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning in 2018, including additional limitations on deductibility of executive compensation and employee meal benefits.
The net $0.5 million benefit represents what the Company believe is the impact of the TCJA in the current year. As the benefit is based on currently available information and interpretations, which are continuing to evolve, the benefit should be considered provisional. The Company will continue to analyze additional information and guidance related to the TCJA as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. The final impacts may differ from the recorded amounts as of February 3, 2018, and the Company will continue to refine such amounts within the measurement period provided by Staff Accounting Bulletin No. 118.
The components of the income tax expense are as follows (in thousands):
| | | | Fiscal Year | Fiscal Year |
| 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Current: | | | | | | | | | | |
| Federal | $ | 28,480 |
| | $ | 21,718 |
| | $ | 8,127 |
| $ | 45,867 |
| | $ | 40,053 |
| | $ | 30,976 |
|
| State | 3,218 |
| | 3,172 |
| | 2,130 |
| 6,168 |
| | 4,900 |
| | 4,626 |
|
| | 31,698 |
| | 24,890 |
| | 10,257 |
| 52,035 |
| | 44,953 |
| | 35,602 |
|
| Deferred: | | | | | | | | | | |
| Federal | (2,544 | ) | | (3,977 | ) | | 3,043 |
| 4,606 |
| | (1,772 | ) | | 349 |
|
| State | (519 | ) | | (1,097 | ) | | 769 |
| (243 | ) | | (760 | ) | | (975 | ) |
| | (3,063 | ) | | (5,074 | ) | | 3,812 |
| 4,363 |
| | (2,532 | ) | | (626 | ) |
| Income tax expense | $ | 28,635 |
| | $ | 19,816 |
| | $ | 14,069 |
| $ | 56,398 |
| | $ | 42,421 |
| | $ | 34,976 |
|
The reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows:
| | | | Fiscal Year | Fiscal Year |
| 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Statutory federal tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 33.7 | % | | 35.0 | % | | 35.0 | % |
| State taxes, net of federal benefit | 2.2 |
| | 2.6 |
| | 5.5 |
| 2.4 |
| | 2.4 |
| | 2.6 |
|
| Other | 0.2 |
| | 0.5 |
| | 0.8 |
| (0.6 | ) | | (0.3 | ) | | 0.1 |
|
| | 37.4 | % | | 38.1 | % | | 41.3 | % | 35.5 | % | | 37.1 | % | | 37.7 | % |
The effective tax rate for fiscal 20142017 compared to fiscal 20132016 was primarily impacteddriven by changesdiscrete items, which include the impact of the adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," with respect to the requirement to recognize excess income tax benefits or deficiencies as income tax benefit or expense in the mixconsolidated statements of pretax income across state jurisdictionsoperations rather than as additional paid-in capital in the consolidated balance sheets and the Company's operating entitiestax reform as a result of the Restructuring.Tax Cuts and Jobs Act ("TCJA"). The effective tax rate for fiscal 20132016 compared to fiscal 20122015 was primarily impacted by discrete items and changes in the mix of pretaxpre-tax income across state jurisdictions and the Company's operating entities as a result of the Restructuring in fiscal 2013 and permanent book to tax differences related to fees paid for the secondary public offering in fiscal 2012.jurisdictions.
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are (in thousands):
|
| | | | | | | | |
| | | January 31, 2015 | | February 1, 2014 |
| |
| | Deferred tax assets: | | | |
| | Inventories | $ | 6,858 |
| | $ | 5,430 |
|
| | Deferred revenue | 189 |
| | 142 |
|
| | Accrued bonus | 915 |
| | 194 |
|
| | Deferred rent | 17,250 |
| | 15,192 |
|
| | Other | 2,512 |
| | 1,665 |
|
| | Deferred tax assets | 27,724 |
| | 22,623 |
|
| | Deferred tax liabilities: | | | |
| | Property and equipment | (18,912 | ) | | (16,623 | ) |
| | Other | (931 | ) | | (1,182 | ) |
| | Deferred tax liabilities | (19,843 | ) | | (17,805 | ) |
| | | $ | 7,881 |
| | $ | 4,818 |
|
Total income taxes paid during fiscal 2014, fiscal 2013, and fiscal 2012 were $21.6 million, $25.0 million and $10.8 million, respectively. |
| | | | | | | | |
| | | February 3, 2018 | | January 28, 2017 |
| |
| | Deferred tax assets: | | | |
| | Inventories | $ | 7,370 |
| | $ | 10,223 |
|
| | Deferred revenue | 387 |
| | 416 |
|
| | Accrued bonus | 595 |
| | 2,465 |
|
| | Deferred rent | 20,353 |
| | 22,753 |
|
| | Other | 5,114 |
| | 6,999 |
|
| | Deferred tax assets | 33,819 |
| | 42,856 |
|
| | Deferred tax liabilities: | | | |
| | Property and equipment | (25,843 | ) | | (30,349 | ) |
| | Other | (1,300 | ) | | (1,468 | ) |
| | Deferred tax liabilities | (27,143 | ) | | (31,817 | ) |
| | | $ | 6,676 |
| | $ | 11,039 |
|
The Company had no material accrual for uncertain tax positions or interest or penalties related to income taxes on the Company’s balance sheets as of February 3, 2018 and January 31, 2015 and February 1, 2014,28, 2017, and has not recognized any material uncertain tax positions or interest and/or penalties related to income taxes in the consolidated statements of operations for fiscal 2014,2017, fiscal 2013,2016, or fiscal 2012.2015.
The Company files a federal income tax return as well as state tax returns. The Company’s U.S. federal income tax returns for the fiscal years ended January 30, 201131, 2015 and thereafter remain subject to examination by the U.S. Internal Revenue Service (“IRS”).Service. State returns are filed in various state jurisdictions, as appropriate, with varying statutes of limitation and remain subject to examination for varying periods up to 3three to 4four years depending on the state.
Effective February 1, 2007, theThe Company implemented the Five Belowhas a 401(k) Retirement Savings Plan for alland employees who have at least 1 year of service, worked at least 1,000 hours, and are 21 years of age. Employees can contribute up to the maximum amount allowed under law. The Company may make discretionary matching and profit sharing contributions, which vest over a period of 5five years from each employee’s commencement of employment with the Company. During fiscal 20142017, fiscal 20132016 and fiscal 20122015, the Company made discretionarymatching contributions of $0.3$0.5 million, $0.2$0.5 million and $52.0 thousand,$0.4 million, respectively.
The Company evaluates performance internally and manages the business on the basis of one operating segment; therefore, it has only one reportable segment. All of the Company’s identifiable assets are located in the United States.
Set forth below is data for the following groups of products: leisure, fashion and home, and party and snack. The percentage of net sales represented by each product group for each of the last three fiscal years was as follows:
| | | Sales by Product Group | Percentage of Net Sales | |
| Fiscal Year | |
| 2014 | | 2013 | | 2012 | |
| | | Percentage of Net Sales |
| Fiscal Year |
| 2017 | | 2016 | | 2015 |
| Leisure | 51.0 | % | | 51.7 | % | | 52.6 | % | 50.1 | % | | 50.0 | % | | 50.8 | % |
| Fashion and home | 29.3 | % | | 29.3 | % | | 30.3 | % | 31.6 | % | | 31.2 | % | | 29.7 | % |
| Party and snack | 19.7 | % | | 19.0 | % | | 17.1 | % | 18.3 | % | | 18.8 | % | | 19.5 | % |
| Total | 100.0 | % | | 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % | | 100.0 | % |
Leisure includes items such as sporting goods, games, toys, tech, books, electronic accessories, and arts and crafts. Fashion and home includes items such as personal accessories, “attitude” t-shirts, beauty offerings, home goods and storage options. Party and snack includes items such as party and seasonal goods, greeting cards, candy and other snacks, and beverages.
(10) Quarterly Results of Operations and Seasonality (Unaudited)
Quarterly financial results for fiscal 20142017 and fiscal 20132016 were as follows: (in thousands except for per share data).
| | | | Fiscal Year 2014 (1) | | Fiscal Year 2013 (1) | Fiscal Year 2017 (1) (2) | | Fiscal Year 2016 (1) |
| | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter | | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter | | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter |
| Net sales | $ | 263,756 |
| | $ | 137,979 |
| | $ | 152,479 |
| | $ | 126,004 |
| | $ | 211,964 |
| | $ | 110,747 |
| | $ | 117,087 |
| | $ | 95,604 |
| $ | 504,832 |
| | $ | 257,175 |
| | $ | 283,320 |
| | $ | 232,881 |
| | $ | 388,090 |
| | $ | 199,475 |
| | $ | 220,130 |
| | $ | 192,715 |
|
| Gross profit | $ | 106,328 |
| | $ | 41,623 |
| | $ | 50,905 |
| | $ | 38,935 |
| | $ | 84,169 |
| | $ | 34,234 |
| | $ | 39,400 |
| | $ | 30,213 |
| $ | 207,490 |
| | $ | 83,631 |
| | $ | 98,506 |
| | $ | 73,786 |
| | $ | 159,417 |
| | $ | 64,003 |
| | $ | 73,350 |
| | $ | 60,267 |
|
| Net income | $ | 33,313 |
| | $ | 3,311 |
| | $ | 8,320 |
| | $ | 3,080 |
| | $ | 24,826 |
| | $ | 1,677 |
| | $ | 4,069 |
| | $ | 1,570 |
| $ | 67,377 |
| | $ | 9,879 |
| | $ | 16,804 |
| | $ | 8,391 |
| | $ | 49,788 |
| | $ | 5,447 |
| | $ | 9,847 |
| | $ | 6,758 |
|
| Basic income income per common share | $ | 0.61 |
| | $ | 0.06 |
| | $ | 0.15 |
| | $ | 0.06 |
| | $ | 0.46 |
| | $ | 0.03 |
| | $ | 0.08 |
| | $ | 0.03 |
| |
| Diluted income income per common share | $ | 0.61 |
| | $ | 0.06 |
| | $ | 0.15 |
| | $ | 0.06 |
| | $ | 0.45 |
| | $ | 0.03 |
| | $ | 0.07 |
| | $ | 0.03 |
| |
| Basic income per common share | | $ | 1.22 |
| | $ | 0.18 |
| | $ | 0.30 |
| | $ | 0.15 |
| | $ | 0.91 |
| | $ | 0.10 |
| | $ | 0.18 |
| | $ | 0.12 |
|
| Diluted income per common share | | $ | 1.21 |
| | $ | 0.18 |
| | $ | 0.30 |
| | $ | 0.15 |
| | $ | 0.90 |
| | $ | 0.10 |
| | $ | 0.18 |
| | $ | 0.12 |
|
(1) The sum of the quarterly per share amounts may not equal per share amounts reported for the fiscal year due to rounding.
(2) The Company operates on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31 of the following year. Fiscal 2017 consists of a 53-week fiscal year and the fourth quarter of fiscal 2017 included an extra week, representing the 53rd week.
The Company's business is seasonal in nature and demand is generally the highest in the fourth fiscal quarter due to the fourth quarter holiday season and, therefore, operating results for any fiscal quarter are not necessarily indicative of results for the full fiscal year. To prepare for the holiday season, the Company must order and keep in stock more merchandise than it carries during other parts of the year. The Company expects inventory levels, along with an increase in accounts payable and accrued expenses, generally to reach their highest levels in the third and fourth fiscal quarters in anticipation of the increased net sales during the year-end holiday season. As a result of this seasonality, and generally because of variation in consumer spending habits, the Company experiences fluctuations in net sales and working capital requirements during the fiscal year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e)13a-15(e), as of the end of the period covered by this Annual Report on Form 10-K pursuant to Rule 13a-15(b) of the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K are effective at a reasonable assurance level in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent or detect all errors and all fraud. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting during the thirteenfourteen weeks ended January 31, 2015February 3, 2018 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Management, including the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of internal control over financial reporting as of January 31, 2015.February 3, 2018. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control - Integrated Framework (1992)(2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that, as of January 31, 2015,February 3, 2018, the company maintained effective internal control over financial reporting at a reasonable assurance level.
The effectiveness of the company’s internal control over financial reporting as of January 31, 2015February 3, 2018 has been audited by KPMG LLP, our independent registered public accounting firm, as stated in their report dated March 26, 201522, 2018 that appears below.
Report of Independent Registered Public Accounting Firm
TheTo the Shareholders and Board of Directors and Shareholders
Five Below, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Five Below, Inc.’s (the Company) internal control over financial reporting as of January 31, 2015,February 3, 2018, based on criteria established in Internal Control - Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Five Below, Inc.’sCommission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 3, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of February 3, 2018 and January 28, 2017, the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the fiscal years in the three-year period ended February 3, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated March 22, 2018 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control overOver Financial Reporting presented above.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Five Below, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 31, 2015, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Five Below, Inc. and subsidiary as of January 31, 2015 and February 1, 2014, and the related consolidated statements of operations, changes in convertible preferred stock and shareholders’ equity (deficit), and cash flows for each of the fiscal years in the three-year period ended January 31, 2015, and our report dated March 26, 2015 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 26, 201522, 2018
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 is included in the “Board of Directors–Nominees for Election to the Board of Directors for a Three-Year Term Expiring at the 20172021 Annual Meeting,” “Board of Directors–Members of the Board of Directors Continuing in Office for a Term Expiring at the 20152019 Annual Meeting,” “Board of Directors–Members of the Board of Directors Continuing in Office for a Term Expiring at the 20162020 Annual Meeting,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Board of Directors–Code of Business Conduct and Ethics,” “Board of Directors–Committees of the Board of Directors,” and “Board of Directors–Director Nomination Process” sections of our proxy statement for the 20142018 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission, no later than May 31, 2015, and is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is included in the “Compensation Discussion and Analysis,” “Executive Compensation,” “Board of Directors–Director Compensation,” “Board of Directors–Board Leadership Structure and Board’s Role in Risk Oversight,” “Board of Directors–Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” sections of our proxy statement for the 20152018 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission, no later than May 31, 2015, and is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information required by this Item 12 is included in the “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” sections of our proxy statement for the 20152018 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission, no later than May 31, 2015, and is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is included in the “Certain Relationships and Related Party Transactions” and “Board of Directors–Director Independence” sections of our proxy statement for the 20152018 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission, no later than May 31, 2015, and is incorporated by reference herein.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is included in the “Proposal 3,2, Ratification of Independent Registered Public Accounting Firm” section of our proxy statement for the 20152018 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission, no later than May 31, 2015, and is incorporated by reference herein.
PART IV
ITEM 15. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENTS SCHEDULES
(a) 1. Consolidated Financial Statements
| |
| (a) | 1. Consolidated Financial Statements |
The consolidated financial statements of the Company filed as part of this Annual Report on Form 10-K are included in Part II, Item 8 beginning on page 44:44.
2. Consolidated Financial Statements Schedules
| |
| 2. | Consolidated Financial Statements Schedules |
All schedules are omitted because they are not applicable or because the required information is either not material or is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits
Exhibit
Number Description
| |
| 3.1 | Amended and Restated Articles of Incorporation of Five Below, Inc., as currently in effect (incorporated by reference to Exhibit 3.53.1 of Amendment No. 2 to the Registration StatementQuarterly Report on Form S-1 (File No. 333-180780)10-Q filed with the Securities and Exchange Commission on June 12, 2012)September 3, 2015) |
| |
| 3.2 | Amended and Restated Bylaws of Five Below, Inc., as currently in effect (filed herewith)(incorporated by reference to Exhibit 3.2 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on September 3, 2015) |
| |
| 4.1 | Form of Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 of Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-180780) filed with the Securities and Exchange Commission on July 9, 2012) |
| |
10.110.1† | Amended and Restated Investor Rights Agreement, dated September 1, 2010, by and among Five Below, Inc., the Significant Common Shareholders signatory thereto, the Series A Preferred Shareholders signatory thereto and the Other Holders party thereto and any other Persons signatory thereto from time to time 2012 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.310.1 of the Registration StatementQuarterly Report on Form S-1 (File No. 333-180780)10-Q filed with the Securities and Exchange Commission on April 18,November 29, 2012) |
| |
10.210.2† | First Amendment toFive Below, Inc. Amended and Restated Investor Rights Agreement, dated October 14, 2010, by Five Below, Inc.Equity Incentive Plan (incorporated by reference to Exhibit 10.410.1 of the Registration StatementQuarterly Report on Form S-1 (File No. 333-180780)10-Q filed with the Securities and Exchange Commission on April 18, 2012)September 1, 2016) |
| |
10.310.3† | Second Amendment to Amended and Restated Investor Rights Agreement, dated May 23, 2012, by and among Five Below, Inc., the Significant Common Shareholders signatory thereto and the Series A Preferred Shareholders signatory thereto 2016 Performance Bonus Plan (incorporated by reference to Exhibit 10.510.2 of Amendment No. 1 to the Registration StatementQuarterly Report on Form S-1 (File No. 333-180780)10-Q filed with the Securities and Exchange Commission on May 24, 2012)September 1, 2016) |
| |
10.4 | Second Amended and Restated Shareholders Agreement, dated September 1, 2010, by and among Five Below, Inc. and the Shareholders party thereto and any other Persons signatory thereto from time to time (incorporated by reference to Exhibit 10.5 of the Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission on April 18, 2012) |
| |
10.5 | First Amendment to Second Amended and Restated Shareholders Agreement, dated October 14, 2010, by Five Below, Inc. (incorporated by reference to Exhibit 10.6 of the Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission on April 18, 2012) |
| |
10.6 | Second Amendment to Second Amended and Restated Shareholders Agreement, dated November 22, 2011, by and among Five Below, Inc. and the Consenting Shareholders signatory thereto (incorporated by reference to Exhibit 10.7 of the Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission on April 18, 2012) |
| |
10.7 | Third Amendment to Second Amended and Restated Shareholders Agreement, dated May 23, 2012, by and among Five Below, Inc. and the Shareholders party thereto and any other Persons signatory thereto from time to time (incorporated by reference to Exhibit 10.9 of Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission on May 24, 2012) |
| |
10.8a†10.4a† | Form of Non-Qualified Stock Option Agreement (Employees) (used for options granted prior to May 21, 2013) (incorporated by reference to Exhibit 10.10 of the Registration Statement on Form S-1 (File No. 333-180780) filed with the Securities and Exchange Commission on April 18, 2012) |
| |
10.8b†10.4b† | Form of Non-Qualified Stock Option Agreement (Employees) (used for options granted after to May 21, 2013)2013 and prior to June 30, 2014) (incorporated by reference to Exhibit 10.410.3 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on September 10, 2013) |
| |
10.8c†10.4c† | Form of Non-Qualified Stock Option Agreement for Employees (used for options granted after June 30, 2014) (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 30, 2014) |
| |
10.9a†10.5a† | Form of Non-Qualified Stock Option Agreement (Executives) (used for options granted prior to May 21, 2013) (incorporated by reference to Exhibit 10.11 of the Registration Statement on Form S-1 (File No. 333-180780) filed with the Securities and Exchange Commission on April 18, 2012) |
| |
10.9b†10.5b† | Form of Non-Qualified Stock Option Agreement (Executives) (used for options granted after to May 21, 2013)2013 and prior to June 30, 2014) (incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on September 10, 2013) |
| |
10.9c†10.5c† | Form of Non-Qualified Stock Option Agreement for Executives (used for options granted after June 30, 2014) (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 30, 2014) |
| |
10.10†10.6† | Form of Award Agreement for Restricted Shares under the Five Below, Inc. Equity Incentive Plan (Employees) (incorporated by reference to Exhibit 10.14 of Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-180780) filed with the Securities and Exchange Commission on June 12, 2012) |
| |
10.11†10.7† | Form of Award Agreement for Restricted Shares under the Five Below, Inc. Amended and Restated Equity Incentive Plan (Directors) (incorporated by reference to Exhibit 10.210.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on March 11, 2013) |
| |
10.12†10.8† | Form of Award Agreement for Restricted Stock Units (incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 30, 2014) |
| |
10.13†10.9† | Form of Award Agreement for Restricted Stock Units (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on December 5, 2014) |
| |
| 10.10† | Form of Award Agreement for Restricted Stock Units (incorporated by reference to Exhibit 10.14 of the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 24, 2016) |
| |
10.14†10.11† | Five Below, Inc. Amended and Restated Equity Incentive Plan (incorporated by reference to Exhibit 10.15 of Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-180780) filed with the Securities and Exchange Commission on June 12, 2012) |
| |
10.15†10.12† | Five Below, Inc. 2012 Performance Bonus Plan (incorporated by reference to Exhibit 10.16 of Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-180780) filed with the Securities and Exchange Commission on June 12, 2012) |
| |
10.16†10.13† | Form of Director and Officer Indemnification Agreement(incorporatedAgreement (incorporated by reference to Exhibit 10.17 of Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-180780) filed with the Securities and Exchange Commission on May 24, 2012) |
| |
10.17† | Letter Employment Agreement, dated October 14, 2010, by and between David Schlessinger and Five Below, Inc. (incorporated by reference to Exhibit 10.17 of the Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission on April 18, 2012) |
| |
10.18† | Amendment to Employment Agreement, dated September 28, 2011, by and between David Schlessinger and Five Below, Inc. (incorporated by reference to Exhibit 10.18 of the Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission on April 18, 2012) |
| |
10.19†10.14† | Letter Employment Agreement, dated October 14, 2010, by and between Thomas Vellios and Five Below, Inc. (incorporated by reference to Exhibit 10.19 of the Registration Statement on Form S-1 (File No. 333-180780) filed with the Securities and Exchange Commission on April 18, 2012) |
| |
10.20†10.15† | Amendment to Employment Agreement, dated September 28, 2011, by and between Thomas Vellios and Five Below, Inc. (incorporated by reference to Exhibit 10.20 of the Registration Statement on Form S-1 (File No. 333-180780) filed with the Securities and Exchange Commission on April 18, 2012) |
| |
10.21†10.16† | Amendment, dated February 18, 2015, to Employment Letter, dated October 14, 2015,2010, as amended, by and between Thomas Vellios and Five Below, Inc. (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 23, 2015) |
| |
10.22†10.17† | Letter Employment Agreement, dated April 16, 2012, by and between Kenneth R. Bull and Five Below, Inc. (incorporated by reference to Exhibit 10.21 of the Registration Statement on Form S-1 (File No. 333-180780) filed with the Securities and Exchange Commission on April 18, 2012) |
| |
10.23†10.18† | Letter Employment Agreement, dated December 10, 2014, by and between Michael Romanko and Five Below, Inc. (filed herewith)(incorporated by reference to Exhibit 10.23 of the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 26, 2015) |
| |
10.24†10.19† | Employment Letter and Non-Disclosure Agreement, each dated June 8, 2014, by and between Joel D. Anderson and Five Below, Inc. (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 12, 2014) |
| |
10.25†10.20† | Amendment to Employment Letter, dated December 4, 2014, by and between Joel D. Anderson and Five Below, Inc. (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4, 2014) |
| |
| 10.21† | Second Amendment to Employment Letter, dated July 20, 2015, by and between Joel D. Anderson and Five Below, Inc. (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on September 3, 2015) |
| |
10.26†10.22† | Employment Letter and Non-Disclosure Agreement, each dated May 21, 2014, by and between Eric M. Specter and Five Below, Inc. (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 12, 2014) |
| |
10.27†10.23† | Non-Qualified Stock Option Agreement,Amendment to Employment Letter, dated October 14, 2010,March 11, 2016, by and between David SchlessingerEric M. Specter and Five Below, Inc. (incorporated by reference to Exhibit 10.2210.1 of the Registration StatementCurrent Report on Form S-1 (File No. 333-180780)8-K filed with the Securities and Exchange Commission on April 18, 2012)March 17, 2016) |
| |
10.28†10.24 | Non-Qualified Stock Option Agreement, dated October 14, 2010, by and between Thomas Vellios and Five Below, Inc. (incorporated by reference to Exhibit 10.23 of the Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission on April 18, 2012) |
| |
10.29† | Option Cancellation Agreement, dated March 22, 2012, by and between David Schlessinger and Five Below, Inc. (incorporated by reference to Exhibit 10.24 of the Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission on April 18, 2012) |
| |
10.30† | Option Cancellation Agreement, dated March 22, 2012, by and between Thomas Vellios and Five Below, Inc. (incorporated by reference to Exhibit 10.25 of the Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission on April 18, 2012) |
| |
10.31 | Lease Agreement, dated April 1, 2007, by and between Twin Spans Business Park, LLC and Five Below, Inc., as amended (incorporated by reference to Exhibit 10.27 of Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission on May 24, 2012) |
| |
10.32 | Credit Agreement, dated as of May 16, 2012, among Five Below, Inc. and the Lenders Party thereto, and Goldman Sachs Bank USA, Barclays Bank PLC and Jefferies Finance, LLC, collectively as lead arrangers and lead bookrunners and, individually, as administrative agent and collateral agent, syndication agent, and documentation agent, respectively, and Credit Suisse AG, Cayman Islands Branch, Deutsche Bank Trust Company Americas, UBS Securities LLC and Wells Fargo Bank, National Association, as arrangers and bookrunners (incorporated by reference to Exhibit 10.28 of Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission on May 24, 2012) |
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10.33 | Guarantee Joinder Agreement, dated June 12, 2013, by Five Below Merchandising, Inc. and acknowledged and accepted by Goldman Sachs Bank USA, to the Credit Agreement, dated as of May 16, 2012, among Five Below, Inc. and the Lenders Party thereto, and Goldman Sachs Bank USA, Barclays Bank PLC and Jefferies Finance, LLC, collectively as lead arrangers and lead bookrunners and, individually, as administrative agent and collateral agent, syndication agent, and documentation agent, respectively, and Credit Suisse AG, Cayman Islands Branch, Deutsche Bank Trust Company Americas, UBS Securities LLC and Wells Fargo Bank, National Association, as arrangers and bookrunners (incorporated by reference to Exhibit 10.6 of the Quarterly Report on Form 10-Q filed with the Commission on June 13, 2013) |
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10.34 | Security Agreement, dated as of May 16, 2012, among Five Below, Inc. and Goldman Sachs Bank USA (incorporated by reference to Exhibit 10.29 of Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission on May 24, 2012) |
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10.35 | Supplement No. 1, dated as of June 12, 2013, by and between Five Below Merchandising, Inc. and Goldman Sachs Bank USA, to the Security Agreement, dated as of May 16, 2012, among Five Below, Inc. and Goldman Sachs Bank USA (incorporated by reference to Exhibit 10.7 of the Quarterly Report on Form 10-Q filed with the Commission on June 13, 2013) |
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10.36 | ThirdFourth Amended and Restated Loan and Security Agreement, dated June 12, 2013,May 10, 2017, among Five Below, Inc., Five Below Merchandising, Inc., and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.510.1 of the Quarterly Report on Form 10-Q filed with the Commission on June 13, 2013) |
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10.37† | Five Below, Inc. Compensation Policy for Non-Employee Directors (incorporated by reference to Exhibit 10.30 of the Annual Report on Form 10-K filed with the Commission on March 26, 2014) |
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10.38† | Separation and General Release Agreement, dated August 6, 2013, by and between David Johnston and Five Below, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 6, 2013)May 11, 2017) |
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10.39†10.25† | Employment Letter, dated April 6, 2017, by and between George S. Hill and Five Below, Inc. 2012 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on NovemberJune 2, 2017) |
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| 10.26† | Five Below, Inc. Executive Severance Plan (incorporate by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on June 2, 2017) |
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| 10.27† | Employment Letter, dated October 29, 2012)2017, by and between David Makuen and Five Below, Inc. (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on December 1, 2017) |
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| 10.28† | Compensation Policy for Non-Employee Directors (filed herewith) |
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| 21.1 | List of Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 of the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 23, 2017) |
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| 23.1 | Consent of KPMG LLP (filed herewith) |
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| 31.1 | Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
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| 31.2 | Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
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| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
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| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
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| 101* | The following financial information from this Annual Report on Form 10-K, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets as of January 31, |
of February 3, 2018 and January 28, 2017; (ii) the Consolidated Statements of Operations for Fiscal Years 2017, 2016, and 2015; (iii) the Consolidated Statements of Changes in Shareholders’ Equity For Fiscal Years 2017, 2016, and 2015; (iv) the Consolidated Statements of Cash Flows for Fiscal Years 2017, 2016, and 2015 and February 1, 2014; (ii) the Consolidated Statements of Operations for Fiscal Years 2014, 2013, and 2012; (iii) the Consolidated Statements of Changes in Convertible Preferred Stock and Shareholders’ Equity (Deficit) For Fiscal Years 2014, 2013, and 2012; (iv) the Consolidated Statements of Cash Flows for Fiscal Years 2014, 2013, and 2012 and (v) the Notes to Consolidated Financial Statements, in each case, tagged in detail.
† Management contract or compensatory plan or arrangement.
* Pursuant to applicable securities laws and regulations, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.
ITEM 16. FORM 10-K SUMMARY
Optional disclosure not included in this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Philadelphia, Pennsylvania, on the 26th22nd day of March 2015.2018.
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| | | |
| | | | FIVE BELOW, INC.
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| | | | By: /s/ Joel D. Anderson |
| | | | Name: Joel D. Anderson |
| | | | Title: President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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| | | | |
| | | | | |
| Signature | | Title | | Date |
/s/ Thomas G. Vellios Thomas G. Vellios | | Executive Chairman | | March 26, 201522, 2018 |
/s/ Joel D. Anderson Joel D. Anderson | | President, Chief Executive Officer and Director (Principal Executive Officer) | | March 26, 201522, 2018 |
/s/ Kenneth R. Bull Kenneth R. Bull | | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | | March 26, 201522, 2018 |
/s/ David SchlessingerKathleen S. Barclay David Schlessinger
| | Chairman Emeritus, Director | | March 26, 2015 |
/s/ Michael F. Devine
Michael F. DevineKathleen S. Barclay
| | Director | | March 26, 201522, 2018 |
/s/ David M. MussaferCatherine E. Buggeln David M. MussaferCatherine E. Buggeln
| | Director | | March 26, 201522, 2018 |
/s/ Michael F. Devine III Michael F. Devine III | | Director | | March 22, 2018 |
/s/ Daniel J. Kaufman Daniel J. Kaufman | | Director | | March 22, 2018 |
/s/ Dinesh Lathi Dinesh Lathi | | Director | | March 22, 2018 |
/s/ Richard L. Markee Richard L. Markee | | Director | | March 22, 2018 |
/s/ Thomas M. Ryan Thomas M. Ryan | | Director | | March 26, 201522, 2018 |
/s/ Ronald L. Sargent Ronald L. Sargent | | Director | | March 26, 2015 |
__________________
Kathleen S. Barclay
| | Director | | |
__________________
Catherine E. Buggeln
| | Director | | 22, 2018 |
Exhibit Index
No. Description
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3.110.28† | Amended Bylaws, as currently in effect (filed herewith) |
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10.23† | Letter Employment Agreement, dated December 10, 2014, by and between Michael Romanko and Five Below, Inc. (filed herewith) |
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| 101* | The following financial information from this Annual Report on Form 10-K, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets as of February 3, 2018 and January 31, 2015 and February 1, 2014;28, 2017; (ii) the Consolidated Statements of Operations for Fiscal Years 2014, 2013,2017, 2016, and 2012;2015; (iii) the Consolidated Statements of Changes in Convertible Preferred Stock and Shareholders’ Equity (Deficit) For Fiscal Years 2014, 2013,2017, 2016, and 2012;2015; (iv) the Consolidated Statements of Cash Flows for Fiscal Years 2014, 2013,2017, 2016, and 2012 2015 and (v) the Notes to Consolidated Financial Statements, in each case, tagged in detail. |
† Management contract or compensatory plan or arrangement.arrangement
* Pursuant to applicable securities laws and regulations, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.
