Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 891K
2: EX-10.1 Material Contract HTML 25K
3: EX-10.2 Material Contract HTML 37K
4: EX-10.3 Material Contract HTML 27K
5: EX-31.1 Certification -- §302 - SOA'02 HTML 22K
6: EX-31.2 Certification -- §302 - SOA'02 HTML 22K
7: EX-32.1 Certification -- §906 - SOA'02 HTML 18K
8: EX-32.2 Certification -- §906 - SOA'02 HTML 18K
14: R1 Document and Entity Information HTML 71K
15: R2 Consolidated Balance Sheets HTML 117K
16: R3 Consolidated Balance Sheets (Parenthetical) HTML 30K
17: R4 Consolidated Statements of Operations HTML 80K
18: R5 Consolidated Statement of Shareholders' Equity HTML 118K
19: R6 Consolidated Statements of Cash Flows HTML 96K
20: R7 Summary of Significant Accounting Policies HTML 65K
21: R8 Revenue from Contracts With Customers HTML 51K
22: R9 Leases HTML 45K
23: R10 Income Per Common Share HTML 48K
24: R11 Line of Credit HTML 30K
25: R12 Commitments and Contingencies HTML 22K
26: R13 Share-Based Compensation HTML 50K
27: R14 Income Taxes HTML 35K
28: R15 Pay vs Performance Disclosure HTML 30K
29: R16 Insider Trading Arrangements HTML 23K
30: R17 Summary of Significant Accounting Policies HTML 49K
(Policies)
31: R18 Summary of Significant Accounting Policies HTML 50K
(Tables)
32: R19 Revenue from Contracts With Customers (Tables) HTML 46K
33: R20 Leases (Tables) HTML 46K
34: R21 Income Per Common Share (Tables) HTML 45K
35: R22 Share-Based Compensation (Tables) HTML 44K
36: R23 Income Taxes (Tables) HTML 30K
37: R24 Summary of Significant Accounting Policies - HTML 24K
Nature of business (Details)
38: R25 Summary of Significant Accounting Policies - Fair HTML 39K
value of financial instruments (Details)
39: R26 Summary of Significant Accounting Policies - HTML 22K
Prepaid expenses and other current assets
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40: R27 Summary of Significant Accounting Policies - Other HTML 19K
accrued expenses (Details)
41: R28 Revenue from Contracts With Customers (Details) HTML 29K
42: R29 Leases - Narrative (Details) HTML 27K
43: R30 Leases - Components of net lease cost (Details) HTML 24K
44: R31 Leases - Maturity of lease liabilities under HTML 36K
operating leases (Details)
45: R32 Leases - Supplemental cash flow information HTML 23K
(Details)
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and diluted income (Loss) Per Share (Details)
47: R34 Income Per Common Share - Narrative (Details) HTML 22K
48: R35 Line of Credit (Details) HTML 58K
49: R36 Commitments and Contingencies (Details) HTML 19K
50: R37 Share-Based Compensation - 2002 Equity incentive HTML 31K
plan (Details)
51: R38 Share-Based Compensation - Schedule of stock HTML 51K
option activity under plan (Details)
52: R39 Share-Based Compensation - Share-based HTML 19K
compensation valuation of stock options (Details)
53: R40 Share-Based Compensation - Restricted stock units HTML 95K
and performance-based restricted stock units
(Details)
54: R41 Share-Based Compensation - Share repurchase HTML 40K
program (Details)
55: R42 Income Taxes - Schedule of effective income tax HTML 28K
rate reconciliation (Details)
56: R43 Income Taxes - Narrative (Details) HTML 25K
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(Exact name of Registrant as Specified in its Charter)
iPennsylvania
i75-3000378
(State
or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
i701 Market Street
iSuite
300
iPhiladelphia
iPennsylvania
i19106
(Address
of Principal Executive Offices)
(Zip Code)
(i215) i546-7909
(Registrant’s Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon stock
iFIVE
iThe
Nasdaq Stock Market LLC
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. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically 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 such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
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 i☐ No ☒
The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of November 29, 2023 was i55,192,768.
Property
and equipment, net of accumulated depreciation and amortization of $i547,682, $i454,027,
and $i439,890, respectively.
i1,075,275
i925,530
i880,469
Operating
lease assets
i1,475,095
i1,319,132
i1,312,437
Other
assets
i16,069
i13,870
i13,761
$
i3,657,438
$
i3,324,911
$
i3,163,715
Liabilities
and Shareholders’ Equity
Current liabilities:
Line of credit
$
i—
$
i—
$
i—
Accounts
payable
i349,340
i221,120
i279,836
Income
taxes payable
i—
i19,928
i—
Accrued
salaries and wages
i19,357
i25,420
i14,140
Other
accrued expenses
i158,272
i136,316
i152,260
Operating
lease liabilities
i231,197
i199,776
i193,614
Total
current liabilities
i758,166
i602,560
i639,850
Other
long-term liabilities
i4,625
i4,296
i4,307
Long-term
operating lease liabilities
i1,455,358
i1,296,975
i1,293,692
Deferred
income taxes
i61,364
i59,151
i41,378
Total
liabilities
i2,279,513
i1,962,982
i1,979,227
Commitments
and contingencies (note 6)
i
i
i
Shareholders’
equity:
Common stock, $iii0.01//
par value. Authorized iii120,000,000//
shares; issued and outstanding ii55,192,500/, ii55,537,221/,
and ii55,512,425/ shares, respectively.
i551
i555
i555
Additional
paid-in capital
i177,877
i260,784
i254,663
Retained
earnings
i1,199,497
i1,100,590
i929,270
Total
shareholders’ equity
i1,377,925
i1,361,929
i1,184,488
$
i3,657,438
$
i3,324,911
$
i3,163,715
See
accompanying notes to consolidated financial statements.
Adjustments
to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
i93,652
i76,698
Share-based
compensation expense
i13,366
i18,117
Deferred
income tax expense
i2,213
i5,222
Other
non-cash expenses
i172
i364
Changes
in operating assets and liabilities:
Inventories
(i235,629)
(i246,457)
Prepaid
income taxes and tax receivable
(i15,008)
(i14,064)
Prepaid
expenses and other assets
(i12,530)
(i21,787)
Accounts
payable
i123,374
i79,046
Income
taxes payable
(i19,928)
(i28,096)
Accrued
salaries and wages
(i6,063)
(i39,399)
Operating
leases
i33,841
i27,271
Other
accrued expenses
i15,521
i7,895
Net
cash provided by (used in) operating activities
i91,888
(i44,982)
Investing
activities:
Purchases of investment securities and other investments
(i128,950)
(i31,815)
Sales,
maturities, and redemptions of investment securities
i195,795
i273,951
Capital
expenditures
(i231,921)
(i173,589)
Net
cash (used in) provided by investing activities
(i165,076)
i68,547
Financing
activities:
Cash paid for Revolving Credit Facility financing costs
i—
(i248)
Net
proceeds from issuance of common stock
i440
i464
Repurchase
and retirement of common stock
(i80,541)
(i40,007)
Proceeds
from exercise of options to purchase common stock and vesting of restricted and performance-based restricted stock units
i288
i111
Common
shares withheld for taxes
(i16,395)
(i4,629)
Net
cash used in financing activities
(i96,208)
(i44,309)
Net
decrease in cash and cash equivalents
(i169,396)
(i20,744)
Cash
and cash equivalents at beginning of period
i332,324
i64,973
Cash
and cash equivalents at end of period
$
i162,928
$
i44,229
Supplemental
disclosures of cash flow information:
Non-cash investing activities
Increase in accrued purchases of property and equipment
$
i11,541
$
i6,008
See
accompanying notes to consolidated financial statements.
8
FIVE BELOW, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(1) iSummary
of Significant Accounting Policies
(a)iDescription of Business
Five Below, Inc. is a specialty value retailer offering merchandise targeted at the tween and teen demographic. The Company offers an edited assortment of products, with most priced at $i5
and below. As used herein, “Five Below,” the “Company,” refers to Five Below, Inc. (collectively with its wholly owned subsidiaries), except as expressly indicated or unless the context otherwise requires. As used herein, references to “crew” refer to our employees, and references to “shipcenters” refer to our distribution and logistics centers.
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 October 28, 2023, operated in i43 states, which does not include Alaska, Hawaii, Idaho, Montana, Oregon, Washington, and Wyoming. As of October 28, 2023 and October 29, 2022,
the Company operated i1,481 stores and i1,292 stores, respectively, each operating under the name “Five Below.”The
Company also sells its merchandise on the internet, through the Company's fivebelow.com e-commerce website, offering home delivery and the option to buy online and pick up in store. Additionally, the Company sells merchandise through on-demand third-party services to enable its customers to shop online and receive convenient delivery.
(b)iFiscal
Year
The Company operates on a 52/53-week fiscal year ending on the Saturday closest to January 31. References to "fiscal year 2023" or "fiscal 2023" refer to the period from January 29, 2023 to February 3, 2024, which is a 53-week fiscal year. References to "fiscal year 2022" or "fiscal 2022" refer to the period from January 30, 2022 to January 28, 2023, which is a 52-week fiscal year. The fiscal quarters ended October 28, 2023 and October 29, 2022 refer to the thirteen weeks ended as of those dates. The year-to-date
periods ended October 28, 2023 and October 29, 2022 refer to the thirty-nine weeks ended as of those dates.
(c)iBasis of Presentation
The consolidated balance sheets as of October 28, 2023 and October 29, 2022, the
consolidated statements of operations for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022, the consolidated statements of shareholders’ equity for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022 and the consolidated statements of cash flows for the thirty-nine weeks ended October 28, 2023 and October 29, 2022 have been prepared by the Company in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim reporting and are unaudited. In the opinion of management, the aforementioned financial statements
include all known adjustments (which consist primarily of normal, recurring accruals, estimates and assumptions that impact the financial statements) necessary to present fairly the financial position at the balance sheet dates and the results of operations and cash flows for the periods ended October 28, 2023 and October 29, 2022. The balance sheet as of January 28, 2023, presented herein, has been derived from the audited balance sheet included in the Company's Annual Report on Form 10-K for fiscal 2022 as filed with the Securities and Exchange Commission on March 16, 2023 and referred to herein as the “Annual Report,” but does not include all annual disclosures required by U.S.
GAAP. These consolidated financial statements should be read in conjunction with the consolidated financial statements for the fiscal year ended January 28, 2023 and footnotes thereto included in the Annual Report. The consolidated results of operations for the thirteen and thirty-nine weeks October 28, 2023 and October 29, 2022 are not necessarily indicative of the consolidated operating results for the year ending February 3, 2024 or any other period. The Company's business is seasonal and as a result, the Company's net sales fluctuate from quarter to quarter. Net sales are usually highest in the fourth
fiscal quarter due to the year-end holiday season.
(d)iRecently Issued Accounting Pronouncements
In September 2022, the FASB issued ASU 2022-04, Liabilities-Supplier Finance Programs (Topic 405-50) - Disclosure of Supplier Finance Program Obligations, which requires that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of financial statements
to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. The amendments in this ASU are effective for the first quarter of 2023, except for the amendment on roll-forward information, which is effective for the first quarter of 2024, with early adoption permitted. The Company adopted this guidance on January 29, 2023, and determined that the impact of the adoption of ASU 2022-04 did not have a material impact on its consolidated financial statements.
9
(e)iUse
of Estimates
The preparation of the 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 the carrying amount of property and equipment, net realizable value for inventories, income taxes, share-based compensation expense, the incremental borrowing rate utilized in operating lease liabilities, equity method investments and notes receivable.
(f)iFair
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 are based upon the lowest level of input that is significant to the measurement.
The Company’s financial instruments consist primarily of cash equivalents, investment securities, accounts payable, borrowings, if any, under a line of credit, equity method investments and notes receivable. 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 borrowings, if any, under the line of credit approximates 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 cash equivalents and the investments in corporate bonds are Level 1 while the investments in municipal bonds are Level 2. The fair market values of Level 2 instruments 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 October 28, 2023, January 28, 2023 and October 29, 2022, the Company had cash equivalents of $i115.1
million, $i313.2 million and $i21.7 million, respectively. The Company’s cash equivalents typically consist of cash management solutions, credit and debit card receivables, money market funds, corporate bonds and municipal bonds with original
maturities of 90 days or less. Fair value for cash equivalents was determined based on Level 1 inputs.
As of October 28, 2023, the Company did not have any holdings in investment securities. As of January 28, 2023 and October 29, 2022, the Company's investment securities are classified as held-to-maturity since the Company has the intent and ability to hold the investments to maturity. iSuch
securities are carried at amortized cost plus accrued interest and consist of the following (in thousands):
The Five Below, Inc. Nonqualified Deferred Compensation Plan (the "Deferred Comp Plan") and a related, irrevocable grantor trust (the "Trust") provides eligible key crew with the opportunity to elect to defer up to i80% of their eligible compensation. The Company may make discretionary contributions, at the discretion of the Board. Payments under the Deferred Comp Plan will be made from
the general assets of the Company or from the assets of the Trust, funded by the Company. The related liability is recorded as deferred compensation and included in other long-term liabilities in the consolidated balance sheets.
Revenue from store operations, including third party delivery services, is recognized at the point of sale when control of the product is transferred to the customer at such time. Internet sales, through the Company's fivebelow.com e-commerce website, are recognized when the customer receives the product as control transfers upon delivery. Returns subsequent
to the period end are immaterial; accordingly, no significant reserve has been recorded. Gift card sales to customers are initially recorded as liabilities and recognized as sales upon redemption for merchandise or as breakage revenue in proportion to the pattern of redemption of the gift cards by the customer in net sales.
The transaction price for the Company’s sales is based on the item’s stated price. To the extent that the Company charges customers for shipping and handling on e-commerce sales, the Company records such amounts in net sales. Shipping and handling costs, which include fulfillment and shipping costs related to the
Company's e-commerce operations, are included in costs of goods sold. As permitted by applicable accounting guidance, ASU 2014-09 "Revenue from Contracts with Customers,"the Company has elected to exclude all sales taxes collected from customers and remitted to governmental authorities from net sales in the accompanying consolidated statements of operations.
i
Disaggregation of Revenue
The following
table provides information about disaggregated revenue by groups of products: leisure, fashion and home, and snack and seasonal (dollars in thousands):
(1)
Due to realignment of certain products, there was a minor adjustment to historical sales by product group.
/
11
(3) iLeases
The
Company determines if an arrangement contains a lease at the inception of a contract. Operating lease assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease.
During the thirteen weeks ended October 28, 2023, the Company committed to i69
new store leases with average terms of approximately i10 years that have future minimum lease payments of approximately $i126.6 million.
All of the Company's leases are
classified as operating leases and the associated assets and liabilities are presented as separate captions in the consolidated balance sheets. As of October 28, 2023 and October 29, 2022, the weighted average remaining lease term for the Company's operating leases was i7.5 years and i7.7
years, respectively, and the weighted average discount rate was i5.2% and i5.2%, respectively.
i
The
following table is a summary of the Company's components for net lease costs (in thousands):
Cash paid for amounts included in the measurement
of lease liabilities:
Cash payments arising from operating lease liabilities (1)
$
i170,156
$
i154,840
Supplemental
non-cash information:
Operating lease liabilities arising from obtaining right-of-use assets
$
i282,147
$
i274,097
(1)
Included within operating activities in the Company's Consolidated Statements of Cash Flows.
12
(4) iIncome Per Common Share
Basic income per common share amounts are calculated using the weighted average
number of common shares outstanding for the period. Diluted income per common share amounts are calculated using the weighted average number of common shares outstanding for the period and include the dilutive impact of exercised stock options as well as assumed vesting of 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 dilutive impact, if any, for performance-based restricted stock units, which are subject to market conditions based on the Company's
total shareholder return relative to a pre-defined peer group, are included in the weighted average shares.
i
The following table reconciles net income and the weighted average common shares outstanding used in the computations of basic and diluted income per common share (in thousands, except for share and per share data):
Weighted
average common shares outstanding - basic
i55,452,533
i55,509,525
i55,592,536
i55,551,382
Dilutive
impact of options, restricted stock units and employee stock purchase plan
i123,607
i174,084
i125,451
i169,410
Weighted
average common shares outstanding - diluted
i55,576,140
i55,683,609
i55,717,987
i55,720,792
Per
common share:
Basic income per common share
$
i0.26
$
i0.29
$
i1.78
$
i1.62
Diluted
income per common share
$
i0.26
$
i0.29
$
i1.78
$
i1.62
/
The
effects of the assumed vesting of restricted stock units for i56,695 shares of common stock for the thirteen weeks ended October 28, 2023 were excluded from the calculation of diluted income per share, as their impact would have been anti-dilutive.
The effects of the assumed vesting of restricted stock units for i54,833
shares of common stock for the thirteen weeks ended October 29, 2022 were excluded from the calculation of diluted income per share, as their impact would have been anti-dilutive.
The effects of the assumed vesting of restricted stock units for i25,119 shares of common stock for the thirty-nine weeks ended October 28, 2023 were excluded from the calculation of diluted income
per share, as their impact would have been anti-dilutive.
The effects of the assumed vesting of restricted stock units for i87,225 shares of common stock for the thirty-nine weeks ended October 29, 2022 were excluded from the calculation of diluted income per share, as their impact would have been anti-dilutive.
The aforementioned excluded shares do not reflect the impact of any
incremental repurchases under the treasury stock method.
(5)iLine of Credit
On September 16, 2022, the Company entered into a Second Amendment to Credit Agreement (the "Second Amendment")
which amended the Fifth Amended and Restated Credit Agreement, dated as of April 24, 2020, as previously amended by that certain First Amendment to Credit Agreement, dated as of January 27, 2021 (the "First Amendment"; the Fifth Amended and Restated Credit Agreement as amended by the First Amendment and the Second Amendment, the “Credit Agreement”), among the Company, 1616 Holdings, Inc., a wholly-owned subsidiary of the Company ("1616 Holdings" and together with the Company, the "Loan Parties"), Wells Fargo Bank, National Association as administrative agent (the "Agent"), and other
lenders party thereto (the "Lenders").
13
The Credit Agreement provides for a secured asset-based revolving line of credit in the amount of up to $i225.0 million (the "Revolving Credit Facility"). Advances under the Revolving Credit Facility are tied to a borrowing base consisting of eligible credit card receivables and inventory, as reduced by certain reserves
in effect from time to time. Pursuant to the Credit Agreement, inventory appraisals and certain other diligence items are deferred, with reduced advance rates during the period that such appraisals have not been delivered. Pursuant to the Second Amendment, the Revolving Credit Facility expires on the earliest to occur of (i) September 16, 2027 or (ii) an event of default.
The Second Amendment also replaced the existing LIBOR (the "London Interbank Offered Rate") provisions with SOFR (the "Secured Overnight Financing Rate") provisions which converted then outstanding LIBOR loans into SOFR loans and additionally makes a number of other revisions to other provisions of the Credit Agreement. Giving effect to the Second Amendment, outstanding borrowings under the Revolving Credit Facility would accrue interest at floating rates plus an applicable margin ranging from
i1.12% to i1.50% for SOFR loans and i0.125%
to i0.50% for base rate loans, and letter of credit fees range from i1.125% to i1.50%,
in each case based on the average availability under the Revolving Credit Facility.
The Revolving Credit Facility may be increased by up to an additional $i150.0 million, subject to certain conditions, including obtaining commitments from one or more Lenders (the "Accordion"). Pursuant to the First Amendment, the Company obtained commitments from the Lenders that would allow the
Company at its election (subject only to satisfaction of certain customary conditions such as the absence of any Event of Default), to increase the amount of the Revolving Credit Facility by an aggregate principal amount up to $i50.0 million within the Accordion (the "Committed Increase"). The entire amount of the Revolving Credit Facility is available for the issuance of letters of credit and allows for swingline loans.
The Credit Agreement contains
customary covenants that limit, absent lender approval, the ability of the Company and certain of its affiliates to, among other things, pay cash dividends, incur debt, create liens and encumbrances, redeem or repurchase stock, enter into certain acquisition transactions with affiliates, merge, dissolve, repay certain indebtedness, change the nature of the Company’s business, enter sale or leaseback transactions, make investments or dispose of assets. In some cases, these restrictions are subject to certain negotiated exceptions or permit the Company to undertake otherwise restricted activities if it satisfies certain conditions. In addition, the
Company will be required to maintain availability of not less than (i) i12.5% of the lesser of (x) aggregate commitments under the Revolving Credit Facility and (y) the borrowing base (the "loan cap") during the period that inventory appraisals have not been delivered as described above and (ii) at all other times i10.0%
of the loan cap.
If there exists an event of default or availability under the Revolving Credit Facility is less than i15% of the loan cap, amounts in any of the Loan Parties’ or subsidiary guarantors' designated deposit accounts will be transferred daily into a blocked account held by the Agent and applied to reduce outstanding amounts under the Revolving Credit Facility (the "Cash Dominion Event"), so long as (i) such event of default has not
been waived and/or (ii) until availability has exceeded i15% of the loan cap for sixty (i60) consecutive calendar days (provided that such ability to discontinue the
Cash Dominion Event shall be limited to two times during the term of the Credit Agreement).
The Credit Agreement contains customary events of default including, among other things, failure to pay obligations when due, initiation of bankruptcy or insolvency proceedings, defaults on certain other indebtedness, change of control, incurrence of certain material judgments that are not stayed, satisfied, bonded or discharged within 30 days, certain ERISA events, invalidity of the credit documents, and violation of affirmative and negative covenants or breach of representations and warranties set forth in the Credit Agreement. Amounts under the Revolving Credit Facility may become due upon events of default (subject to any applicable grace or cure periods).
All obligations under the Revolving Credit Facility are guaranteed by 1616 Holdings and secured by substantially all of the assets
of the Company and 1616 Holdings.
As of October 28, 2023, the Company had ino borrowings under the Revolving Credit Facility and had approximately $i225
million available under the Revolving Credit Facility.
As of October 28, 2023, the Company has other purchase commitments of approximately $i5.3 million consisting of purchase agreements for materials that will be used in the construction of new stores.
14
Contingencies
Legal
Matters
The Company is subject to various proceedings, lawsuits, disputes, and claims arising in the ordinary course of the Company's business. Many of these actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against the Company 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. The Company cannot
predict with assurance the outcome of actions brought against the Company. 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, the Company records 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 the Company's financial condition or results of operations.
(7)iShare-Based
Compensation
Equity Incentive Plan
Pursuant to the Company's 2022 Equity Incentive Plan (the “Plan”), the Company’s Board of Directors may grant stock options, restricted shares, and restricted stock units to officers, directors, key crew and professional service providers. The Plan allows for the issuance of up to a total of i4.3
million shares under the Plan. As of October 28, 2023, approximately i3.4 million stock options, restricted shares, or restricted stock units were available for grant.
Common Stock Options
All
stock options have a term not greater than iten 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 ifour years from the date of grant.
i
Stock
option activity during the thirty-nine weeks ended October 28, 2023 was as follows:
Options Outstanding
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term (in years)
The
fair value of each option award granted to crew, including outside directors, is estimated on the date of grant using the Black-Scholes option-pricing model. There were ino stock options granted during the thirty-nine weeks ended October 28, 2023.
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. RSUs and PSUs granted to date generally have vesting periods ranging from less than ione year to ifour
years from the date of grant. The fair value of RSUs is the market price of the underlying common stock on the date of grant. PSUs granted to date have vesting periods ranging from less than one year to five years from the date of grant.
PSUs that have a performance condition are 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. The fair value of these PSUs is the market price of the underlying common stock on the date of grant. Compensation is recognized over the vesting period and adjusted for the probability of achievement of the performance criteria.
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PSUs
that have a market condition based on our total shareholder return relative to a pre-defined peer group are subject to multi-year performance objectives with vesting periods of approximately ithree years from the date of grant (if the applicable performance objectives are achieved). The fair value of these PSUs are determined using a Monte Carlo simulation model, which utilizes multiple input variables such as (i) total shareholder return from the beginning of the performance cycle through the performance measurement date(s); (ii) volatility; (iii) risk-free interest
rates; and (iv) the correlation of the pre-defined peer group's total shareholder return.
i
RSU and PSU activity during the thirty-nine weeks ended October 28, 2023 was as follows:
In
connection with the vesting of RSUs and PSUs during the thirty-nine weeks ended October 28, 2023, the Company withheld i84,527 shares with an aggregate value of $i16.4
million in satisfaction of minimum tax withholding obligations due upon vesting.
In connection with the vesting of RSUs and PSUs during the thirty-nine weeks ended October 29, 2022, the Company withheld i30,380 shares with an aggregate value of $i4.6
million in satisfaction of minimum tax withholding obligations due upon vesting.
As of October 28, 2023, there was $i39.9 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements (including stock options, RSUs and PSUs) granted under the Plan. The cost is expected to be recognized over a weighted average vesting period of i2.3
years.
Share Repurchase Program
On March 20, 2018, the Company's Board of Directors approved a share repurchase program authorizing the repurchase of up to $i100 million of the Company's common stock
through March 31, 2021, on the open market, in privately negotiated transactions, or otherwise. This program expired on March 31, 2021.
On March 9, 2021, the Company's Board of Directors approved a new share repurchase program for up to $i100 million of the
Company's common stock through March 31, 2024. In fiscal 2021, the Company purchased i368,699 shares at an aggregate cost of approximately $i60.0 million,
or average price of $i162.75 per share. In fiscal 2022, the Company purchased i247,132
shares at an aggregate cost of approximately $i40.0 million, or average price of $i161.88
per share. The Company has exhausted repurchases under this program.
On June 14, 2022, the Company's Board of Directors approved a new share repurchase program for up to $i100 million of the Company's common stock through June
30, 2025. During the thirteen weeks ended October 28, 2023, the Company purchased i504,369 shares at an aggregate cost of approximately $i80.0 million,
or average price of $i158.63 per share. On November 27, 2023, the Company's Board of Directors retired this share repurchase program.
Since approval of the share repurchase program in March 2018, the Company has purchased approximately i1.6
million shares for an aggregate cost of approximately $i230 million. There can be no assurances that any additional repurchases will be completed, or as to the timing or amount of any repurchases. The share repurchase program may be modified or discontinued at any time.
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(8)iIncome
Taxes
i
The following table summarizes the Company’s income tax expense and effective tax rates for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022 (dollars in thousands):
The
effective tax rates for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022 were based on the Company’s forecasted annualized effective tax rates and were adjusted for discrete items that occurred within the periods presented. The effective tax rate for the thirteen weeks ended October 28, 2023 was higher than the thirteen weeks ended October 29, 2022 primarily due to non-deductible expenses, partially offset by discrete items, which includes the impact of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" with respect to the requirements 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. The effective tax rate for the thirty-nine weeks ended October 28, 2023 was lower than the thirty-nine weeks ended October 29, 2022 primarily due to discrete items, which includes the impact of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," partially offset by non-deductible expenses.
The Company had iiino//
material accrual for uncertain tax positions or interest and/or penalties related to income taxes on the Company’s balance sheets as of October 28, 2023, January 28, 2023 or October 29, 2022 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 the thirteen and thirty-nine weeks ended October 28, 2023 or October 29, 2022.
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 February 1, 2020 and thereafter remain subject to examination by the U.S. Internal Revenue 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 ithree years to ifour
years depending on the state.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with “Selected Financial Data” and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for our fiscal year ended January 28, 2023 and referred to herein as the "Annual Report," and the consolidated financial statements and related notes as of and for the thirteen and thirty-nine weeks endedOctober 28, 2023 included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 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 below in “Special Note Regarding Forward-Looking Statements” and in Part II, Item 1A "Risk Factors." 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 2023" or "fiscal 2023" refer to the period from January 29, 2023 to February
3, 2024, which is a 53-week fiscal year. References to "fiscal year 2022" or "fiscal 2022" refer to the period from January 30, 2022 to January 28, 2023, which is a 52-week fiscal year. The fiscal quarters ended October 28, 2023 and October 29, 2022 refer to the thirteen weeks ended as of those dates. The year-to-date periods ended October 28, 2023 and October 29, 2022 refer to the thirty-nine weeks ended as of those dates. 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.
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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. Forward-looking statements frequently are identified 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 Quarterly Report on Form 10-Q 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 in Part I, Item 1A “Risk Factors” in our Annual Report, as amended by the risk factors included
in Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q. These factors include without limitation:
•the impacts of inflation and increasing commodity prices;
•failure to successfully implement our growth strategy;
•disruptions in our ability to select, obtain, distribute and market merchandise profitably;
•reliance on merchandise manufactured outside of the United States;
•the direct and indirect impact of current and potential tariffs imposed and proposed by the United States on foreign imports, including, without limitation, the tariffs themselves, any counter-measures thereto and any indirect effects on
consumer discretionary spending, which could increase the cost to us of certain products, lower our margins, increase our import related expenses, and reduce consumer spending for discretionary items, each of which could have a material adverse effect on our business, financial condition and results of future operations;
•the impact of price increases, such as, a reduction in our unit sales, damage to our reputation with our customers, and our becoming less competitive in the marketplace;
•dependence on the volume of traffic to our stores and website;
•inability to successfully build, operate or expand our shipcenters or network capacity;
•disruptions
to the global supply chain, increased cost of freight, constraints on shipping capacity to transport inventory or the timely receipt of inventory;
•extreme weather conditions in the areas in which our stores are located could negatively affect our business and results of operations;
•disruptions in our information technology systems and our inability to maintain and update those systems could adversely affect operations and our customers;
•systemic failure of the banking system in the United States or globally;
•the risks of cyberattacks or other cyber incidents, such as the failure to secure customers' confidential or credit card information, or other private data relating to our crew or our
Company, including the costs associated with protection against or remediation of such incidents;
•increased operating costs or exposure to 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;
•the costs
and risks of constructing and owning real property;
•changes in our competitive environment, including increased competition from other retailers and the presence of online retailers;
•the seasonality of our business;
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•inability to successfully implement our expansion into online retail;
•natural disasters, adverse weather conditions, pandemic outbreaks, global political events, war, terrorism or civil unrest;
•the impact of changes in tax legislation;
•the
impact to our financial performance related to insurance programs;
•inability to protect our brand name, trademarks and other intellectual property rights;
•the impact of product and food safety claims and effects of legislation; and
•restrictions imposed by our indebtedness on our current and future operations.
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 Quarterly Report on Form 10-Q 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.
Overview
Five Below, Inc. (collectively referred to herein with its wholly owned subsidiaries as "we,""us," or "our") is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the tween and teen customer. We offer a dynamic, edited assortment of exciting products, with most priced at $5 and below, including select brands and licensed merchandise across our category worlds. In fiscal 2019, we rolled out new pricing to our full chain, increasing prices on certain products over
$5. Most of our products remain at $5 and below. As of October 28, 2023, we operated 1,481 stores in 43 states.
We also offer our merchandise on the internet, through our fivebelow.com e-commerce website, offering home delivery and the option to buy online and pick up in store. Additionally, we sell merchandise through on-demand third-party services to enable our customers to shop online and receive convenient delivery. All e-commerce sales, including shipping and handling revenue, are included in net sales and are included in comparable sales. Our e-commerce expenses will have components classified as both cost of goods sold and selling, general and administrative expenses.
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 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 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 or as breakage revenue in proportion to the pattern of redemption of the gift cards by the customer.
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 Sales
Comparable sales include net sales from stores that have been open for at least 15 full months from their opening 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 sales:
•The period beginning when the closing store receives its last merchandise delivery from one of our shipcenters 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
▪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 shipcenters through the first anniversary of the date the store re-opened.
Comparable sales exclude the 53rd week of sales for 53-week fiscal years. 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 Quarterly Report on Form 10-Q regarding our comparable sales may not be comparable to similar data made available by other retailers. Non-comparable 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 sales.
Measuring the change in fiscal year-over-year comparable sales allows us to evaluate how we are performing. Various factors affect comparable 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 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;
•weather conditions; and
•the impacts associated with the COVID-19 pandemic, including closures of our stores, adverse impacts on our operations, and consumer sentiment regarding discretionary spending.
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 sales. Accordingly, comparable 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 and tariffs, as well as shipping and handling costs, store occupancy, distribution and buying expenses. Shipping and handling costs include internal 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 from our shipcenters 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 Quarterly Report on Form 10-Q regarding our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers.
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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 cost of goods sold could have an adverse impact on our gross profit and results of operations. In addition, global supply chain disruptions, the cost of freight and constraints on shipping capacity to transport inventory may have an adverse impact on our gross profit and results of operations, as well as our sales. 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 expenses.
Operating Income
Operating income equals gross profit less SG&A expenses. Operating income excludes interest expense or income, other expense or income, 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.
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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.
Net sales increased to $736.4 million in the thirteen weeks ended October 28, 2023 from $645.0 million in the thirteen weeks ended October 29, 2022, an increase of $91.4 million, or 14.2%. The increase was the result of a non-comparable sales increase of $76.0 million and a comparable sales increase of $15.4 million. The increase in non-comparable sales was primarily driven by new stores that opened in fiscal 2023 and the number of stores that opened in fiscal 2022 but have not been open for 15 full months.
Comparable
sales increased 2.5%. This increase resulted from an increase of approximately 3.1% in the number of transactions, partially offset by a decrease of approximately 0.6% in the average dollar value of transactions.
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Cost of Goods Sold and Gross Profit
Cost of goods sold increased to $513.6 million in the thirteen weeks ended October 28, 2023 from $437.2 million in the thirteen weeks ended October 29, 2022, an increase of $76.4 million, or 17.5%. The increase in cost of goods sold was primarily the result of an increase in the merchandise cost of goods sold primarily resulting from the increase in net sales. Also contributing to the
increase in cost of goods sold was an increase in store occupancy costs primarily resulting from new store openings.
Gross profit increased to $222.8 million in the thirteen weeks ended October 28, 2023 from $207.8 million in the thirteen weeks ended October 29, 2022, an increase of $15.0 million, or 7.2%. Gross margin decreased to 30.3% in the thirteen weeks ended October 28, 2023 from 32.2% in the thirteen weeks ended October 29, 2022, a decrease of approximately 190 basis points. The decrease in gross margin was primarily the result of an increase as a percentage of net sales in merchandise cost of goods sold, which includes the impact of inventory shrinkage.
Selling, General and
Administrative Expenses
Selling, general and administrative expenses increased to $206.7 million in the thirteen weeks ended October 28, 2023 from $186.9 million in the thirteen weeks ended October 29, 2022, an increase of $19.8 million, or 10.6%. As a percentage of net sales, selling, general and administrative expenses decreased approximately 90 basis points to 28.1% in the thirteen weeks ended October 28, 2023 from 29.0% in the thirteen weeks ended October 29, 2022. The increase in selling, general and administrative expenses was the result of increases of $18.1 million in store-related expenses and $1.7 million in corporate-related expenses primarily to support new store growth.
Income
Tax Expense
Income tax expense decreased to $5.0 million in the thirteen weeks ended October 28, 2023 from $5.3 million in the thirteen weeks ended October 29, 2022, a decrease of $0.3 million or 5.8%. The decrease in income tax expense was primarily due to the $1.9 million decrease in pre-tax income.
Our effective tax rate for the thirteen weeks ended October 28, 2023 was 25.4% compared to 24.6% in the thirteen weeks ended October 29, 2022. Our effective tax rate for the thirteen weeks ended October 28, 2023 was higher than the comparable prior year period primarily due to non-deductible expenses, partially offset by discrete items,
which includes the impact of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" with respect to the requirements 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.
Net Income
As a result of the foregoing, net income decreased to $14.6 million in the thirteen weeks endedOctober 28, 2023 from $16.1 million in the thirteen weeks ended October 29, 2022, a decrease of $1.5 million or 9.6%.
Net sales increased to $2,221.6 million in the thirty-nine weeks ended October 28, 2023 from $1,953.6 million in the thirty-nine weeks ended October 29, 2022, an increase of $268.0 million, or 13.7%. The increase was the result of a non-comparable sales increase of $218.5 million and a comparable sales increase of $49.5 million. The increase in non-comparable sales was primarily driven by the number of stores that opened in fiscal 2022 but have not been open for 15 full months and new stores that opened in fiscal 2023.
Comparable
sales increased 2.6%. This increase resulted from an increase of approximately 3.8% in the number of transactions, partially offset by a decrease of approximately 1.2% in the average dollar value of transactions.
Cost of Goods Sold and Gross Profit
Cost of goods sold increased to $1,499.4 million in the thirty-nine weeks ended October 28, 2023 from $1,310.5 million in the thirty-nine weeks ended October 29, 2022, an increase of $188.9 million, or 14.4%. The increase in cost of goods sold was primarily the result of an increase in the merchandise cost of goods sold resulting from the increase in net sales. Also contributing to the increase in cost of goods sold was an increase in store occupancy costs primarily resulting from new store openings.
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Gross
profit increased to $722.2 million in the thirty-nine weeks ended October 28, 2023 from $643.1 million in the thirty-nine weeks ended October 29, 2022, an increase of $79.1 million, or 12.3%. Gross margin decreased to 32.5% in the thirty-nine weeks ended October 28, 2023 from 32.9% in the thirty-nine weeks ended October 29, 2022, a decrease of approximately 40 basis points. The decrease in gross margin was primarily the result of an increase as a percentage of net sales in merchandise cost of goods sold, which includes the impact of inventory shrinkage. This decrease was partially offset by a decrease as a percentage of net sales in distribution costs.
Selling, General and Administrative Expenses
Selling,
general and administrative expenses increased to $605.1 million in the thirty-nine weeks ended October 28, 2023 from $523.8 million in the thirty-nine weeks ended October 29, 2022, an increase of $81.3 million, or 15.5%. As a percentage of net sales, selling, general and administrative expenses increased approximately 40 basis points to 27.2% in the thirty-nine weeks ended October 28, 2023 from 26.8% in the thirty-nine weeks ended October 29, 2022. The increase in selling, general and administrative expenses was the result of increases of $60.6 million in store-related expenses and $20.7 million in corporate-related expenses primarily to support new store growth.
Income Tax Expense
Income
tax expense increased to $29.6 million in the thirty-nine weeks ended October 28, 2023 from $29.4 million in the thirty-nine weeks ended October 29, 2022, an increase of $0.2 million or 0.8%. The increase in income tax expense was primarily due to the $8.9 million increase in pre-tax income, partially offset by discrete items, which includes the impact of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting."
Our effective tax rate for the thirty-nine weeks ended October 28, 2023 was 23.1% compared to 24.6% in the thirty-nine weeks ended October 29, 2022. Our effective tax rate for the thirty-nine weeks ended October 28, 2023 was lower than the comparable
prior year period primarily due to discrete items, which includes the impact of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," partially offset by non-deductible expenses.
Net Income
As a result of the foregoing, net income increased to $98.9 million in the thirty-nine weeks ended October 28, 2023 from $90.2 million in the thirty-nine weeks ended October 29, 2022, an increase of $8.7 million or 9.6%.
Liquidity and Capital Resources
Overview
Cash
capital expenditures typically vary depending on the timing of new store openings and infrastructure-related investments. We plan to make cash capital expenditures of approximately $335 million in fiscal 2023, which exclude the impact of tenant allowances, and which we expect to fund from cash generated from operations, cash on hand, investments and, as needed, borrowings under our Revolving Credit Facility. We expect to incur approximately $155 million of our cash capital expenditure budget in fiscal 2023 to construct and open over 200 new stores with the remainder projected to be spent on our store relocations and remodels, our shipcenters and our 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 Revolving Credit Facility, which expires in September 2027, as needed, and we expect that funding to continue. When we have used our 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. As of
October 28, 2023, we did not have any direct borrowings under our Revolving Credit Facility and had approximately $225 million available on the line of credit.
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On March 20, 2018, our Board of Directors approved a share repurchase program authorizing the repurchase of up to $100 million of our common stock through March 31, 2021, on the open market, in privately negotiated transactions, or otherwise. This program expired on March 31, 2021.
On March 9, 2021, our Board of Directors approved
a new share repurchase program for up to $100 million of our common stock through March 31, 2024. In fiscal 2021, we purchased 368,699 shares at an aggregate cost of approximately $60.0 million, or an average price of $162.75 per share. In fiscal 2022, we purchased 247,132 shares at an aggregate cost of approximately $40.0 million, or an average price of $161.88 per share. We have exhausted repurchases under this program.
On June 14, 2022, our Board of Directors approved a new share repurchase program for up to $100 million of our common stock through June 30, 2025. During the thirteen weeks ended October 28, 2023, we purchased 504,369 shares at an aggregate cost of approximately $80.0 million, or average price of $158.63 per share.
On November 27, 2023, our Board of Directors retired this share repurchase program.
On November 27, 2023, our Board of Directors approved a new share repurchase program for up to $100 million of our common stock through November 27, 2026.
Since approval of the share repurchase program in March 2018, we have purchased approximately 1.6 million shares for an aggregate cost of approximately $230 million. There can be no assurances that any additional repurchases will be completed, or as to the timing or amount of any repurchases. The share repurchase program may be modified or discontinued at any time.
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 Revolving Credit Facility, which expires in September 2027, will be adequate to finance our planned capital expenditures, authorized share repurchases and working capital requirements over the next 12 months and for the foreseeable future thereafter. If cash flows from operations and borrowings under our 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):
Net cash provided by (used in) operating activities
$
91.9
$
(45.0)
Net
cash (used in) provided by investing activities
(165.1)
68.5
Net cash used in financing activities
(96.2)
(44.3)
Net decrease during period in cash and cash equivalents (1)
$
(169.4)
$
(20.7)
(1)
Components may not add to total due to rounding.
Cash Provided by (Used in) Operating Activities
Net cash provided by operating activities for the thirty-nine weeks ended October 28, 2023 was $91.9 million, an increase of $136.9 million compared to the thirty-nine weeks ended October 29, 2022. The increase was primarily due to changes in working capital, an increase in operating cash flows from store performance and a decrease in income taxes paid.
Cash (Used in) Provided
by Investing Activities
Net cash used in investing activities for the thirty-nine weeks ended October 28, 2023 was $165.1 million, an increase of $233.6 million compared to the thirty-nine weeks ended October 29, 2022. The increase was primarily due to a decrease in net sales, maturities, and redemptions of investment securities and an increase in capital expenditures. The increase in capital expenditures was primarily for our new store construction and our corporate infrastructure.
Cash Used in Financing Activities
Net cash used in financing activities for the thirty-nine weeks ended October 28,
2023 was $96.2 million, an increase of $51.9 million compared to the thirty-nine weeks ended October 29, 2022. The increase was primarily due to an increase in the repurchase and retirement of common stock and an increase in common shares withheld for taxes.
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Line of Credit
On September 16, 2022, we entered into a Second Amendment to Credit Agreement (the "Second Amendment") which amended the Fifth Amended and Restated Credit Agreement, dated as of April
24, 2020, as previously amended by that certain First Amendment to Credit Agreement, dated as of January 27, 2021 (the "First Amendment"; the Fifth Amended and Restated Credit Agreement as amended by the First Amendment and the Second Amendment, the “Credit Agreement”), among the Company, 1616 Holdings, Inc., a wholly-owned subsidiary of the Company ("1616 Holdings" and together with the Company, the "Loan Parties"), Wells Fargo Bank, National Association as administrative agent (the "Agent"), and other lenders party thereto (the "Lenders").
The Credit Agreement provides for
a secured asset-based revolving line of credit in the amount of up to $225.0 million (the "Revolving Credit Facility"). Advances under the Revolving Credit Facility are tied to a borrowing base consisting of eligible credit card receivables and inventory, as reduced by certain reserves in effect from time to time. Pursuant to the Credit Agreement, inventory appraisals and certain other diligence items are deferred, with reduced advance rates during the period that such appraisals have not been delivered. Pursuant to the Second Amendment, the Revolving Credit Facility expires on the earliest to occur of (i) September 16, 2027 or (ii) an event of default.
The Second Amendment also replaced the existing LIBOR (the "London Interbank Offered Rate") provisions with SOFR (the "Secured Overnight Financing Rate") provisions which converted then outstanding LIBOR
loans into SOFR loans and additionally makes a number of other revisions to other provisions of the Credit Agreement. Giving effect to the Second Amendment, outstanding borrowings under the Revolving Credit Facility would accrue interest at floating rates plus an applicable margin ranging from 1.12% to 1.50% for SOFR loans and 0.125% to 0.50% for base rate loans, and letter of credit fees range from 1.125% to 1.50%, in each case based on the average availability under the Revolving Credit Facility.
The Revolving Credit Facility may be increased by up to an additional $150.0 million, subject to certain conditions, including obtaining commitments from one or more Lenders (the "Accordion"). Pursuant to the First Amendment, we obtained commitments from the Lenders that would allow us at our election (subject only to satisfaction of certain customary conditions such as the absence of any Event of Default), to increase the
amount of the Revolving Credit Facility by an aggregate principal amount up to $50.0 million within the Accordion (the "Committed Increase"). The entire amount of the Revolving Credit Facility is available for the issuance of letters of credit and allows for swingline loans.
The Credit Agreement contains customary covenants that limit, absent lender approval, the ability of the Company and certain of its affiliates to, among other things, pay cash dividends, incur debt, create liens and encumbrances, redeem or repurchase stock, enter into certain acquisition transactions with affiliates, merge, dissolve, repay certain indebtedness, change the nature of our business, enter sale or leaseback transactions, make investments or dispose of assets. In some cases, these restrictions are subject to certain negotiated exceptions or permit us
to undertake otherwise restricted activities if it satisfies certain conditions. In addition, we will be required to maintain availability of not less than (i) 12.5% of the lesser of (x) aggregate commitments under the Revolving Credit Facility and (y) the borrowing base (the "loan cap") during the period that inventory appraisals have not been delivered as described above and (ii) at all other times 10% of the loan cap.
If there exists an event of default or availability under the Revolving Credit Facility is less than 15% of the loan cap, amounts in any of the Loan Parties’ or subsidiary guarantors' designated deposit accounts will be transferred daily into a blocked account held by the Agent and applied to reduce outstanding amounts under the Revolving Credit Facility (the "Cash Dominion Event"), so long as (i) such event of default has not been waived and/or (ii) until availability has exceeded 15% of the
loan cap for sixty (60) consecutive calendar days (provided that such ability to discontinue the Cash Dominion Event shall be limited to two times during the term of the Credit Agreement).
The Credit Agreement contains customary events of default including, among other things, failure to pay obligations when due, initiation of bankruptcy or insolvency proceedings, defaults on certain other indebtedness, change of control, incurrence of certain material judgments that are not stayed, satisfied, bonded or discharged within 30 days, certain ERISA events, invalidity of the credit documents, and violation of affirmative and negative covenants or breach of representations and warranties set forth in the Credit Agreement. Amounts under the Revolving Credit Facility may become due upon events of default (subject to any applicable grace or cure periods).
All obligations under the Revolving
Credit Facility are guaranteed by 1616 Holdings and secured by substantially all of the assets of the Company and 1616 Holdings.
As of October 28, 2023, we had no borrowings under the Revolving Credit Facility and had approximately $225 million available under the Revolving Credit Facility.
As of October 28, 2023 and October 29, 2022, we were in compliance with the covenants applicable to it under the Credit Agreement.
26
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from estimates in amounts that may be material to the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements. Our critical accounting policies and estimates are discussed in the Annual Report.
Contractual
Obligations
Except as set forth below, there have been no material changes to our contractual obligations as disclosed in the Annual Report, other than those which occur in the ordinary course of business.
From January 29, 2023 to October 28, 2023, we have entered into 221 new fully executed retail leases with average terms of approximately 10 years and other lease modifications that have future minimum lease payments of approximately $397.6 million.
Off-Balance Sheet Arrangements
For the thirteen weeks ended October 28, 2023, 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.
Recently Issued Accounting Pronouncements
See "Note 1 - Summary of Significant Accounting Policies" to the unaudited consolidated financial statements included in "Part I. Financial Information, Item 1. Consolidated Financial Statements" of this Form 10-Q, for a detailed description of recently issued accounting pronouncements.
ITEM 3. 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 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 a Revolving Credit Facility which includes a revolving line of credit, which bears interest at a variable rate. Because our Revolving Credit Facility bears interest at a variable rate, we will be exposed to market risks relating to changes in interest rates, which could materially impact our consolidated statements of operations should we have any material borrowings under our Revolving Credit Facility.
As of October 28, 2023, we had approximately $225 million available on the line of credit. The Credit Agreement provides that the interest rate payable on borrowings shall be, at the Company’s option, a per annum rate equal to (a) a base rate plus an applicable margin ranging from 0.125% to 0.50% or (b) SOFR plus a margin ranging from 1.12% to 1.50%. Letter of credit fees range from 1.125%
to 1.50%. 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 seek to minimize the impact of increasing prices and general inflation in a variety of ways, including, with respect to our merchandise, by sourcing from different vendors and changing our product mix. However, we cannot assure that our results of operations and financial condition will not be materially impacted by inflation in the future.
27
ITEM
4. 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) of the Securities Exchange Act of 1934 (the "Exchange Act"), as of the end of the period covered by this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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 thirteen weeks ended October 28, 2023, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
28
PART II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
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.
29
ITEM 1A. RISK FACTORS
Risk factors that affect our business and financial results are discussed in Part I, Item 1A "Risk Factors" in our Annual Report. There have been no material changes in our risk factors from those previously disclosed in our Annual Report.
The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table below sets forth the information with respect to repurchases of our common stock for the thirteen weeks ended October 28, 2023:
Period
Total
Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased As Part of a Publicly Announced Program(1)
Maximum Dollar Value of Shares that May Yet be Purchased Under the Program
(1)On June 14, 2022, our Board of Directors approved a new share repurchase program for up to $100 million of our common stock through June 30, 2025. On November 27, 2023, our Board of Directors retired the current share repurchase program and approved a new share repurchase program for up to $i100 million of our common stock through November 27, 2026. This repurchase
program does not include a specific timetable or price targets and may be suspended or terminated at any time. Shares may be repurchased through open market or privately negotiated transactions at the discretion of management based on its evaluation of market conditions and other factors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
Rule 10b5-1 Trading Plans - Directors and Section 16 Officers
During the thirteen weeks ended October 28, 2023, none of the Company's directors or Section 16 officers iiadopted/
or iiterminated/ any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any
"non-Rule 10b5-1 trading arrangement."
The following financial information from this Quarterly Report on
Form 10-Q for the fiscal quarter ended October 28, 2023, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Unaudited Consolidated Balance Sheets as of October 28, 2023, January 28, 2023 and October 29, 2022; (ii) the Unaudited Consolidated Statements of Operations for the Thirteen and Thirty-Nine Weeks Ended October 28, 2023 and October 29, 2022; (iii) the Unaudited Consolidated Statements of Shareholders’ Equity for the Thirteen and Thirty-Nine Weeks Ended October 28, 2023 and October 29, 2022; (iv) the Unaudited Consolidated
Statements of Cash Flows for the Thirty-Nine Weeks Ended October 28, 2023 and October 29, 2022 and (v) the Notes to Unaudited Consolidated Financial Statements, tagged in detail.
104*
Coverage Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
†
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 Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.
31
SIGNATURES
Pursuant
to the requirements 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.
