Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 835K
2: EX-31.1 Certification -- §302 - SOA'02 HTML 22K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 22K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 18K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 18K
11: R1 Document and Entity Information HTML 71K
12: R2 Consolidated Balance Sheets HTML 117K
13: R3 Consolidated Balance Sheets (Parenthetical) HTML 30K
14: R4 Consolidated Statements of Operations HTML 80K
15: R5 Consolidated Statement of Shareholders' Equity HTML 104K
16: R6 Consolidated Statements of Cash Flows HTML 94K
17: R7 Summary of Significant Accounting Policies HTML 71K
18: R8 Revenue from Contracts With Customers HTML 50K
19: R9 Leases HTML 45K
20: R10 Income Per Common Share HTML 47K
21: R11 Line of Credit HTML 29K
22: R12 Commitments and Contingencies HTML 22K
23: R13 Share-Based Compensation HTML 49K
24: R14 Income Taxes HTML 35K
25: R15 Pay vs Performance Disclosure HTML 29K
26: R16 Insider Trading Arrangements HTML 23K
27: R17 Summary of Significant Accounting Policies HTML 47K
(Policies)
28: R18 Summary of Significant Accounting Policies HTML 62K
(Tables)
29: R19 Revenue from Contracts With Customers (Tables) HTML 46K
30: R20 Leases (Tables) HTML 45K
31: R21 Income Per Common Share (Tables) HTML 44K
32: R22 Share-Based Compensation (Tables) HTML 43K
33: R23 Income Taxes (Tables) HTML 30K
34: R24 Summary of Significant Accounting Policies - HTML 24K
Nature of business (Details)
35: R25 Summary of Significant Accounting Policies - Fair HTML 39K
value of financial instruments (Details)
36: R26 Summary of Significant Accounting Policies - HTML 22K
Prepaid expenses and other current assets
(Details)
37: R27 Summary of Significant Accounting Policies - Other HTML 19K
accrued expenses (Details)
38: R28 Revenue from Contracts With Customers (Details) HTML 29K
39: R29 Leases - Narrative (Details) HTML 27K
40: R30 Leases - Components of net lease cost (Details) HTML 24K
41: R31 Leases - Maturity of lease liabilities under HTML 35K
operating leases (Details)
42: R32 Leases - Supplemental cash flow information HTML 23K
(Details)
43: R33 Income Per Common Share - Computations of basic HTML 55K
and diluted income (Loss) Per Share (Details)
44: R34 Income Per Common Share - Narrative (Details) HTML 22K
45: R35 Line of Credit (Details) HTML 57K
46: R36 Commitments and Contingencies (Details) HTML 19K
47: R37 Share-Based Compensation - 2002 Equity incentive HTML 31K
plan (Details)
48: R38 Share-Based Compensation - Schedule of stock HTML 50K
option activity under plan (Details)
49: R39 Share-Based Compensation - Share-based HTML 18K
compensation valuation of stock options (Details)
50: R40 Share-Based Compensation - Restricted stock units HTML 93K
and performance-based restricted stock units
(Details)
51: R41 Share-Based Compensation - Share repurchase HTML 28K
program (Details)
52: R42 Income Taxes - Schedule of effective income tax HTML 28K
rate reconciliation (Details)
53: R43 Income Taxes - Narrative (Details) HTML 24K
56: XML IDEA XML File -- Filing Summary XML 98K
54: XML XBRL Instance -- five-20230729_htm XML 852K
55: EXCEL IDEA Workbook of Financial Report Info XLSX 87K
7: EX-101.CAL XBRL Calculations -- five-20230729_cal XML 118K
8: EX-101.DEF XBRL Definitions -- five-20230729_def XML 199K
9: EX-101.LAB XBRL Labels -- five-20230729_lab XML 1.13M
10: EX-101.PRE XBRL Presentations -- five-20230729_pre XML 609K
6: EX-101.SCH XBRL Schema -- five-20230729 XSD 99K
57: JSON XBRL Instance as JSON Data -- MetaLinks 339± 482K
58: ZIP XBRL Zipped Folder -- 0001177609-23-000022-xbrl Zip 205K
(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 August 30, 2023 was i55,685,733.
Property
and equipment, net of accumulated depreciation and amortization of $i514,097, $i454,027,
and $i412,312, respectively.
i1,013,686
i925,530
i842,002
Operating
lease assets
i1,407,474
i1,319,132
i1,267,316
Other
assets
i16,322
i13,870
i13,149
$
i3,549,408
$
i3,324,911
$
i3,086,226
Liabilities
and Shareholders’ Equity
Current liabilities:
Line of credit
$
i—
$
i—
$
i—
Accounts
payable
i249,093
i221,120
i266,114
Income
taxes payable
i—
i19,928
i—
Accrued
salaries and wages
i26,279
i25,420
i19,983
Other
accrued expenses
i162,919
i136,316
i159,976
Operating
lease liabilities
i211,177
i199,776
i184,450
Total
current liabilities
i649,468
i602,560
i630,523
Other
long-term liabilities
i4,925
i4,296
i4,077
Long-term
operating lease liabilities
i1,394,698
i1,296,975
i1,247,631
Deferred
income taxes
i60,171
i59,151
i41,414
Total
liabilities
i2,109,262
i1,962,982
i1,923,645
Commitments
and contingencies (note 6)
i
i
i
Shareholders’
equity:
Common stock, $iii0.01//
par value. Authorized iii120,000,000//
shares; issued and outstanding ii55,686,858/, ii55,537,221/,
and ii55,507,931/ shares, respectively.
i556
i555
i555
Additional
paid-in capital
i254,687
i260,784
i248,902
Retained
earnings
i1,184,903
i1,100,590
i913,124
Total
shareholders’ equity
i1,440,146
i1,361,929
i1,162,581
$
i3,549,408
$
i3,324,911
$
i3,086,226
See
accompanying notes to consolidated financial statements.
Adjustments
to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
i60,068
i49,120
Share-based
compensation expense
i9,605
i12,139
Deferred
income tax expense
i1,021
i5,258
Other
non-cash expenses
i72
i281
Changes
in operating assets and liabilities:
Inventories
(i15,901)
(i114,097)
Prepaid
income taxes and tax receivable
(i1,626)
(i3,046)
Prepaid
expenses and other assets
i6,644
(i15,967)
Accounts
payable
i17,674
i64,908
Income
taxes payable
(i19,928)
(i28,096)
Accrued
salaries and wages
i859
(i33,556)
Operating
leases
i20,782
i17,167
Other
accrued expenses
i5,685
i17,984
Net
cash provided by operating activities
i169,268
i46,157
Investing
activities:
Purchases of investment securities and other investments
(i128,950)
(i21,848)
Sales,
maturities, and redemptions of investment securities
i93,982
i219,391
Capital
expenditures
(i116,423)
(i109,710)
Net
cash (used in) provided by investing activities
(i151,391)
i87,833
Financing
activities:
Net
proceeds from issuance of common stock
i440
i464
Repurchase
and retirement of common stock
i—
(i40,007)
Proceeds
from exercise of options to purchase common stock and vesting of restricted and performance-based restricted stock units
i54
i102
Common
shares withheld for taxes
(i16,151)
(i4,421)
Net
cash used in financing activities
(i15,657)
(i43,862)
Net
increase in cash and cash equivalents
i2,220
i90,128
Cash
and cash equivalents at beginning of period
i332,324
i64,973
Cash
and cash equivalents at end of period
$
i334,544
$
i155,101
Supplemental
disclosures of cash flow information:
Non-cash investing activities
Increase in accrued purchases of property and equipment
$
i31,801
$
i3,841
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 July 29, 2023, operated in i43 states, which does not include Alaska, Hawaii, Idaho, Montana, Oregon, Washington, and Wyoming. As of July 29, 2023 and July 30, 2022, the
Company operated i1,407 stores and i1,252 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 July 29, 2023 and July 30, 2022 refer to the thirteen weeks ended as of those dates. The year-to-date
periods ended July 29, 2023 and July 30, 2022 refer to the twenty-six weeks ended as of those dates.
(c)iBasis of Presentation
The consolidated balance sheets as of July 29, 2023 and July 30, 2022, the consolidated
statements of operations for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022, the consolidated statements of shareholders’ equity for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022 and the consolidated statements of cash flows for the twenty-six weeks ended July 29, 2023 and July 30, 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 July 29, 2023 and July 30, 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 twenty-six weeks July 29, 2023 and July 30, 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 July 29, 2023, January 28, 2023 and July 30, 2022, the Company had cash equivalents of $i297.6
million, $i313.2 million and $i115.0 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 July 29, 2023, January 28, 2023 and July 30, 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):
Other accrued expenses include accrued capital expenditures of $i65.1 million, $i43.6
million, and $i40.8 million as of July 29, 2023, January 28, 2023 and July 30, 2022, respectively.
(i)iDeferred
Compensation
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.
11
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.
/
(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 July 29, 2023, the Company committed to i57 new store leases with average terms of approximately
i10 years that have future minimum lease payments of approximately $i116.7 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 July 29, 2023 and July 30, 2022, the weighted average remaining lease term for the Company's operating leases was i7.4 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)
$
i108,649
$
i102,023
Supplemental
non-cash information:
Operating lease liabilities arising from obtaining right-of-use assets
$
i166,593
$
i188,968
(1)
Included within operating activities in the Company's Consolidated Statements of Cash Flows.
(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.
13
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
i55,675,357
i55,498,471
i55,662,930
i55,572,425
Dilutive
impact of options, restricted stock units and employee stock purchase plan
i126,150
i147,568
i126,393
i167,327
Weighted
average common shares outstanding - diluted
i55,801,507
i55,646,039
i55,789,323
i55,739,752
Per
common share:
Basic income per common share
$
i0.84
$
i0.74
$
i1.51
$
i1.33
Diluted
income per common share
$
i0.84
$
i0.74
$
i1.51
$
i1.33
/
The
effects of the assumed vesting of restricted stock units for i464 shares of common stock for the thirteen weeks ended July 29, 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 i188,656
shares of common stock for the thirteen weeks ended July 30, 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 i9,485 shares of common stock for the twenty-six weeks ended July 29, 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 i103,553 shares of common stock for the twenty-six weeks ended July 30, 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").
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.
14
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 July 29, 2023, the Company had ino borrowings under the Revolving Credit Facility and had approximately $i210
million available under the Revolving Credit Facility.
As of July 29, 2023, the Company has other purchase commitments of approximately $i1.8 million consisting of purchase agreements for materials that will be used in the construction of new stores.
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.
15
(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 July 29, 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 twenty-six weeks ended July 29, 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 twenty-six weeks ended July 29, 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.
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 twenty-six weeks ended July 29, 2023 was as follows:
In
connection with the vesting of RSUs and PSUs during the twenty-six weeks ended July 29, 2023, the Company withheld i83,059 shares with an aggregate value of $i16.2
million in satisfaction of minimum tax withholding obligations due upon vesting.
In connection with the vesting of RSUs and PSUs during the twenty-six weeks ended July 30, 2022, the Company withheld i28,832 shares with an aggregate value of $i4.4
million in satisfaction of minimum tax withholding obligations due upon vesting.
As of July 29, 2023, there was $i46.6 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 i2.5 years.
i
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.
Since
approval of the share repurchase program in March 2018, the Company has purchased approximately i1,100,000 shares for an aggregate cost of approximately $i150
million.
(8)iIncome Taxes
i
The following table summarizes the
Company’s income tax expense and effective tax rates for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022 (dollars in thousands):
The
effective tax rates for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 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 July 29, 2023 was lower than the thirteen weeks ended July 30, 2022 primarily due to 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 twenty-six weeks ended July 29, 2023 was lower than the twenty-six weeks ended July 30, 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 July 29, 2023, January 28, 2023 or July 30, 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 twenty-six weeks ended July 29, 2023 or July 30, 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.
17
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 twenty-six weeks ended July 29,
2023 included in Part I, Item I 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 July 29, 2023 and July 30, 2022 refer to the thirteen weeks ended as of those dates. The year-to-date periods ended July 29, 2023 and July 30, 2022 refer to the twenty-six 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.
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;
18
•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;
•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 July 29, 2023, we operated 1,407 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.
19
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:
▪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.
20
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.
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.
21
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.
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 $759.0 million in the thirteen weeks ended July 29, 2023 from $668.9 million in the thirteen weeks ended July 30, 2022, an increase of $90.1 million, or 13.5%. The increase was the result of a non-comparable sales increase of $72.9 million and a comparable sales increase of $17.2 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 2.7%. This increase resulted from an increase of approximately 4.5% in the number of transactions, partially offset by a decrease of approximately 1.8% in the average dollar value of transactions.
Cost of Goods Sold and Gross Profit
Cost of goods sold increased to $494.4 million in the thirteen weeks ended July 29, 2023 from $440.4 million in the thirteen weeks ended July 30, 2022, an increase of $54.0 million, or 12.3%. 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.
Gross profit increased to $264.6 million in the thirteen weeks ended July 29, 2023 from $228.5 million in the thirteen weeks ended July 30, 2022, an increase of $36.1 million, or 15.8%. Gross margin increased to 34.9% in the thirteen weeks ended July 29, 2023 from 34.2% in the thirteen weeks ended July 30, 2022, an increase of approximately 70 basis points. The increase in gross margin was primarily the result of decreases as a percentage of net sales in merchandise cost of goods sold and distribution costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased
to $206.0 million in the thirteen weeks ended July 29, 2023 from $172.5 million in the thirteen weeks ended July 30, 2022, an increase of $33.5 million, or 19.4%. As a percentage of net sales, selling, general and administrative expenses increased approximately 130 basis points to 27.1% in the thirteen weeks ended July 29, 2023 from 25.8% in the thirteen weeks ended July 30, 2022. The increase in selling, general and administrative expenses was the result of increases of $21.9 million in store-related expenses and $11.6 million in corporate-related expenses primarily to support new store growth.
Income Tax Expense
Income tax expense increased to $16.1 million in the thirteen weeks
ended July 29, 2023 from $14.8 million in the thirteen weeks ended July 30, 2022, an increase of $1.3 million or 9.1%. The increase in income tax expense was primarily due to the $6.8 million increase in pre-tax income.
Our effective tax rate for the thirteen weeks ended July 29, 2023 was 25.6% compared to 26.3% in the thirteen weeks ended July 30, 2022. Our effective tax rate for the thirteen weeks ended July 29, 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."
Net Income
As
a result of the foregoing, net income increased to $46.8 million in the thirteen weeks endedJuly 29, 2023 from $41.3 million in the thirteen weeks ended July 30, 2022, an increase of $5.5 million or 13.3%.
Net sales increased to $1,485.2 million in the twenty-six weeks ended July 29, 2023 from $1,308.5 million in the twenty-six weeks ended July 30, 2022,
an increase of $176.7 million, or 13.5%. The increase was the result of a non-comparable sales increase of $142.6 million and a comparable sales increase of $34.1 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 2.7%. This increase resulted from an increase of approximately 4.2% in the number of transactions, partially offset by a decrease of approximately 1.5% in the average dollar value of transactions.
23
Cost
of Goods Sold and Gross Profit
Cost of goods sold increased to $985.8 million in the twenty-six weeks ended July 29, 2023 from $873.2 million in the twenty-six weeks ended July 30, 2022, an increase of $112.6 million, or 12.9%. 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.
Gross profit increased to $499.4 million in the twenty-six weeks ended July 29, 2023 from $435.3 million in the twenty-six weeks ended July 30, 2022, an increase of $64.1
million, or 14.7%. Gross margin increased to 33.6% in the twenty-six weeks ended July 29, 2023 from 33.3% in the twenty-six weeks ended July 30, 2022, an increase of approximately 30 basis points. The increase in gross margin was primarily the result of a decrease as a percentage of net sales in distribution costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $398.4 million in the twenty-six weeks ended July 29, 2023 from $336.9 million in the twenty-six weeks ended July 30, 2022, an increase of $61.5 million, or 18.2%. As a percentage of net sales, selling, general and administrative expenses increased approximately 100 basis
points to 26.8% in the twenty-six weeks ended July 29, 2023 from 25.8% in the twenty-six weeks ended July 30, 2022. The increase in selling, general and administrative expenses was the result of increases of $42.5 million in store-related expenses and $19.0 million in corporate-related expenses primarily to support new store growth.
Income Tax Expense
Income tax expense increased to $24.7 million in the twenty-six weeks ended July 29, 2023 from $24.1 million in the twenty-six weeks ended July 30, 2022, an increase of $0.6 million or 2.3%. The increase in income tax expense was primarily due to the $10.8 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 twenty-six weeks ended July 29, 2023 was 22.6% compared to 24.6% in the twenty-six weeks ended July 30, 2022. Our effective tax rate for the twenty-six weeks ended July 29, 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 $84.3 million in the twenty-six
weeks ended July 29, 2023 from $74.1 million in the twenty-six weeks ended July 30, 2022, an increase of $10.2 million or 13.8%.
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 July 29, 2023, we did not have any direct borrowings under our Revolving Credit Facility and had approximately $210 million available on the line of credit.
24
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 the Company's common stock through June 30, 2025. As of July 29, 2023, we have not made any repurchases under this program.
Since approval of the share repurchase program in March 2018, we have purchased approximately 1,100,000 shares for an aggregate cost of approximately $150 million.
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 (used in) provided by investing activities
(151.4)
87.8
Net cash used in financing activities
(15.7)
(43.9)
Net increase during period in cash and cash equivalents (1)
$
2.2
$
90.1
(1)
Components may not add to total due to rounding.
Cash Provided by Operating Activities
Net cash provided by operating activities for the twenty-six weeks ended July 29, 2023 was $169.3 million, an increase of $123.1 million compared to the twenty-six weeks ended July 30, 2022. The increase was primarily due to changes in working capital and an increase in operating cash flows from store performance, partially offset by an increase in income taxes paid.
Cash (Used in) Provided
by Investing Activities
Net cash used in investing activities for the twenty-six weeks ended July 29, 2023 was $151.4 million, an increase of $239.2 million compared to the twenty-six weeks ended July 30, 2022. The increase was primarily due to an increase in net purchases of investment securities and other investments and an increase in capital expenditures.
Cash Used in Financing Activities
Net cash used in financing activities for the twenty-six weeks ended July 29, 2023 was $15.7 million, a decrease of $28.2 million compared to the twenty-six weeks ended July 30,
2022. The decrease was primarily due to a decrease in the repurchase and retirement of common stock, partially offset by an increase in common shares withheld for taxes.
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").
25
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 July 29, 2023, we had no borrowings under the Revolving Credit Facility and had approximately $210 million available under the Revolving Credit Facility.
As of July 29, 2023 and July 30, 2022, we were in compliance with the covenants applicable to it under the Credit Agreement.
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.
26
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 July 29, 2023, we have entered into 152 new fully executed retail leases with average terms of approximately 10 years and other lease modifications that have future minimum lease payments of approximately $271.0 million.
Off-Balance Sheet Arrangements
For the thirteen weeks ended July 29, 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 July 29, 2023, we had approximately $210 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 July 29, 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
None.
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 July 29, 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 July 29, 2023, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Unaudited Consolidated Balance Sheets as of July 29, 2023, January 28, 2023 and July 30, 2022; (ii) the Unaudited Consolidated Statements of Operations for the Thirteen
and Twenty-Six Weeks Ended July 29, 2023 and July 30, 2022; (iii) the Unaudited Consolidated Statements of Shareholders’ Equity for the Thirteen and Twenty-Six Weeks Ended July 29, 2023 and July 30, 2022; (iv) the Unaudited Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended July 29, 2023 and July 30, 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.
