•New & Now: Consists of seasonally-specificseasonally specific items used to celebrate and decorate for events such as Christmas, Easter, Halloween and St. Patrick’s Day. These products are most often placed at the front of the store.
Set forth below is data for the following groups of products – leisure, fashion and home, and partysnack and snack.seasonal. The percentage of net sales represented by each product group for each of the last three fiscal years was as follows:
| | | | | | | | | | | | | | | | | |
| Percentage of Net Sales |
2023 | | 2022 | | 2021 |
Leisure | 46.2 | % | | 47.6 | % | | 49.6 | % |
Fashion and home | 29.3 | % | | 29.2 | % | | 30.2 | % |
Snack and seasonal | 24.5 | % | | 23.2 | % | | 20.2 | % |
Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
|
| | | | | | | | |
| Percentage of Net Sales |
2017 | | 2016 | | 2015 |
Leisure | 50.1 | % | | 50.0 | % | | 50.8 | % |
Fashion and home | 31.6 | % | | 31.2 | % | | 29.7 | % |
Party and snack | 18.3 | % | | 18.8 | % | | 19.5 | % |
Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
Leisure includes items such as sporting goods, games, toys, tech, books, electronic accessories, and arts and crafts. crafts, and party. Fashion and home includes include items such as personal accessories, “attitude” t-shirts, beauty offerings, home goods and storage options. PartySnack and snack includesseasonal include items such as party and seasonal goods, greeting cards, candy and other snacks, and beverages.
Our Stores
As of February 3, 2018,2024, we operated 6251,544 stores throughout the Northeast, South, Midwest and West regions of the United States. Our new store model assumes a store size of approximately 8,000 squareapproximately 9,500 square feet. Our stores are primarily located in power, community and lifestyle shopping centers; approximately 3%4% of our stores are located in malls. The following map shows the number of stores in each of the states in which we operated and the locations of our distribution centersshipcenters as of February 3, 2018.2024.
Store Design and Layout
We present our products in a unique and engaging in-store atmosphere. We maintain a floor layout designed with an easy-to-navigate flow and featuring sight-linessightlines across the entire store enabling customers to easily identify our category worlds. All of our stores feature a sound system playing popular music throughout the shopping day. We employ novel and dynamic techniques to display our products, including distinctive merchandise fixtures and colorful and stimulating signage, which attract customers, encourage hands-on interaction with our products and convey our value pricing. In addition to traditional perimeter and gondola shelving, racks and tables, we utilize innovative approaches such as wheelbarrows, oil drums and bins strategically placed throughout our stores. These techniques foster customer interaction with products, supporting the strong relationship we strive to develop with our customers and enhance our upbeat and vibrant shopping environment.
Each of our category worlds is strategically located within our stores in an effort to enhance the customer’s shopping experience. For example, our our New &Now offerings are located in the front of the store with the goal of catching customers’ attention and being “top of mind,” and specially featured value items and other key items are positioned along the center aisle. Impulse items and “dollar value” tablesitems surround the checkout areas to capture add-on purchases.
Expansion Opportunities and Site Selection
Our unique focus on the teentween and pre-teenteen customer is supported by our real estate strategy to locate stores in high-visibility locations. We seek to operate stores in high-visibility, high-traffic retail venues, which reinforce our brand message, heighten brand awareness and drive customer traffic.
Our strategy is to saturatedensify markets with clusters of stores because of the considerable benefit that stores derive from market concentration. Our store model is profitable across a variety of urban, suburban and semi-rural markets and in multiple real estate venues including power, community and lifestyle shopping centers. Our retail concept works well with a large and varied group of national co-tenants that drive customer traffic.
We select store sites for new store openings based upon certain criteria including minimum population density requirements, availability of attractive lease terms, sufficient space and strong positioning within a center. Members ofCrew on our real estate team spend considerable time evaluating prospective sites before bringing a proposal to our real estate committee. Our real estate committee, which is composed of senior management including some of our executive officers, approves all of our locations before a lease is signed.
We believe there is a significant opportunity to expand our store base in the United States. We opened 103204 net new stores in fiscal 20172023 and we intendplan to open approximately 125between 225 and 235 new stores in fiscal 20182024 through expansion in existing markets and by entering new markets. We maintain a pipeline of real estate sites that have been approved by our real estate committee and have executed 68137 leases through as of February 3, 20182024 for new stores in fiscal 2018.2024. The actual number, location and timing of new store openings in 2024 will depend on a number of factors, such as retail trends, competition, the general economic environment and our ability to hire and retain new store managers and crew. Our recent store growth is summarized in the following table:
|
| | | | | | | | | | | | | | |
Period | Stores at Start of Period | | Stores Opened | | Stores Closed | | Net Store Increase | | Stores at End of Period |
Fiscal 2015 | 366 |
| | 74 |
| | 3 |
| | 71 |
| | 437 |
|
Fiscal 2016 | 437 |
| | 86 |
| | 1 |
| | 85 |
| | 522 |
|
Fiscal 2017 | 522 |
| | 104 |
| | 1 |
| | 103 |
| | 625 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | Stores at Start of Period | | Stores Opened | | Stores Closed | | Net Store Increase | | Stores at End of Period |
| | | | | | | | | |
Fiscal 2021 | 1,020 | | 171 | | 1 | | 170 | | | 1,190 |
Fiscal 2022 | 1,190 | | 150 | | — | | 150 | | | 1,340 |
Fiscal 2023 | 1,340 | | 205 | | 1 | | 204 | | | 1,544 |
Opening stores within existing markets enables Five Below to benefit from enhanced brand awareness and to achieve advertising, operating and distribution efficiencies. Our targeted new store openings include additional locations in existing markets as well as expansion into new markets. In existing markets, we use a store densification strategy that promotes brand awareness and leverages marketing, operating and distribution costs. When entering new markets, we employ a store clustering strategy, opening multiple stores in a single market on the same day, enabling us to leverage marketing and pre-opening expenses and generate initial new market brand awareness.
Our store growth is supported by our new store economics, which we believe to be compelling. Our new store model assumes a store size of approximately 8,000 square9,500 square feet that achieves sales of approximately $1.6$2 millionin the first full year of operation and an average new store cash investment of approximately $0.3$0.4 million, including our store build-out (net of tenant allowances), inventory (net of payables) and cash pre-opening expenses. Our new store model targets an average payback period of less than one year on our initial investment.
Store Management, Culture and TrainingOperations
Each of our stores is managed by a store manager and one or two assistant managers who oversee full-time and part-time team memberscrew within each store. Each store manager is responsible for the day-to-day operations of his or her store, including the unit’s operating results, maintaining a clean and appealing store environment and the hiring, training and development of personnel.crew. We also employ district managers who are responsible for overseeing the operations of 10 to 15 stores, on average, and regional directors who are responsible for overseeing the operations of our district managers. Our district managers are responsible for overseeing the operations of 10 to 15 stores, on average.
We are guided by a philosophy that recognizes strong sales performance and customer service, allowing us to identify and reward team memberscrew who meet our high performancehigh-performance standards. Store managers participate in a rewarding bonus incentive program. We also recognize individual performance through internal promotions and provide extensive opportunities for advancement.
Our employeescrew are critical to achieving our goals, and we strive to hire talented employeespeople with high energy levels and motivation. We have well-established store operating policies and procedures and an in-store training program for new store managers, assistant managers and staff.store associates. In addition, we have a dedicated group of training and new store opening managers who are focused on ensuring a consistent new store opening and remodel process and who leverage their extensive experience and knowledge of the Five Below culture to train new store managers. Our customer service and store procedure training programs are designed to enable associatescrew to assist customers in a friendly manner and to help create a positive sales-driven environment and culture as well as teach successful operating practices and procedures.
Merchandising, Sourcing and Distribution
We have developed a disciplined approach to buying and a dynamic inventory planning and allocation process to support our merchandising strategy.
Merchandising
Our merchandising team consists of an Executive Vice President,a Chief Merchandising Officer, who reports directly to our Chief Executive Officer, and is supported by an extensive team of merchandising personnel.crew. Our merchandising team works directly with our product development team and our central planning and allocation group to ensure a consistent delivery of products across our store base. Our Executive Vice President,Chief Merchandising Officer has over 30 years of experience within the retail sector.
Our product development team is led by a Senior Vice President of Business and Product Development. Our product development team works directly with our merchandising group to identify new and improved products through international sourcing. Our Senior Vice President of Businesssourcing and Product Development has over 30 years ofsignificant experience within the retail sector.
Sourcing
We believe we have strong sourcing capabilities developed through a dynamic and collaborative relationship with our vendor partners that provide us with favorable access to quality merchandise at attractive prices. We regularly purchase core merchandise in accordance with our key categories. We also have the ability to employ an opportunistic buying strategy, when appropriate, capitalizing on selected excess inventory opportunities, to purchase complementary merchandise based on consumer trends, product availability and favorable economic terms.
We work with approximately 800 active1,000 vendors, with no single vendor representing more than 7% than 5% of our purchases in fiscal 2017.2023. We sourced approximately 65%60% of our purchases from domestic vendors in fiscal 2017.2023. We typically have no long-term supply agreements or exclusive arrangements with our vendors.
Distribution and Fulfillment
We distribute overapproximately 85% of our merchandise for our retail stores from our approximately 800,0001,030,000 square foot distribution centershipcenter in Indianapolis, Indiana, our approximately 1,000,000 square foot shipcenter in Pedricktown, New Jersey, our approximately 860,000 square foot shipcenter in Conroe, Texas, our approximately 860,000 square foot shipcenter in Buckeye, Arizona and our approximately 600,000700,000 square foot distribution centershipcenter in Olive Branch, Mississippi,Forsyth, Georgia, with the remaining merchandise shipped directly from the vendor to our stores. We realize cost savings by working with our vendors to streamline and reduce packaging to diminish shipping costs.
For our direct-to-customer e-commerce business, we distribute our merchandise from our shipcenters in Buckeye, Arizona and Indianapolis, Indiana.
We generally ship merchandise from our distribution centersshipcenters to our stores between two and fourone to six times a week, depending on the season and the volume of a specific store. We use either contract carriers or our own private fleet of trucks to ship merchandise to our stores. From time to time, we augment our distribution facilities with third-party warehousing.
We continuously assess ways to maximize the productivity and efficiency of our existing distribution facilities and evaluate opportunities for additional distribution centers. shipcenters.
In June 2015,March 2019, we opened a new distribution centercompleted the purchase of an approximately 700,000 square foot shipcenter in Pedricktown, New Jersey to support our anticipated growth.Forsyth, Georgia. The total amount paid for the land and building was approximately $42 million. We currently occupy approximately 800,000 square feet at this distribution centerbegan operating the shipcenter in April 2019 and will expand to approximately one million1,000,000 square feet by 2019. The lease agreement, which began in fiscal 2015, will expire in 2025 with options to renew for three successive five-year periods. We are planning to lease or build new distribution centers that will open in the Southeastfirst half of 2024. The total construction cost of the expansion is expected to be approximately $21 million.
In August 2019, we acquired land in 2019,Conroe, Texas, to build an approximately 860,000 square foot shipcenter. The total amount paid for the Southwestland and building was approximately $56 million. We began operating the shipcenter in July 2020.
In July 2020, we acquired land in Buckeye, Arizona, to build an approximately 860,000 square foot shipcenter. The total amount paid for the land and building was approximately $65 million. We began operating the Midwestshipcenter in August 2021 and will expand to supportapproximately 1,200,000 square feet in the second half of 2024. The total construction cost of the expansion is expected to be approximately $26 million.
In March 2021, we acquired land in Indianapolis, Indiana, to build an approximately 1,030,000 square foot shipcenter. The total amount paid for the land and building was approximately $60 million. We began operating the shipcenter in June 2022.
As a result of the significant expansion of our growth objectives.network of distribution facilities over the last several years, including the opening of our Indianapolis, Indiana shipcenter in June 2022, we ceased operations at our shipcenters in Olive Branch, Mississippi and Cincinnati, Ohio in the first half of fiscal 2022 as well as the e-commerce operations in our Pedricktown, New Jersey shipcenter in the first half of fiscal 2023.
Marketing and Advertising
Our cost-effective marketing strategy is designed to promote brand awareness and drive store and website traffic with our target demographic, as well as other value-oriented customers. Our strategy includes highlighting our brand, exceptional value and quality proposition predominantly through the use of newspaper,digital advertising, commercials (on television and digital advertising duringthrough streaming), affiliate marketing, social influencers, content creators, syndicated talk show integrations and local marketing, with a focus on peak selling seasons that highlight our brand and exceptional value proposition as well as local community marketing to support existing and new market entries.seasons. Additionally, we rely on the strong visibility and the presence of our store locations, email messaging and philanthropic community fundraising to promote and further our brand image and drive traffic. Our digital experience, anchored by our mobile e-commerce website, app and social media presence is growing rapidly as we utilize TikTok, Instagram, Facebook, Instagram, YouTube and Snapchat to engage our customers with compelling digital content on a dailyfrequent basis.
Our marketing team, which reports into our Chief Merchandising Officer, works with our merchandising team to develop novel and dynamic techniques to display our products, including distinctive merchandise fixtures and colorful and stimulating signage, which attract customers, encourage hands-on interaction with our quality products and convey our value pricing.
For new store openings, we seek to create community awareness and consumer excitement predominantly through a mix of print and digital advertising, public relations, and community outreach and events promoting the grand opening and by creating an engaging grand opening event that includes contests, giveaways and signature “Five Cent” hot dogs.opening. We also aim to execute multiple store openings in a given new market on the same day in order to leverage marketing efforts to produce maximum impact.
In addition to our marketing and advertising efforts described above, we also maintain an e-commerce website (www.fivebelow.com) and, over the last year,few years, our online following has grown substantially. We use both our website and social media channels to highlight our featured products, valuevalue/quality proposition, store locations, employment opportunities, and grand openings.
Competition
We compete with a broad range of retailers including discount, mass merchandise, grocery, drug, convenience, variety and other specialty stores with both physical locations and online stores. Many of these retail companies operate stores in many of the areas where we operate, and many of them engage in extensive advertising and marketing efforts. We also compete with online retailers who do not have traditional brick and mortar locations.
The principal basis upon which we compete is by offering a dynamic, edited assortment of trend-right products, allwith most priced at $5 orand below and includingalso inclusive of select brands and licensed merchandise, targeted at the teentweens, teens and pre-teen customer.beyond. We believe we are transforming the shopping experience of our target demographic with a unique merchandising strategy and high-energy retail concept that our customers consider fun and exciting. Our success also depends in substantial part on our ability to respond quickly to trends so that we can meet the changing demands of our customers. We believe that we compare favorably relative to many of our competitors based on our merchandising strategy, edited product assortment targeted at teenstweens and pre-teens,teens, store environment, flexible real estate strategy and company culture. Nonetheless, certain of our competitors have greater financial, distribution, marketing and other resources than we do.
Trademarks and Other Intellectual Property
We own several trademarks that have been registered with the U.S. Patent and Trademark Office, including Five Below®, Five Beyond® and Five Below Hot Stuff. Cool Prices®. We also own domain names, including www.fivebelow.com, and unregistered copyrights in our website content. We attempt to obtain registration of our trademarks whenever practicable and pursue any infringement of those marks. Solely for convenience, trademarks and trade names referred to in this document may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We also refer to product names, trademarks, trade names and service marks that are the property of other companies.
Management Information Systems
Our management information systems provide a full range of business process assistance and timely information to support our merchandising strategy, warehouse management, stores and operating and financial teams. We believe our current systems provide us with operational efficiencies, scalability, management control and timely reporting that allow us to identify and respond to merchandising and operating trends in our business. We use a combination of internal and external resources to support store point-of-sale, merchandise planning and buying, inventory management, financial reporting, real estate, human resource and administrative functions. We continuously assess ways to maximize productivity and efficiency, and evaluate opportunities to further enhance our existing systems.
Government Regulation
We are subject to labor and employment laws, laws governing advertising, privacy laws, safety regulations and other laws, including consumer protection regulations that regulate retailers and/or govern the promotion and sale of merchandise and the operation of stores and warehouse facilities.shipcenters. We monitor changes in these laws and believe that we are in material compliance with applicable laws.
Insurance
We maintain third-party insurance for a number of risk management activities including but not limited to workers’ compensation, cyber, directors & officers, general liability, property and employee-relatedcrew-related health care benefits. We evaluate our insurance requirements on an ongoing basis to ensure we maintain adequate levels of coverage.
Employees
Human Capital
Our Purpose, Beliefs and Core Values
The success and growth of Five Below is the direct result of our crew who embrace our purpose, our beliefs and our core values.
| | | | | | | | |
Why We Exist - Our Purpose - | What We Believe - The Five Below Way - | How We Behave - Our Five Core Values - |
Five Below believes life is better when customers are free to Let Go and Have Fun in an amazing experience filled with unlimited possibilities priced so low we make it easy to say YES! to the newest, coolest stuff! | We are an Adopted Family. One who actively participates and leans in to support each other and our business. In this family, we value every individual for their uniqueness and potential. We know Five Below is strongest when our teams reflect the diversity of the communities we serve and our crew members can bring their whole authentic self to work, do what they do best, feel that they truly belong and grow every single day. | We live our purpose through five core values. These values guide all of our decisions and actions.
•Wow Our Customers •Unleash Your Passion •Hold the Penny Hostage •Achieve the Impossible •Work Hard, Have Fun and Build a Career
|
Crew
As of February 3, 2018,2024, we employed approximately 2,7007,000 full-time and 9,40015,000 part-time personnel.crew. Of our total employees,crew, approximately 300800 were corporate, approximately 1,000 were based at our corporate headquarters in Philadelphia, Pennsylvania, approximately 300 were based at our distribution centersshipcenters in Pedricktown, New Jersey, Forsyth, Georgia, Conroe, Texas, Buckeye, Arizona, and Olive Branch, MississippiIndianapolis, Indiana and approximately 11,50020,200 were store employees.crew located in 43 states throughout the United States. The number of part-time associatescrew fluctuates depending on seasonal needs. None of our employeescrew belong to a union or are party to any collective bargaining or similar agreement.
We provide a comprehensive suite of benefits designed to help crew and their families stay healthy, meet their financial goals, protect their income and help them balance their work and personal lives. We provide competitive pay and significant career growth opportunities all within a culture that values diverse viewpoints and contributions at every level. Our available benefits also include the following:
| | | | | |
Health and Wellness | Medical (with a choice of two high deductible plans and a traditional plan) |
Prescription drug coverage included with every medical plan |
Dental (with a choice of three plans) |
Vision plan (with a choice of two plans) |
Health savings account with Company match |
Pre-tax flexible spending account for qualified medical and dependent care expenses |
Mental health support with medical benefits coverage |
Crew assistance program with supplemental mental health support |
Medical option for part-time crew |
Life and Disability | No cost life and disability coverage provided for all full-time crew |
Supplemental life plan at option and cost of crew |
401(k) | 401(k) retirement savings option with safe harbor Company match |
Other | In-store crew discount |
Employee Stock Purchase Plan |
Paid time off provided to all full-time crew |
Paid parental leave provided to all full-time crew |
Identification theft, pet insurance, legal services access, term life, as well as supplemental accident, hospital indemnity, and critical illness coverage at option and cost of crew |
Employment Practices
We aim to provide challenging, meaningful and rewarding opportunities for personal and professional growth of all crew and encourage all crew to bring their unique backgrounds and experiences to the table to work together. In order to promote the desired work environment, we have adopted policies which describe the standards of respect, inclusivity and professionalism expected of all crew.
As an equal opportunity employer, we comply with all federal, state and local laws. This means that we make all employment decisions (such as who to recruit, hire, train, promote, transfer, and terminate, as well as compensation decisions) without considering an crew’s or applicant’s sex, race, religion, color, gender (including gender identity and gender expression), national origin, ancestry, physical or mental disability, medical condition, genetic information, marital status, registered domestic partner status, age, sexual orientation, military and veteran status or any other characteristic protected by federal, state or local law.
We do not and will not tolerate harassment, discrimination, retaliation, and disrespectful or other unprofessional conduct against crew or any other covered persons based on any protected characteristic. We also prohibit discrimination, harassment, disrespectful or unprofessional conduct based on the perception that anyone has any of those characteristics or is associated with a person who has or is perceived as having any of those characteristics. In addition, we will not retaliate against individuals who raise complaints of discrimination or harassment or who participate in workplace investigations or other protected activities. Furthermore, we are committed to maintaining a workplace free from sexual harassment and unwelcome conduct and recognizes sexual harassment as a form of workplace discrimination.
We promote and strive to maintain a safe and healthy work environment and conduct our business in ways that protect our crew’s safety and are sensitive to the environment. We are committed to maintaining a drug-free workplace and prohibit the manufacture, distribution, sale, purchase, transfer, possession, or use of illegal substances in the workplace, while representing us outside the workplace or if such activity affects work performance or the work environment of the Company.
We encourage open, timely communications that help us achieve organizational goals, share information, increase understanding, participate in the decision-making process, enhance our pride in the organization and provide recognition for our work-related successes. We believe our policies and practices are in compliance with all applicable laws and have been designed with significant inputs from the crew themselves.
Turnover
Retention of our talented crew is an important focus for us. We, therefore, monitor crew turnover, particularly at the store management and district management levels and employ various strategies to strive to improve our turnover rate.
Crew Engagement
We engage our crew in a variety of ways, including: conducting an annual crew survey to directly engage with, and collect feedback from our crew, maintaining an open-door policy for crew to report concerns, and providing an anonymous reporting hotline, available in multiple languages and managed by an independent company not affiliated with us, to allow crew to voice concerns freely.
The annual crew survey results help us understand the crew experience, evaluate our performance, identify our strengths, and pinpoint opportunities for improvement. Starting in fiscal 2020, we partnered with Gallup, Inc., a global analytics and advisory firm, to monitor and improve the engagement of our workforce. We utilize the survey results to identify strengths and weaknesses and create action plans to improve engagement and, ultimately, team performance.
In 2023 a high percentage of our crew participated in the survey, and the results demonstrated that our overall engagement levels exceed Gallup’s overall company averages in the United States and worldwide. The results also reflected that we are a mission-driven company with crew’s response on our strength of purpose far exceeding Gallup’s measurement for world class.
Seasonality
Our business is seasonal in nature with the highest level of net sales and net income generated in the fourth fiscal quarter due to the year-end holiday season and, therefore, operating results for any fiscal quarter are not necessarily indicative of results for the full fiscal year. To prepare for the holiday season, we must order and keep in stock more merchandise than we carry during other parts of the year. We expect inventory levels, along with an increase in accounts payable and accrued expenses, generally to reach their highest levels in the third and fourth fiscal quarters in anticipation of the increased net sales during the year-end holiday season. As a result of this seasonality, and generally because of variation in consumer spending habits, we experience fluctuations in net sales, net income and working capital requirements during the year.
Available Information
For more information about us, visit our website at www.fivebelow.com. The contents of our website are not part of this Annual Report on Form 10-K. Our electronic filings with the Securities and Exchange Commission (including all annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and any amendments to these reports), including the exhibits, are available, free of charge, through our website as soon as reasonably practicable after we electronically file them with, or furnish them to, the Securities and Exchange Commission.
ITEM 1A. RISK FACTORS
You should carefully consider carefully the following risks and uncertainties when reading this Annual Report.Report. If any of the following risks actually occurs,occur, our business, financial condition andand/or results of operations could be materially and adversely affected. In that event, the trading price of our common stock could decline. Although we believe that we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known to us or that are notwe currently believeddeem to be significantimmaterial that may materially adversely affect our performance business, financial condition and/or financial condition.
results of operations.
Risks Relating to Our Business and Industry
Inflation and rising commodity prices could adversely affect our business.
Our financial performance could be adversely impacted by inflation, which is subject to market conditions. Inflationary pressures on the products we sell could impact our net sales and earnings. If the cost of goods changes as a result of inflation, we may be unable to adjust our retail prices accordingly, which could adversely impact our sales or earnings. During fiscal 2022, we experienced levels of inflation that are higher than we have experienced in recent years, resulting in part from various supply disruptions, increased shipping and transportation costs, increased commodity costs, increased labor costs in the supply chain, monetary policy actions, and other disruptions caused by the uncertain economic environment. While we have been able to mitigate this impact to date through our pricing strategies, we are unable to predict how long the current inflationary environment will continue or the impact of inflationary trends on consumer behavior and our sales and profitability in the future. Additionally, commodities can be subject to availability constraints and price volatility caused by weather, supply conditions, political instability, government regulations, tariffs, energy prices and general economic conditions and other unpredictable factors. Changes in commodity prices could also negatively impact our sales and earnings if our competitors react more aggressively.
We may not be able to successfully implement our growth strategy on a timely basis or at all, which could harm our growth and results of operations.
Our growth is dependent on our ability to open profitable new stores. We believe we have an opportunity to continue to grow our store base from 6251,544 stores in 3243 states as of February 3, 20182024 to more than2,500 3,500 locations over time.
Our ability to open profitable new stores depends on many factors, including our ability to:
•identify suitable markets and sites for new stores;
•negotiate leases with acceptable terms;
•achieve brand awareness in the new markets;
•efficiently source and distribute additional merchandise;
•expand our distribution capacity by successfully opening and operating new shipcenters;
•maintain adequate distribution capacity, information systems and other operational system capabilities;
•hire, train and retain store management and other qualified personnel;crew; and
•achieve sufficient levels of cash flow and financing to support our expansion.
Unavailability of attractive store locations, delays in the acquisition or opening of new stores, delays or costs resulting from a decrease in commercial development due to landlord capital constraints, difficulties in staffing and operating new store locations or lack of customer acceptance of stores in new market areas may negatively impact our new store growth and the costs or the profitability associated with new stores.
Additionally, some of our new stores may be located in areas where we have little experience or a lack of brand recognition. Those markets may have different competitive conditions, market conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause these new stores to be less successful than stores in our existing markets. Other new stores may be located in areas where we have existing stores. Although we have experience in these markets, increasing the number of locations in these markets may result in inadvertent over-saturation of markets and temporarily or permanently divert customers and sales from our existing stores, thereby adversely affecting our overall financial performance.
Accordingly, we cannot assure youguarantee that we will achieve our planned growth or, even if we are able to grow our store base as planned, that any new stores will perform as planned. If we fail to successfully implement our growth strategy, we will not be able to sustain the rapid growth in sales and profits that we expect, which would likely have an adverse impact on the price of our common stock.
Any disruption in our ability to select, obtain, distribute and market merchandise attractive to customers at prices that allow us to profitably sell such merchandise could impact our business negatively.
We generally have been able to select and obtain sufficient quantities of attractive merchandise at prices that allow us to be profitable. If we are unable to continue to select products that are attractive to our customers, to obtain such products at costs that allow us to sell such products at a profit, or to market such products effectively to consumers, our sales or profitability could be affected adversely. In addition, the success of our business depends in part on our ability to anticipate, identify and respond promptly to evolving trends in demographics and consumer preferences, expectations and needs. If we are unable to quickly respond to developing trends or if the spending patterns or demographics of these markets change, and we do not timely and appropriately respond to such changes, then the demand for our products, which are discretionary, and our market share could be adversely affected. Failure to maintain attractive stores and to timely identify or effectively respond to changing consumer needs, preferences and spending patterns could adversely affect our relationship with customers, the demand for our products and our market share.
Any disruption in the supply or increase in pricing of our merchandise could negatively impact our ability to achieve anticipated operating results. The products we sell are sourced from a wide variety of domestic and international vendors. We have not experienced any difficulty in obtaining sufficient quantities of core merchandise and believe that, if one or more of our current sources of supply become unavailable, we would generally be able to obtain alternative sources without experiencing a substantial disruption of our business. However, such alternative sources could increase our merchandise costs and reduce the quality of our merchandise, and an inability to obtain alternative sources could affect our sales.
Our reliance on merchandise manufactured outside of the United States subjects us to legal, regulatory, political and economic risks.
In particular, tariffs imposed by the U.S. government could increase the cost to us of certain products, lower our margins, increase our import related expenses, cause us to increase our prices to consumers, and reduce consumer spending on discretionary items, each of which could have a material adverse effect on our business, financial condition and results of future operations.
A significant majority of our merchandise is manufactured outside of the United States, and changes in the prices and flow of these goods for any reason could have an adverse impact on our operations. The United States and other countries have occasionally proposed and enacted protectionist trade legislation,policies, which may result in changes in tariff structures and trade policies and restrictions that could increase the cost or reduce the availability of certain merchandise. In particular, recent political discourseFor example, in 2018 and 2019 the United States imposed increased tariffs on certain imports from China (up to 30%), and the then-President of the United States, at one point, directed United States companies to immediately begin to look for alternatives to China and suggested he had the authority to order United States companies to cease production in, and importation from, China. Although a partial trade deal has increasingly focusedbeen reached between the United States and China, the trade issues between these countries are not fully resolved. The trade issues between the United States and China may continue to be volatile and difficult to predict or forecast.
Increased tariffs as well as any newly imposed tariffs on implementing protectionist trade policies. The implementationitems imported from China or elsewhere would likely result in lower gross margins on impacted products, unless we are able to successfully take any one or more of protectionist policiesthe following mitigating actions: negotiate lower product costs with our vendors, purchase products produced in countries with no or lower tariffs or transition away from domestic vendors who source from China or other tariff impacted countries, increase our prices, or alter or cease offering certain products. Any increase in pricing, alteration of products or reduced product offering could reduce the competitiveness of our products. Furthermore, any retaliatory countermeasures imposed by countries subject to such tariffs, such as newChina, could increase our, or our vendors’, import expenses. Additionally, even if the products we import are not directly impacted by additional tariffs, could adversely affect us because we sell products that are principally manufactured outsidethe imposition of such additional tariffs on goods imported into the United States. States could cause increased prices for consumer goods in general, which could have a negative impact on consumer spending for discretionary items reducing demand for our products. These direct and indirect impacts of increased tariffs or trade restrictions implemented by the United States, both individually and cumulatively, could have a material adverse effect on our business, financial condition and results of future operations.
It has also been suggested that the United States may materially modify or withdraw from some of its existing trade agreements. Any of these or other measures, if ultimately enacted, or events relating to the manufacturers of our merchandise and the countries in which they are located, some or all of which are beyond our control, cancould adversely affect our ability to access suitable merchandise on acceptable terms, negatively impact our operations, increase costs and lower our margins. Such events or circumstances include, but are not limited to:
•political and economic instability;
•the financial instability and labor problems of the manufacturers of our merchandise;
•the availability and cost of raw materials;
•merchandise quality or safety issues;
•changes in currency exchange rates;
•the regulatory environment in the countries in which the manufacturers of our merchandise are located;
•work stoppages or other employee rights issues;
•inflation or deflation; and
•transportation availability, costs and disruptions.
Moreover, negative press or reports about products manufactured outside the United States may sway public opinion, and thus customer confidence, away from the products sold in our stores. These and other factors affecting the manufacturers of our merchandise who are located outside of the United States and our access to our products could adversely affect our financial performance adversely.performance.
We have implemented price increases in an effort to mitigate current and future cost increases. These or future price increases could reduce our unit sales, damage our reputation with our customers as an extreme value retailer, or cause us to become less competitive in the marketplace, each of which could have a material adverse effect on our business, financial condition and results of future operations.
We, like many retailers, are and may in the future be subject to increasing operational costs, including escalating product costs, the imposition of tariffs on imported goods, and higher wage and benefits costs in response to legislative requirements and competitive pressures. In fiscal 2019, we implemented price increases (including beyond $5 per item) in an effort to mitigate some or all of the risks of such operational cost increases. We can offer no assurances that price increases will be accepted by our customers, or that price increases will be sufficient to offset the impact of future cost increases. In addition, any increase in our prices may cause our unit sales to decline and could undermine our positioning as an extreme value retailer making us less attractive to our customers and less competitive in the marketplace. Accordingly, such factors could have a material adverse effect on our business, financial condition and results of future operations.
Our sales depend on a volume of traffic to our stores, and a reduction in traffic to, or the closing of, anchor tenants and other destination retailers in the shopping centers in which our stores are located could significantly reduce our sales and leave us with excess inventory.
Most of our stores are located in power, community and lifestyle shopping centers that benefit from the ability of “anchor” retail tenants, generally big box stores, and other destination retailers and attractions to generate sufficient levels of consumer traffic in the vicinity of our stores. Any decline in the volume of consumer traffic at shopping centers, whether because of consumer preferences to shop on the internet or at large warehouse stores, an economic slowdown, a decline in the popularity of shopping centers, the closing of anchor stores or other destination retailers or otherwise, could result in reduced sales at our stores and leave us with excess inventory, which could have a material adverse effect on our financial results or business.
An inability to attract and retain qualified employees and to control labor costs, as well as other labor issues, could adversely affect our business.
Our growth could be adversely impacted by an inability to attract, retain and motivate qualified employees at the store operations level, in distribution facilities, and at the corporate level, at costs which allow us to profitably conduct our operations. Our ability to meet our labor needs, while controlling our labor costs, is subject to many external factors, including competition for and availability of qualified personnel in a given market, unemployment levels within those markets, prevailing wage rates, minimum wage laws, health and other insurance costs, and changes in employment and labor laws (including changes in the process for our employees to join a union) or other workplace regulation. For example, some jurisdictions in which we operate have historically enacted minimum wages that exceed the federal standards. To the extent our competitors increase wage rates for their employees, we will likely have to increase wage rates to stay competitive and attract and retain our employees, which would increase our labor costs. If we do not maintain competitive wages, our customer service could suffer due to declining quality of our workforce or, alternatively, our earnings could decrease if we increase our wage rates. In addition, if a significant portion of our employee base unionizes, or attempts to unionize, our labor costs could increase. Further, we believe the current pricing of our healthcare costs includes the potential future impact of the Patient Protection and Affordable Care Act, but such legislation may further cause our healthcare costs to increase. Significant costs of the Patient Protection and Affordable Care Act may occur due to provisions of the legislation being phased in over time and changes to our healthcare costs structure could have a significant negative effect on our business. In addition, our ability to pass along any increase in labor costs to our customers is constrained by our low price model.
Our new store growth is dependent upon our ability to successfully expand our distribution network capacity, and failure to achieve or sustain these plans could affect our performance adversely.
We maintain distribution centersshipcenters in Pedricktown, New Jersey, Forsyth, Georgia, Conroe, Texas, Buckeye, Arizona, Indianapolis and Olive Branch, Mississippi.Indiana. We continuously assess ways to maximize the productivity and efficiency of our existing distribution facilities and evaluate opportunities for additional distribution centers. During fiscal 2015,shipcenters. In March 2019, we opened a new distribution centercompleted the purchase of an approximately 700,000 square foot shipcenter in Pedricktown, New Jersey to support our growth objectives. We currently occupy approximately 800,000 square feetForsyth, Georgia, which we began operating in April 2019, and will expand to approximately one million1,000,000 square feet by 2019. In addition, we are planning to lease or build new distribution centers that will open in the Southeastfirst half of 2024. In August 2019, we acquired land in 2019,Conroe, Texas to building an approximately 860,000 square foot shipcenter, which we began operating in July 2020. In July 2020, we acquired land in Buckeye, Arizona, to build an approximately 860,000 square foot shipcenter, which we began operating in August 2021, and will expand to approximately 1,200,000 square feet in the Southwestsecond half of 2024. In March 2021, we acquired land in 2020,Indianapolis, Indiana, to build an approximately 1,030,000 square foot shipcenter, which we began operating in June 2022. As a result of the significant expansion of our network of distribution facilities over the last several years, including the opening of our Indianapolis, Indiana shipcenter in June 2022, we ceased operations at our shipcenters in Olive Branch, Mississippi and Cincinnati, Ohio in the Midwestfirst half of fiscal 2022 as well as the e-commerce operations in 2021 to support our growth objectives. Delays in expanding our Pedricktown, New Jersey distribution center orshipcenter in the first half of fiscal 2023. Delays in opening the planned new distribution centersshipcenters could adversely affect our future operations by slowing store growth, which could in turn reduce sales growth. In addition, any distribution-related construction or expansion projects entail risks which could cause delays and cost overruns, such as: shortages of materials; shortages of skilled labor or work stoppages; unforeseen construction, scheduling, engineering, environmental or geological problems; weather interference; fires or other casualty losses; and unanticipated cost increases. The completion date and ultimate cost of future projects, including the planned future expansion of the Pedricktown, New Jersey distribution center opening the planned new distribution centersshipcenters could differ significantly from initial expectations due to construction-related or other reasons. We cannot guarantee that any project will be completed on time or within established budgets.
In addition, the fixed costs associated with owning, operating and maintaining our shipcenters during a period of economic weakness or declining sales can result in lower operating efficiencies, financial deleverage and potential impairment in the recorded value of distribution assets. This fixed cost structure may adversely affect profitability if sales volumes decline for an extended period of time and could have material adverse effects on our financial condition, results of operations or cash flow.
Furthermore, our shipcenters in Forsyth, Georgia, Conroe, Texas, Buckeye, Arizona and Indianapolis, Indiana subject us to the risks of owning real property, which include, but are not limited to:
•the possibility of environmental contamination and the costs associated with remediating any environmental problems;
•adverse changes in the value of this property, and any future properties we may own, due to interest rate changes, changes in the neighborhood in which the property is located, or other factors;
•the possible need for structural improvements in order to comply with zoning, seismic and other legal or regulatory requirements;
•the potential disruption of our business and operations arising from or connected with a relocation due to moving to or renovating the facility;
•increased cash commitments for improvements to the building or the property, or both;
•increased operating expenses for the buildings or the property, or both; and
•the risk of financial loss in excess of amounts covered by insurance, or uninsured risks, such as the loss caused by damage to the buildings as a result of earthquakes, floods and/or other natural disasters.
A significant disruption to our distribution network or to the timely receipt of inventory could adversely impact sales or increase our transportation costs, which would decrease our profits.
Because most of our products are distributed from our distribution centers,shipcenters, the unexpected loss of any one of our distribution centers,shipcenters, due to natural disaster or otherwise, would materially affect our operations. We also rely upon independent third-party transportation to provide goods to our stores in a timely and cost-effective manner, through deliveries to our distribution centersshipcenters from vendors and then from the distribution centersshipcenters or direct ship vendors to our stores. Our use of outside delivery services for shipments is subject to risks outside of our control and any disruption, unanticipated expense or operational failure related to this process could affect store operations negatively. For example, unexpectedUnexpected delivery delays or increases in transportation costs (including through increased fuel costs or a decrease in transportation capacity for overseas shipments or resulting from labor shortages or work stoppages) could significantly decrease our ability to generate sales and earn profits. If we change shipping companies, we could face logistical difficulties that could adversely impact deliveries and we would incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those received from the independent third-party transportation providers we currently use, which would increase our costs. Additionally, long-term disruptions to the United States and international transportation infrastructure from wars, political unrest, terrorism, natural disasters, governmental budget constraints and other significant events that could lead to delays or interruptions of service could adversely affect our business. As we seek to expand our operation through the implementation of our online retail capabilities, we may face increased or unexpected demands on distribution centershipcenter operations, as well as new demands on our distribution network.
Extreme weather conditions in thecommon to areas in which many of our stores are located could negatively affect our business and results of operations.operations, particularly as such extreme conditions occur during what is typically our most profitable quarter.
Extreme weather conditions in the areas in which our stores are located could negatively affect our business and results of operations. We have a significant number of stores in the Northeastern and Midwestern regions of the United States, which are prone to inclement weather conditions, as well as severe storms. Such inclement weather could have a significant impact on consumer behavior, travel and store traffic patterns, as well as our ability to operate our stores. For example, frequent or unusually heavy snowfall, ice storms, rainstorms or other extreme weather conditions over a prolonged period could make it difficult for our customers to travel to our stores and thereby reduce our sales and profitability. In addition, we typically generate higher revenues and gross margins during our fourth fiscal quarter, which includes the year-end holiday season. If weather conditions are not favorable during these periods, our operating results and cash flow from operations could be adversely affected.
A significant disruption in our information technology systems and our inability to adequately maintain and update those systems could adversely affect our operations and negatively affect our customers.
We rely extensively on our information technology systems (which includes certain systems currently outsourced to, or using cloud-based services provided by, third parties) throughout our business. We also rely on continued and unimpeded access to the internet to use our information technology systems. Our systems are subject to damage or interruption from power outages, telecommunications failures, computer viruses, malicious attacks, security breaches, catastrophic events, and implementation errors. If our systems are damaged, disrupted or fail to function properly or reliably, we may incur substantial repair or replacement costs, experience data loss or theft and impediments to our ability to manage inventories or process customer transactions, and encounter lost customer confidence, which could require additional promotional activities to attract customers and otherwise adversely affect our results of operations. We continually invest to maintain and update our information technology systems. Implementing significant system changes increases the risk of system disruption. The potential problems and interruptions associated with implementing technology initiatives, as well as providing training and support for those initiatives, could disrupt or reduce our operational efficiency, and could negatively impact customer experience and customer confidence.
If we are unable to secure our customers’ confidential or credit card information, or other private data relating to our employeescrew or our Company, we could be subject to negative publicity, costly government enforcement actions or private litigation, which could damage our business reputation and adversely affect our financial results.
As with other companies, we are periodically subject to cyberattacks. Cyberattacks and other cyber incidents are occurring more frequently including as a result of ongoing military conflicts, certain U.S. foreign relations, and remote work arrangements, are constantly evolving in nature, are becoming more sophisticated and are being made by groups and individuals (including criminal hackers, hacktivists, state-sponsored institutions, terrorist organizations and individuals or groups participating in organized crime) with a wide range of expertise and motives (including monetization of corporate, payment or other internal or personal data, theft of trade secrets and intellectual property for competitive advantage and leverage for political, social, economic and environmental reasons). Such cyberattacks and cyber incidents can take many forms including cyber extortion, denial of service, social engineering, such as impersonation attempts to fraudulently induce crew or others to disclose information or unwittingly provide access to systems or data, introduction of viruses or malware, such as ransomware through phishing emails, website defacement or theft of passwords and other credentials. Although we may incur significant costs in protecting against or remediating cyberattacks or other cyber incidents, no cyberattack or other cyber incident has, to our knowledge, had a material adverse effect on our business, financial condition or results of operations to date.
The protection of our customer, employeecrew and company data is critical to us. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements that affect our business. In addition, customers have a high expectation that we will adequately protect their personal information from cyberattack or other security breaches. We have procedures and technology in place designed to safeguard our customers’ debit and credit card and other personal information, our employees’crew’s private data and company records, intellectual property and intellectual property. Whileother confidential information, and we have takencontinue to devote significant stepsresources to network security, backup and disaster recovery, and other security measures, including training, to protect customerour systems and confidential information,data. Nevertheless, these security measures cannot provide absolute security or guarantee that we will be successful in preventing or responding to every such breach or disruption, including through the intentional or negligent actions of employees,our crew, business associates or third parties may undermine our security measures.parties. As a result, unauthorized parties may obtain access to our data systems and misappropriate customer data and company confidential data. information.
There can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography or other developments will prevent the compromise of our customer transaction processing capabilities and personal data. Furthermore, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If any such compromise of our security or the security of information residing with our business associates or third parties were to occur, we could be exposed to negative publicity, government enforcement actions, card issuer fines and/or penalties, private litigation or costly response measures. In addition, our reputation within the business community and with our customers may be affected, which could result in our customers discontinuing the use of debit or credit cards in our stores, or not shopping in our stores altogether. This could cause us to lose market share to our competitors and could have an adverse effect on our financial results.
We use, and may over time increase the usage of, machine learning and other types of artificial intelligence in our business, and challenges with properly managing its use could adversely affect our business.
Like many businesses, we utilize machine learning and other types of artificial intelligence (collectively, “AI”) and advancements in technology may allow us to expand the use of AI, including generative AI, into key operational and/or administrative aspects of our business with the result that applications of AI may become important in our operations over time. Our competitors or other third parties may incorporate AI into their businesses more quickly or more successfully than us, which could impair our ability to compete effectively and adversely affect our results of operations. Additionally, if the types of information that AI applications assist in producing are or are alleged to be deficient, inaccurate, or biased, our business, financial condition, and results of operations may be adversely affected. The rapid evolution of AI, including potential government regulation of AI, may require significant resources to develop, test and maintain our implementations of AI.
We are subject to customer payment-related risks that could increase operating costs or exposure to fraud or theft, subject us to potential liability and potentially disrupt our business.
We accept payments using a variety of methods, including cash, credit and debit cards and gift cards. Acceptance of these payment options subjects us to rules, regulations, contractual obligations and compliance requirements, including payment network rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. Any inability to comply with such requirements may subject us to increased risk of liability for fraudulent transactions and may adversely affect our business and operating results.
For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us, or if their systems are compromised, it could potentially disrupt our business. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs. As a result, our business and operating results could be adversely affected.
Our growth from existing stores is dependent upon our ability to increase sales and improve the efficiencies, costs and effectiveness of our operations, and failure to achieve or sustain these plans could affect our performance adversely.
Increases in sales in existing stores are dependent on factors such as competition, including from online retailers, merchandise selection, store operations and customer satisfaction. If we fail to realize our goals of successfully managing our
store operations and increasing our customer retention and recruitment levels, our sales may not increase, and our growth may be impacted adversely.
Our success depends on our executive officers, senior management, district, store, and distribution centershipcenter managers, and other key personnel. If we lose our executive officers, senior management, district, store, and distribution centershipcenter managers, or any other key personnel, or are unable to hire additional qualified personnel, our business could be harmed.
Our future success depends to a significant degree on the skills, experience and efforts of our executive officers, senior management, district, store, and distribution centershipcenter managers, and other key personnel, including Joel Anderson, our President and Chief Executive Officer. The loss of the services of any of our executive officers, senior management, district, store, and distribution centershipcenter managers, or other key personnel could have an adverse effect on our operations. Competition for skilled and experienced management in the retail industry is intense, and our future success will also depend on our ability to attract, retain and motivate qualified personnel, as a failure to attract these key personnel could have an adverse effect on our operations. We do not currently maintain key person life insurance policies with respect to our executive officers or key personnel.
Our profitability and cash flows from operations may be negatively affected if we are not successful in managing our inventory balances and inventory shrinkage.
Our inventory balance represented approximately 27%15% of our total assets as of February 3, 2018.2024. Efficient inventory management is a key component of our business success and profitability. To be successful, we must maintain sufficient inventory levels and an appropriate product mix to meet our customers’ demands without allowing those levels to increase to such an extent that the costs to store and hold the goods unduly impacts our financial results. If our buying decisions do not accurately predict customer trends or purchasing actions, or if our expectations about customer spending levels are inaccurate, we may have to take unanticipated markdowns to dispose of excess inventory, which also can adversely impact our financial results. We also experiencehave historically experienced loss of inventory (also called “inventory shrink”, “shrink”, or "shrinkage") due to damage, theft, and other causes and have recently seen inventory shrink reach higher than historic levels. Although we are making every effort to minimize inventory shrinkage, and we cannot assure you that incidences of inventory loss and theft will stay at acceptable levels or decrease in the future, or that the measures we are taking will effectively address the problem of inventory shrinkage.problem. We continue to focus on ways to reduce these risks, but we cannot assure you that we will be successful in our inventory management. If we are not successful in managing our inventory balances, our profitability and cash flows from operations may be negatively affected.
Our business requires that we lease substantial amounts of space and there can be no assurance that we will be able to continue to lease space on terms as favorable as the leases negotiated in the past.
We currently do not own any real estate but may in the future. Currently, we lease all of our store locations, as well as our corporate headquarters and distribution facilities in Pedricktown, New Jersey (and own our shipcenters in Forsyth, Georgia, Conroe, Texas, Buckeye, Arizona and Indianapolis, Indiana). As a result of the significant expansion of our network of distribution facilities over the last several years, including the opening of our Indianapolis, Indiana shipcenter in June 2022, we ceased operations at our shipcenters in Olive Branch, Mississippi.Mississippi and Cincinnati, Ohio in the first half of fiscal 2022. Our stores are leased from third parties, with typical initial lease terms of ten years. Many of our lease agreements also have additional five-year renewal options. Historically, we have been able to negotiate terms that fit within our economic model and that we believe are favorable; however, there is no guarantee that we will be able to continue to negotiate such terms. Consolidation in the commercial retail real estate market could affect our ability to successfully negotiate favorable rental terms for our stores in the future. Should significant consolidation occur, a large proportion of our store base could be concentrated with one or a few landlords that would then be in a position to dictate unfavorable terms to us due to their significant negotiating leverage. Many of our lease agreements have defined escalating rent provisions over the initial term and any extensions. Increases in our occupancy costs and difficulty in identifying economically suitable new store locations could have significant negative consequences, which include:
•requiring that a greater portion of our available cash be applied to pay our rental obligations, thus reducing cash available for other purposes and reducing our profitability;
•increasing our vulnerability to general adverse economic and industry conditions; and
•limiting our flexibility in planning for, or reacting to changes in, our business or in the industry in which we compete.
We depend on cash flow from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities to fund these expenses and needs and sufficient funds are not otherwise available to us, we may not be able to service our lease expenses, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which could harm our business. If an existing or future store is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. In addition, if we are not able to enter into new leases or renew existing leases on terms acceptable to us, this could have an adverse effect on our results of operations.
Operational difficulties, including those associated with our ability to either lease or build and operate our distribution centers,shipcenters, could adversely impact our business.
We maintain a network of distribution centersshipcenters and are planning to lease or build new distribution centers that will openshipcenters in the Southeast in 2019, the Southwest in 2020, and the Midwest in 2021future to support our growth objectives. Delays in opening these new distribution centersshipcenters could adversely affect our future financial performance by slowing store growth, which may in turn reduce revenue growth, or by increasing transportation costs. In addition, distribution center-relatedshipcenter-related construction entails risks that could cause delays and cost overruns, such as: shortages of materials or skilled labor; work stoppages; unforeseen construction, scheduling, engineering, environmental or geological problems;problems, weather interference; fires or other casualty losses; and unanticipated cost increases. The completion date and ultimate cost of these projects could differ significantly from initial expectations due to construction-related or other reasons. We cannot guarantee that these distribution centersshipcenters or any future operational projects will be completed on time or within established budgets. Additionally, potential ownership of these facilities and of additional facilities which we may lease, acquire, build and own in the future, entails risks of our ability to comply with regulations restricting the construction and operation of these facilities, as well as local community actions opposed to the location of our facilities at specific sites and the adoption of local laws restricting our operations and environmental regulations, which may impact our ability to find suitable locations, and increase the cost of sites and of constructing, leasing and operating our facilities. We also may have difficulty negotiating real estate purchase agreements or leases on acceptable terms. Failure to manage these and other similar factors effectively may affect our ability to timely build or lease new facilities, which could have a material adverse effect on our future growth and profitability.
We operate in a competitive environment and, as a result, we may not be able to compete effectively or maintain or increase our sales, market shares or margins.
We operate in a highly competitive retail environment with numerous competitors, including online retailers, some of which have greater resources or better brand recognition than we do. We compete with respect to customers, price, store location, merchandise quality and supply, assortment and presentation, in-stock consistency, customer service and employees.crew. This competitive environment subjects us to various risks, including the ability to provide quality, trend-right merchandise to our customers at competitive prices that allow us to maintain our profitability. Because of our low pricelow-price model, we may have limited ability to increase prices in response to increased costs without losing competitive position which may adversely affect our margins and financial performance. In addition, price reductions by our competitors may result in the reduction of our prices and a corresponding reduction in our profitability. Accordingly, we may face periods of intense competition in the future, which could have a material adverse effect on our profitability and results of operations.
Consolidation among retailers, changes in pricing of merchandise or offerings of other services by competitors could have a negative impact on the relative attractiveness of our stores to consumers. We do not possess exclusive rights to many of the elements that comprise our in-store experience and product offerings. Our competitors may seek to copy our business strategy and in-store experience, which could result in a reduction of any competitive advantage or special appeal that we might possess. In addition, most of our products are sold to us on a non-exclusive basis. As a result, our current and future competitors may be able to duplicate or improve on some or all of our in-store experience or product offerings that we believe are important in differentiating our stores and our customers’ shopping experience. If our competitors were to duplicate or improve on some or all of our in-store experience or product offerings, our competitive position and our business could suffer. Our ability to provide quality, trend-right products at attractive, competitive prices could be impacted by various actions of our competitors that are beyond our control.
Our profitability is vulnerable to inflation, cost increases, wage rate increases and energy prices.
Future increases in costs such as the cost of merchandise, wage rates, shipping rates, freight costs, fuel costs and store occupancy costs may reduce our profitability, particularly given our $5 and below pricing model. These cost increases may be the result of inflationary pressures that could further reduce our sales or profitability. Increases in other operating costs, including changes in energy prices, transportation costs, wage rates and lease and utility costs, may increase our cost of goods sold or operating expenses. In addition, because our expenses relating to wages are significant, any unfavorable changes in labor costs could negatively affect our operational results, financial position, and cash flows. Our low price model and competitive pressures in our industry may have the effect of inhibiting our ability to reflect these increased costs in the prices of our products and therefore reduce our profitability.
Our business is seasonal, and adverse events during the holiday season could have a substantial negative impact on our operating results negatively.results.
Our business is seasonal, with the highest percentage of sales (approximately 40% of total annual sales over the last two fiscal years) occurring during the fourth fiscal quarter (November, December and January), which includes the year-end holiday season. This increased percentage of net sales has historically resulted in the highest percentages of net income during the fourth fiscal quarter. We purchase substantial amounts of inventory in the end of the third fiscal quarter (October) and
beginning of the fourth fiscal quarter (November and December) and incur higher shipping costs and higher payroll costs in anticipation of the increased sales activity during these time periods. Adverse events, such as inclement or unusual weather, deteriorating economic conditions, higher unemployment, increased wage rates, higher gas prices or public transportation disruptions, could result in lower-than-planned sales during the holiday season which may lead to unanticipated markdowns. Since we rely on third parties for transportation and use third-party warehouses when we build up inventory, a number of these factors are outside of our control. Our holiday sales are also materially impacted by the length of the holiday selling season. In years where the selling season is shorter than typical due to the timing of the major holidays, our retail sales could be negatively impacted. In addition, the occurrence of any other operational disruptions during a shorter holiday period could have a heightened negative impact. An unsuccessful fourth quarter, or holiday season, will have a substantial negative impact on our financial condition and results of operations for the entire fiscal year.
We may not be successful in implementing our continued expansion into online retail and if we are successful, we will face new risks and challenges, which could adversely affect our results of operations.
In August 2016, we commenced sellingWe sell merchandise on the internet, through our fivebelow.com e-commerce website. Our ability to successfully execute a further expansion of our e-commerce strategy may suffer if we are unable to establish an effective online presencesell and sellfulfill our products in a cost-efficient manner while maintaining our $5 and below price point. Because we are in the process of developing our online sales platform, we may not be able to compete as effectively with seasoned online retailers who have a known online presence, well established e-commerce distribution networks and online sales platforms, and more resources than we do.manner.
In addition, if we are successful, we will encounter risks and difficulties frequently experienced by internet-based businesses, including risks related to our ability to attract and retain customers on a cost-effective basis and our ability to operate, support, expand and develop our internet operations, website and software and other related operational systems. Although we believe that our participation in both e-commerce and physical store sales will be a distinct advantage for us due to synergies, the potential for new customers and increased brand-recognitionbrand recognition nationwide in markets where we do not yet have stores, supporting product offerings through both of these channels could create issues that have the potential to adversely affect our results of operations. For example, if our e-commerce business successfully grows, it may do so in part by attracting existing customers, rather than new customers, who choose to purchase products from us online rather than from our physical stores, thereby reducing the financial performance of our stores. In addition, selling products through the internet exposes us to the potential for fraud associated with “card-not-present” credit card transactions that does not exist for physical store sales. Criminals are using increasingly sophisticated methods to engage in illegal activities such as unauthorized use of credit or debit cards and bank account information. Requirements relating to consumer authentication and fraud detection are more complex for online sales than for physical store sales. We may be denied the revenues associated with orders resulting from the unauthorized use of a cardholder’s card number in an illegal activity even if the associated financial institution approved payment of the orders. As we develop our e-commerce business, the impact of attracting existing rather than new customers, of the increased costs associated with the technology infrastructure and distribution networks, and of opening up our channels to increased internet competition could have a material adverse impact on our business, financial condition, profitability and cash flows, including future growth.
Material damage to, or interruptions to, or theOur inability to upgrade or expand, our technology systems as a result of external factors, staffing shortages or difficulties in updating our existing technology or developing or implementing new technology could have a material adverse effect on our business or results of operations.
We depend on a variety of information technology systems for the efficient functioning of our business. Such systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches and natural disasters. Damage or interruption to these systems may require a significant investment to fix or replace them, and we may suffer interruptions in our operations in the interim. Any material interruptions may have a material adverse effect on our business or results of operations.
We are continuing to expand, upgrade and develop our information technology capabilities, including, most recently, our point-of-sale system.core-enterprise resource planning system (or "ERP") which we implemented through Oracle software in fiscal 2020, the re-launch of our e-commerce website on the Hollar platform in fiscal 2020, and the implementation of a new enterprise wide human capital management system, Workday, in 2021. If we are unable to successfully upgradecontinue upgrading or expandexpanding our technological capabilities includingto support our point-of-sale system,growth, we may not be able to take advantage of market opportunities, manage our costs and transactional data effectively, satisfy customer requirements, execute our business plan or respond to competitive pressures. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology, or with maintenance or adequate support of existing systems, could also disrupt or reduce the efficiency of our operations.
Some of our information technology systems are currently outsourced to, or using cloud-based services provided by, third parties. If these third parties are unable, unwilling, or otherwise experience interruptions in their ability to provide services to us or to provide us access to the systems on which we rely, this would disrupt or reduce the efficiency of our operations if we are unable to convert to alternate systems in an efficient and timely manner. Furthermore, if these third parties are unable to secure our private data from cyberattacks and other cyber incidents, it may disrupt or reduce the efficiency of our operations or otherwise have a material adverse effect on our business, financial condition or reputation.
We also rely heavily on our information technology staff.crew. Failure to meet these staffing needs may negatively affect our ability to fulfill our technology initiatives while continuing to provide maintenance on existing systems. We rely on certain vendors to maintain and periodically upgrade many of these systems so that they can continue to support our business. The software programs supporting many of our systems were licensed to us by independent software developers. The inability of these developers or us to continue to maintain and upgrade these information systems and software programs would disrupt or reduce the efficiency of our operations if we are unable to convert to alternate systems in an efficient and timely manner.
Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting, which could harm our business and cause a decline in our stock price.
Reporting obligations as a public company and our anticipated growth are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel. In addition, as a public company, we are required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 so that our management can certify the effectiveness of our internal controls and our independent registered public accounting firm can render an opinion on the effectiveness of our internal control over financial reporting. As a result, we have incurred, and may continue to incur, substantial expenses to test our systems, to make any necessary improvements, and to hire additional personnel. At February 3, 2018, our internal control over financial reporting was effective using “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO); however, there can be no assurance that our internal control over financial reporting will be effective in future years. If our management is unable to certify the effectiveness of our internal controls or if our independent registered public accounting firm cannot render an opinion on the effectiveness of our internal control over financial reporting, or if material weaknesses in our internal controls are identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could harm our business and cause a decline in our stock price. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to accurately report our financial performance on a timely basis, which could cause a decline in our stock price and harm our ability to raise capital. Failure to accurately report our financial performance on a timely basis could also jeopardize our continued listing on The NASDAQ Global Select Market or any other stock exchange on which our common stock may be listed. Delisting of our common stock on any exchange could reduce the liquidity of the market for our common stock, which could reduce the price of our stock and increase the volatility of our stock price.
We are in the process of implementing a new enterprise resource planning system. Complications with the design or implementation of this system could adversely impact our business and operations and the implementation of this system could cause a financial statement error not to be detected.
We are in the process of a multi-year implementation of a new enterprise resource planning system (“ERP”). The ERP is designed to enhance functionality and provide timely information to the company's management team related to the operation of the business. The ERP implementation process has required, and likely will continue to require the investment of significant human and financial resources. We may not be able to successfully implement the ERP without experiencing delays, increased costs and other difficulties. If we are unable to successfully design and implement the new ERP system as planned, our financial position, results of operations and cash flows could be negatively impacted. The possibility exists that the migration to a new ERP system could adversely affect the effectiveness of our internal controls over financial reporting.
We are exposed to the risk of natural disasters, adverse weather conditions, pandemic outbreaks, global political events, war and terrorism that could disrupt business and result in lower sales, increased operating costs and capital expenditures.
Climate change could present risks to our operations. Our headquarters, store locations and distribution centers,shipcenters, as well as certain of our vendors and customers, are located in areas which have been and could be subject to natural disasters such as floods, hurricanes, tornadoes, fires or earthquakes. Adverse weather conditions or other extreme changes in the weather, including as a result of climate change and including resulting electrical and technological failures, may disrupt our business and may adversely affect our ability to sell and distribute products. For example, as a result of Superstorm Sandy in October 2012, we experienced closures in the majority of our stores open at that time. In addition, we operate in markets that may beare susceptible to pandemic outbreaks, or terrorist acts, and our operations may be affected by disruptive global political events, both global and domestic, such as civil unrest in countries fromin which our vendors are located or products are manufactured. manufactured, and in the US, where protests and other disturbances have affected, and may continue to affect, our ability to operate our stores.
Further, recent global events have adversely affected and are continuing to adversely affect workforces, organizations, economies, and financial markets globally, leading to economic downturns, inflation, and increased market volatility. Military conflicts and wars (such as the ongoing conflicts between Russia and Ukraine, Israel and Hamas, and the Red Sea crisis and its impact on shipping and logistics), terrorist attacks, instability in Venezuela, other geopolitical events, high inflation, increasing interest rates, bank failures and associated financial instability and crises, and supply chain issues can cause exacerbated volatility and disruptions to various aspects of the global economy. The uncertain nature, magnitude, and duration of hostilities stemming from such conflicts, including the potential effects of sanctions and countersanctions, or retaliatory cyber-attacks on the world economy and markets, have contributed to increased market volatility and uncertainty, which could have an adverse impact on macroeconomic factors that affect our business and operations.
Our business may be harmed if our ability to sell and distribute products is impacted by any such events, any of which could influence customer trends and purchases and may negatively impact our net sales, properties or operations. Such events could result in physical damage to one or more of our properties, the temporary closure of some or all of our stores or distribution centers,shipcenters, the temporary lack of an adequate work force in a market, temporary or long-term disruption in the transport of goods, decreases in transportation capacity, increases in transportation costs, delay in the delivery of goods to our distribution centersshipcenters or stores, disruption of our technology support or information systems, or fuel shortages or dramatic increases in fuel prices, which increase the cost of doing business. These events also can have indirect consequences such as increases in the costs of insurance if they result in significant loss of property or other insurable damage. Any of these factors, or combination thereof, could adversely affect our operations.
Changes to federal, state or provincial income tax legislation could have a material adverse effect on our business and results of operationsoperations.
From time to time, new tax legislation is adopted by the federal government and various states or other regulatory bodies. Significant changes in tax legislation could adversely affect our business or results of operations in a material way. On December 22, 2018, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"). The changes included in the TCJA are broad and complex. The final transition impacts of the TCJA may differ from he estimates provided elsewhere in this report, possibly materially, due to, among other things, changes in interpretations of the TCJA, any legislative action to address questions that arise because of the TCJA, any changes in accounting standards for income taxes or related interpretations in response to the TCJA, or any updates or changes to estimates we have utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates. As these and other tax laws and related regulations change, our financial results could be materially impacted. GiveGiven the unpredictability of possible changes and their potential interdependency, it is very difficult to assess whether the overall effect of such potential tax changes would be cumulatively positive or negative for our earnings and cash flow, but such changes could adversely impact our financial results.
Current economic conditions and other economic factors could adversely impact our financial performance and other aspects of our business in various respects.
Weakness in the U.S. economy or other economic factors affecting disposable consumer income, such as employment levels, inflation, business conditions, fuel and energy costs, natural disasters, terrorist activities, consumer debt levels, lack of available credit, interest rates, tax rates and reform, and erosion in consumer confidence may affect our business adversely. Such factors could reduce overall consumer spending, and discretionary spending in particular, or cause customers to shift their spending to products other than those sold by us or to products sold by us that are less profitable than other product choices, all of which could result in lower net sales, decreases in inventory turnover or a reduction in profitability due to lower margins. We have limited or no ability to control many of these factors. Global economic uncertainty, the impact of recessions and the potential for failures or realignments of financial institutions and the related impact on available credit may impact us, our vendors and other business partners, our landlords, our customers, our service providers and our operations in an adverse manner. In addition, economic downturns may make it difficult for us to accurately forecast future demand trends, which could cause us to purchase excess inventories, resulting in increases in our inventory carrying cost, or insufficient inventories, resulting in our inability to satisfy our customer demand and potential loss of market share.
Changes in state or federal legislation or regulations, or becoming subject to new regulations as our operations expand, could increase our cost of doing business.
Our business is subject to numerous federal, state and local laws and regulations. The current political environment, financial reform legislation, regulatory reform and stockholder activism may result in substantial new regulations and disclosure obligations and/or changes in the interpretation of existing laws and regulations, which may lead to additional compliance costs as well as the diversion of our management's time and attention from strategic initiatives. In addition, changes in safety and quality requirements related to products and food (including changes in labeling or disclosure requirements), federal or state wage requirements, employee rights (including changes in the process for our employees to join a union), health care, social welfare or entitlement programs such as health insurance, paid leave programs, or other changes in workplace regulation or tax laws could adversely impact our ability to achieve our financial targets. Changes in other regulatory areas, such as consumer credit, privacy and information security, or environmental regulation may result in significant added expenses or may require extensive system and operating changes that may be difficult to implement and/or could materially increase our costs of doing business. Untimely compliance or noncompliance with applicable laws and regulations may subject us to legal risk, including government enforcement action, significant fines and penalties and class action litigation, as well as reputational damage, which could adversely affect our results of operations.
In addition, the expansion of our operations into California requires us to comply with a number of additional regulations. For example, California currently enforces legislation commonly referred to as "Proposition 65" that requires that "clear and reasonable" warnings be given to consumers who are exposed to chemicals known to the State of California to cause cancer or reproductive toxicity. Although we will seek to comply with the requirements of Proposition 65, there can be no assurance that we will not be adversely affected by litigation or other actions relating to Proposition 65 or future legislation that is similar or related thereto. Also, the Transparency in Supply Chains Act of 2010 in California requires us to audit our vendors with respect to risks of human trafficking and slavery and mitigate these risks in our operations. Any failure to disclose issues or other non-compliance could subject us to action by the California Attorney General or other regulatory authorities. Increased compliance costs associated with operating in California could adversely affect our business, financial condition and results of operations.
Changes in accounting standards could significantly affect our results of operations and the presentation of those results.
Changes in accounting standards, including new interpretations and applications of accounting standards, may have adverse effects on our financial condition, results of operations, and liquidity. The Financial Accounting Standards Board ("FASB") have issued and/or adopted new pronouncements that proposes numerous significant changes to current accounting standards. These new standards could significantly change the presentation of financial information and our results of operations. Additionally, the new standards may require us to make systems and other changes that increase our operating costs. Specifically, implementing the new accounting standards related to leases could require us to make significant changes to our lease management system or other accounting systems.
Our current insurance programs may expose us to unexpected costs and negatively affect our financial performance.
Our insurance coverage is subject to deductibles, limits of liability and similar provisions that we believe are prudent based on our overall operations. We may incur certain types of losses that we cannot insure or which we believe are not economically reasonable to insure, such as losses due to acts of war, employee and certain other crime, and some natural disasters. If we incur these losses and they are material, our business could suffer. Certain material events may result in sizable losses for the insurance industry and adversely impact the availability of adequate insurance coverage or result in excessive premium increases. To offset negative cost trends in the insurance market, we may elect to self-insure, accept higher deductibles or reduce the amount of coverage in response to these market changes. In addition, because of ongoing changes in healthcare law, among other things, we may experience an increase in participation in our group health insurance programs, which may lead to a greater number of medical claims. If we experience a greater number of these losses than we anticipate, it could have a material adverse effect on our business, financial condition and results of operations.
Litigation may adversely affect
If we are unable to enforce our intellectual property rights, if we are accused of infringing a third party’s intellectual property rights, or if the merchandise we purchase from brand partners is alleged to have infringed a third party’s intellectual property rights, our business financial condition,or results of operations or liquidity.may be adversely affected.
Our business is subjectfuture success and competitive position depend in part on our ability to the risk of litigation by employees, consumers, vendors, competitors,maintain and protect our brand. We currently own various intellectual property rights holders, shareholders, government agenciesin the United States that differentiate us from our competitors, including our trademarks, such as the “Five Below®,” “Ten Below®” and others through private actions, class actions, administrative proceedings, regulatory actions“Five Below Hot Stuff. Cool Prices®” marks. We also own domain names, including www.fivebelow.com, and unregistered copyrights in our website content. We currently rely on a combination of copyright, trademark, trade dress and unfair competition laws to establish and protect our intellectual property and other proprietary rights, but the steps we take to protect such rights may be inadequate to prevent infringement of our trademarks and proprietary rights by others. Such unauthorized use of our trademarks, trade secrets, or other litigation. For example, weproprietary rights may cause significant damage to our brands and certainhave an adverse effect on our business. The loss or reduction of any of our current and former officers had beensignificant intellectual property or proprietary rights could have an adverse effect on our business.
Additionally, third parties to a securities class action lawsuitmay assert claims against us which was dismissed. The outcomealleging infringement, misappropriation or other violations of litigation, particularly class action lawsuits, regulatory actions andtheir intellectual property or other proprietary rights, whether or not the claims is difficulthave merit. Such claims could be time consuming and expensive to assessdefend, may divert management’s attention and resources, and could harm our brand image. Defending against any such claims could have an adverse effect on our business or quantify. Plaintiffsresults of operations and cause us to incur significant litigation costs and expenses. In addition, resolution of such claims may require us to pay substantial damages with respect to past sales and to cease using the relevant intellectual property or other rights and to cease selling the allegedly infringing products, which in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitudeturn would result in our loss of the potential loss relatingrevenues and profits associated with the ongoing sale of such products, which could have a material adverse effect on our financial results. Alternatively, with respect to these lawsuits may remain unknown for substantial periods of time. In addition, certain of these lawsuits, if decidedany third party intellectual property that we use or wish to use in our business (whether or not asserted against us in litigation), we could be required to license the applicable intellectual property rights from third parties, and we may not be able to enter into licensing or settled by us,other arrangements with the owner of such intellectual property at a reasonable cost or on reasonable terms.
We purchase merchandise from vendors that may result in liability materialbe subject to copyrights or patents, or that may otherwise incorporate protected intellectual property. We do not manufacture any of the merchandise we purchase from our vendors for sale to our consolidated financial statements as a wholecustomers and we do not routinely independently investigate whether our manufacturing partners hold intellectual property rights to merchandise that they are manufacturing or may negatively affect our operating results if changes to our business operation are required. The cost to defend litigation may be significant. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable.distributing. As a result, litigationwe rely upon the vendors’ representations and indemnifications set forth in our purchase orders and supplier agreements concerning their right to sell us the products that we purchase from them. If a third-party claims to have rights with respect to merchandise we purchased from a vendor, or if we acquire unlicensed merchandise, we could be required to remove such merchandise from our stores, resulting in our loss of the revenues and profits associated with the ongoing sale of such products. In addition, we could incur costs associated with destruction of such merchandise if the vendor is unwilling or unable to reimburse us, and be subject to liability under various civil and criminal causes of action, including actions to recover unpaid royalties and other damages and injunctions. Although our purchase orders and agreements with vendors generally require the vendor to indemnify us against such claims, a vendor may adversely affectnot have the financial resources to defend itself or us against such claims, in which case we may have to pay the costs and expenses associated with defending such claims. Any of these results could harm our business,brand image and have a material adverse effect on our financial condition, cash flows and results of operations or liquidity.
If we fail to protectas well as our brand name, competitors may adopt trade names that dilute the value of our brand name.
We may be unable or unwilling to strictly enforce our trademarks in each jurisdiction in which we do business. Also, we may not always be able to successfully enforce our trademarks against competitors or against challenges by others. Our failure to successfully protect our trademarks could diminish the value and efficacy of our brand recognition and could cause customer confusion, which could, in turn, adversely affect our sales and profitability.growth.
Product and food safety claims and the effects of legislation and regulations on product safety and quality and food safety and quality could affect our sales and results of operations adversely.
We may be subject to product liability claims from customers or actions brought or penalties assessed by government agencies relating to products, including food products or over-the-counter drug products that are recalled, mis-labeled, expired, defective or otherwise alleged to be harmful. Such claims may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling and transportation phases. All of our vendors and their products are contractually required to comply with applicable product and food safety laws. We generally seek contractual indemnification and insurance coverage from our vendors. However, if we do not have adequate contractual indemnification and/or insurance available, such claims could have a material adverse effect on our business, financial condition and results of operations. Our ability to obtain indemnification from foreign vendors may be hindered by the manufacturers’ lack of understanding of U.S., state-specific or local product liability or other laws, which may make it more likely that we be required to respond to claims or complaints from customers as if we were the manufacturer of the products. Even with adequate insurance and indemnification, such claims could significantly damage our reputation and consumer confidence in our products. Our litigation expenses could increase as well, which also could have a materially negative impact on our results of operations even if a product liability claim is unsuccessful or is not fully pursued.
Furthermore, if our vendors are unable or unwilling to recall products failing to meet standards, we may be required to recall those products at a substantial cost to us.
We purchase a portion of our products on a closeout basis. Some of these products are obtained through brokers or intermediaries rather than through manufacturers. The closeout nature of a portion of our products sometimes makes it more difficult for us to investigate all aspects of these products. We attempt to assure compliance and to test products when appropriate, and we seek to obtain indemnification through our vendors or to be listed as an additional insured, but there is no assurance that these efforts will be successful.
Our ability to obtain additional financing on favorableThe terms if needed, could be adversely affected by volatility in the capital markets.
We obtain and manage liquidity from the positive cash flow we generate from our operating activities, our access to capital markets and our revolving credit facility. There is no assurance that our ability to obtain additional financing from financial institutions or through the capital markets, if needed, will not be adversely impacted by economic conditions. Tightening in the credit markets, low liquidity and volatility in the capital markets could result in diminished availability of credit, higher cost of borrowing and lack of confidence in the equity market, making it more difficult to obtain additional financing on terms that are favorable to us.
The terms of our revolving credit facility may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations.
Our revolving credit facility contains, and any additional debt financing we may incur would likely contain, covenants requiring us to maintain or adhere to certain financial ratios or limits and covenants that restrict our operations, which may include limitations on our ability to, among other things:
•incur additional indebtedness;
•pay dividends and make certain distributions, investments and other restricted payments;
•create certain liens or encumbrances;
•enter into transactions with our affiliates;
•redeem our common stock; and
•engage in certain merger, consolidation or asset sale transactions.
Complying with these covenants could adversely affect our ability to respond to changes in our business and manage our operations. In addition, these covenants could affect our ability to invest capital in our new stores and fund capital expenditures for existing stores. Our ability to comply with these covenants and other provisions in the revolving credit facility and any future debt instruments may be affected by changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory developments, or other events beyond our control. A failure by us to comply with the financial ratios and restrictive covenants contained in our revolving credit facility and any future debt instruments could result in an event of default. Upon the occurrence of an event of default, the lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in our revolving credit facility and any future debt instruments. In addition, if we are in default, we may be unable to borrow additional amounts under any such facilities to the extent that they would otherwise be available and our ability to obtain future financing may also be impacted negatively. If the indebtedness under our revolving credit facility and any future debt instruments were to be accelerated, our future financial condition could be materially adversely affected.
Regulations related to conflict minerals could adversely impact our business.
The Securities and Exchange Commission has promulgated final rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding disclosureFurthermore, a systemic failure of the use of tin, tantalum, tungsten and gold, known as conflict minerals, included in components of products either manufactured by public companies or for which public companies have contracted to manufacture. These new rules require due diligence to determine whether such minerals originated from the Democratic Republic of Congo (the “DRC”) or an adjoining country and whether such minerals helped finance the armed conflictbanking system in the DRC. WhileUnited States or globally may result in a situation in which we do not manufacture products, we may in the future contractlose our ability to manufacture products. Accordingly, there will be costs associated with complying with these disclosure requirements, including costsdraw down funds from our revolving credit facility, lose access to determine the origin of conflict minerals used in any products weour deposits and are deemedunable to contract to manufacture. In addition, the implementation of these rulesobtain financing from other sources which could materially and adversely affect the sourcing, supplyour business and pricing of materials used in our products. Also, we may face reputational challenges if the due diligence procedures we implement do not enable us to verify the origins for all conflict minerals or to determine that such minerals are DRC conflict-free.
financial condition.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile or may decline regardless of our operating performance.
An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price of our common stock. In addition, broad market and industry factors, most of which we cannot control, may harm the price of our common stock, regardless of our actual operating performance. Factors that could cause fluctuation in the price of our common stock may include, among other things:
•actual or anticipated fluctuations in quarterly operating results or other operating metrics, such as comparable sales, that may be used by the investment community;
•changes in financial estimates by us or by any securities analysts who might cover our stock;
•speculation about our business in the press or the investment community;
•conditions or trends affecting our industry or the economy generally;generally, including, without limitation, the systemic failure of the banking system in the United States or globally;
•stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the retail industry;
•announcements by us or our competitors of new product offerings, significant acquisitions, strategic partnerships or divestitures;
•our entry into new markets;
•timing of new store openings;
•percentage of sales from new stores versus established stores;
•additions or departures of key personnel;
•actual or anticipated sales of our common stock, including sales by our directors, officers or significant shareholders;
•significant developments relating to our relationships with business partners, vendors and distributors;
•customer purchases of new products from us and our competitors;
•investor perceptions of the retail industry in general and our Company in particular;
•major catastrophic events;
•volatility in our stock price, which may lead to higher share-based compensation expense under applicable accounting standards; and
•changes in accounting standards, policies, guidance, interpretation or principles, for example, the adoption of Financial Accounting Standards Board (“FASB”) ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," which involves employee share-based payment accounting and the volatility of the effective tax rate.
In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. For example, we and certain of our current and former senior officers had been parties to a securities class action lawsuit filed against us, which was dismissed. This type of litigation, even if it does not result in liability for us, could result in substantial costs to us and divert management's attention and resources.
Our business and reputation may be adversely affected by environmental, social and governance matters.
Investor and regulatory focus are intensifying with respect to certain environmental, social and governance ("ESG") matters. These matters include, among others, (i) efforts and mitigation of the impact of climate change, (ii) human rights matters, (iii) ethics and compliance with law, (iv) diversity, equity and inclusion, and (v) the role of the Company's board of directors in supervising various sustainability issues. Additionally, in the retail industry, the materials used in the products we sell as well as where we source our products is of particular importance.
In addition, investment in funds that specialize in companies that perform well in ESG assessments are increasingly popular, and major institutional investors and advisors have publicly emphasized the importance of ESG measures to their investment decisions and recommendations. Investors who are focused on ESG matters may seek enhanced disclosures or require implementation of policies that may be adverse to our business, and there can be no assurances that shareholders will not advocate, via proxy contests, media campaigns or other public or private means, for us to take ESG focused actions on an accelerated timeline.
Additionally, there can be no certainty that we will successfully navigate or manage ESG issues or that we will successfully meet investors or others' expectations. Any failure or perceived failure by us in this regard could have a material adverse effect on our reputation with governments, customers, crew, other third parties and the communities and industries in which we operate, as well as, on our business, share price, financial condition, access to capital or results of operations.
Your percentage ownership in us may be diluted by future equity issuances, which could reduce your influence over matters on which shareholders vote.
Our boardBoard of directorsDirectors has the authority, without action or vote of our shareholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, shares issuable upon the vesting of restricted stock units or performance-based restricted stock units, shares that may be issued to satisfy our obligations under our equity incentive plan or shares of our authorized but unissued preferred stock. We initially reserved 7,600,000As of February 3, 2024, 3.4 million stock options, restricted shares, of commonor restricted stock units were available for grant under our equity incentive plan, for future issuances and as of February 3, 2018, 1,324,6980.5 million shares of our common stock are issuable upon the exercise of options outstanding, the vesting of restricted stock units and the vesting of performance-based restricted stock units under that plan. We also initially reserved 500,000 shares of common stock under our employee stock purchase plan for future issuances, and as of February 3, 2018, 22,480 shares of our common stock have been issued under that plan. Exercises of these options or issuances of common stock or preferred stock could reduce your influence over matters on which our shareholders vote and, in the case of issuances of preferred stock, likely could result in your interest in us being subject to the prior rights of holders of that preferred stock.
We do not expect to pay any cash dividends for the foreseeable future.
For the foreseeable future, we do not anticipate paying any cash dividends on our common stock. Any determination to pay dividends in the future will be at the discretion of our boardBoard of directorsDirectors and will depend upon results of operations, financial condition, contractual restrictions, including under agreements for indebtedness we may incur, restrictions imposed by applicable law and other factors our boardBoard of directorsDirectors deems relevant. Accordingly, if you purchase shares, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.
If securities or industry analysts do not publish research or continue to publish or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts ceases coverage of our Company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if our operating results do not meet the expectations of the investor community, or one or more of the analysts who cover our Company downgrade our stock, our stock price could decline.
Anti-takeover provisions could delay and discourage takeover attempts that shareholders may consider to be favorable.
Certain provisions of our amended and restated articles of incorporation and amended and restated bylaws and applicable provisions of Pennsylvania law may make it more difficult or impossible for a third party to acquire control of us or effect a change in our boardBoard of directorsDirectors and management.
In particular, these provisions, among other things:
•provide that only the chairman of the boardBoard of directors,Directors, the chief executive officer or a majority of the boardBoard of directorsDirectors may call special meetings of the shareholders;
•classify our boardBoard of directorsDirectors into three separate classes with staggered terms;
•provide for supermajority approval requirements for amending or repealing provisions in our amended and restated articles of incorporation and amended and restated bylaws;
•establish certain advance notice procedures for nominations of candidates for election as directors and for shareholder proposals to be considered at shareholders’ meetings; and
•permit the boardBoard of directors,Directors, without further action of the shareholders, to issue and fix the terms of preferred stock, which may have rights senior to those of the common stock.
In addition, anti-takeover provisions in Pennsylvania law could make it more difficult for a third party to acquire control of us. These provisions could adversely affect the market price of our common stock and could reduce the amount that shareholders might receive if we are sold. For example, Pennsylvania law may restrict a third party's ability to obtain control of us and may prevent shareholders from receiving a premium for their shares of our common stock. Pennsylvania law also provides that our shareholders are not entitled by statute to propose amendments to our amended and restated articles of incorporation.
These and other provisions of Pennsylvania law and our amended and restated articles of incorporation and amended and restated bylaws could delay, defer or prevent us from experiencing a change of control or changes in our boardBoard of directorsDirectors and management and may adversely affect our shareholders' voting and other rights. Any delay or prevention of a change of control transaction or changes in our boardBoard of directorsDirectors and management could deter potential acquirers or prevent the completion of a transaction in which our shareholders could receive a substantial premium over the then current market price for their shares of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Cybersecurity risk is assessed at the enterprise level as part of our overall enterprise risk management program. We maintain a dedicated cybersecurity function and program that is led by the Chief Information Security Officer ("CISO").
The cybersecurity function performs an annual threat and risk assessment that drives our security strategy. The strategy is aligned to the ISO 27001/02 and NIST cybersecurity frameworks, which drive our security policies and procedures. These policies and procedures, along with enabling security technology and qualified security function employees, maintain activities to prevent, detect, and minimize the effects of cybersecurity incidents. Cybersecurity technology and practices are in place to enable the protection of consumer and employee personal data and confidential information.
We maintain incident response plans and playbooks that allow for cybersecurity incident response, management and recovery in the event of an incident. These plans are tested on an annual basis.
We periodically engage qualified third parties to perform external assessments and audits of our overall security program, as well as to perform detailed security assessments of various components of our overall technology infrastructure. We also supplement our own internal expertise with qualified third parties to engage in varying security operational functions aiding in the identification and remediation of potential cybersecurity threats.
We require employees and temporary staffing to complete annual training on information security, including cybersecurity, global data privacy requirements and compliance measures.
We have implemented a third-party service provider risk assessment program to assess material cyber threats associated with using third party providers. This program is designed to assess risk prior to the onboarding of new providers as well as to review high risk and medium risk providers on an annual basis.
As of the date of this Annual Report, we are not aware of any risks from cybersecurity threats that have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations and financial condition.
We have integrated governance processes into our overall risk management framework to enable the Board of Directors to oversee cybersecurity risk. The Audit Committee oversees management’s policies and procedures related to cybersecurity risk management and periodically reports to the Board of Directors. The Chairman of the Audit Committee acts as the lead with respect to direct oversight of management.
Our Board of Directors considers cybersecurity risks through interaction with our management team and the Audit Committee, as well as through quarterly updates with our CISO.
Management informs the Audit Committee of material aspects of our cybersecurity program on a quarterly basis. This includes informing the committee on key strategic and operational goals, risk mitigation efforts, performance metrics, and descriptions and notification of emerging or existing risks as well as incidents impacting us.
Management assesses and considers cybersecurity risks through its enterprise risk management program, consultation with external advisors, as well as through discussions with our CIO and CISO. We have an experienced and dedicated CISO, who has served in various roles in information technology, technology audit and security over the past 38 years, including serving as a senior partner in charge of various information security and business resiliency practices at one of the Big 4 Accounting consultancies, advising some of the largest public company leadership teams and boards of directors on cyber related issues and projects. The CISO also served as the CISO for one of the Big 4, as well as a retail ecommerce business virtual CISO. The CISO holds an undergraduate degree in Management Information Systems and has attained the professional certification of Certified Information Systems Auditor.
Management is informed of cybersecurity risks and activities as part of the quarterly business review of the Information Technology function.
ITEM 2. PROPERTIES
We currently do not own any real property. In September 2016, we signed a fifteen-year lease for a new corporate headquarters location in Philadelphia, Pennsylvania to accommodate our current and anticipated future growth. We currently occupy approximately 117,000230,000 square feet of office space and willwith multiple options to expand into approximately 50,000 square feet of additional office space by no later than 2020.in the future. The lease agreement expires in early 2033 with three successive options to renew for additional termterms of up to approximately fifteen years.
In connection with our move to our new corporate headquarters,fiscal 2015, we paidopened a termination fee pursuant to the terms of the lease for our previous corporate headquarters.
Ourshipcenter in Pedricktown, New Jersey. We currently occupy approximately 600,0001,000,000 square foot distribution centerfeet at this shipcenter, having expanded from 800,000 square feet in Olive Branch, MississippiSeptember 2018 and it is leased under a lease agreement expiring in 2022 with options to renew for three successive five-year periods. In June 2015, we opened a new distribution center in Pedricktown, New Jersey to support our anticipated growth. We currently occupy approximately 800,000 square feet at this distribution center and will expand to approximately one million square feet by 2019. The lease agreement expires in 2025 with options to renew for three successive five-year periods. In March 2019, we completed the purchase of an approximately 700,000 square foot shipcenter in Forsyth, Georgia for approximately $42 million, for the land and building. We are planningbegan operating the shipcenter in April 2019 and will expand to lease or build new distribution centers that will openapproximately 1,000,000 square feet in the Southeastfirst half of 2024. The total construction cost of the expansion is expected to be approximately $21 million. In August 2019, we acquired land in 2019,Conroe, Texas, to build an approximately 860,000 square foot shipcenter for approximately $56 million, for the Southwestland and building. We began operating the shipcenter in July 2020. In July 2020, we acquired land in Buckeye, Arizona, to build an approximately 860,000 square foot shipcenter for approximately $65 million, for the land and building. We began operating the Midwestshipcenter in August 2021 and will expand to supportapproximately 1,200,000 square feet in the second half of 2024. The total construction cost of the expansion is expected to be approximately $26 million. In March 2021, we acquired land in Indianapolis, Indiana, to build an approximately 1,030,000 square foot shipcenter for approximately $60 million, for land and building. We began operating the shipcenter in June 2022. As a result of the significant expansion of our growth objectives.network of distribution facilities over the last several years, including the opening of our Indianapolis, Indiana shipcenter in June 2022, we ceased operations at our shipcenters in Olive Branch, Mississippi and Cincinnati, Ohio in the first half of fiscal 2022 as well as the e-commerce operations in our Pedricktown, New Jersey shipcenter in the first half of fiscal 2023.
At the end of fiscal 2017,2023, there were 625 1,544 Five Below store locations in 32 43 states. All of our stores are leased from third parties. These leases typically have ten-year terms with additional five-year renewal options, and many provide us with the option to terminate early under specified conditions. In addition to future minimum lease payments, some of our store leases provide for additional rental payments based on a percentage of net sales if sales at the respective stores exceed specified levels, as well as the payment of common area maintenance charges, real property insurance and real estate taxes. Many of our lease agreements have defined escalating rent provisions over the initial term and any extensions.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various proceedings, lawsuits, investigations, 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 usSuch matters from time to time include commercial, intellectual property, customer, consumer, and employment actions,proceedings, including class action lawsuits. The plaintiffs and government authorities in some actions may seek unspecified damages, or injunctive relief, or both.penalties and cost reimbursement. Actions are in various procedural stages, and some are covered in part by insurance. We cannot predict with assurance the outcome of actions brought against us. Accordingly, adverse developments, settlements, or resolutions may occur and negatively impact income in the quarter of such development, settlement or resolution. If a potential loss arising from these lawsuits, claims and pending actions is probable and reasonably estimable, we record the estimated liability based on circumstances and assumptions existing at the time. Although the outcome of these and other claims cannot be predicted with certainty, management does not believe that the ultimate resolution of these matters will have a material adverse effect on our financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the NASDAQNasdaq Global Select Market under the symbol “FIVE.” The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported by the NASDAQ Global Select Market:
|
| | | | | | |
Fiscal 2017 | High | Low |
First Quarter (January 29, 2017 - April 29, 2017) | $ | 49.86 |
| $ | 37.14 |
|
Second Quarter (April 30, 2017 - July 29, 2017) | $ | 54.13 |
| $ | 44.30 |
|
Third Quarter (July 30, 2017 - October 28, 2017) | $ | 58.07 |
| $ | 46.00 |
|
Fourth Quarter (October 29, 2017 - February 3, 2018) | $ | 73.55 |
| $ | 54.82 |
|
|
| | | | | | |
Fiscal 2016 | High | Low |
First Quarter (January 31, 2016 - April 30, 2016) | $ | 43.42 |
| $ | 32.03 |
|
Second Quarter (May 1, 2016 - July 30, 2016) | $ | 52.70 |
| $ | 36.76 |
|
Third Quarter (July 31, 2016 - October 29, 2016) | $ | 51.20 |
| $ | 35.22 |
|
Fourth Quarter (October 30, 2016 - January 28, 2017) | $ | 45.32 |
| $ | 35.03 |
|
On February 2, 20182024 (the last trading day of fiscal 2017)2023), the last reported sale price on the NASDAQNasdaq Global Select Market of our common stock was $62.94$181.11 per share. As of March 9, 2018,8, 2024, we had approximately 60,374258,974 holders of record of our common stock.
Performance Graph
This performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act"), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any future filing under the Securities Act of 1933 or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.
The following graph compares the cumulative total shareholder return on our common stock from July 19, 2012 (the date our common stock commenced trading on the NASDAQNasdaq Global Select Market) through February 3, 2018,2024, with the return on (i) the NASDAQNasdaq Global Market Composite Index and (ii) the NASDAQNasdaq US Benchmark Retail Index over the same period. This graph assumes an initial investment of $100 and assumes the reinvestment of dividends, if any. Such returns are based on historical results and are not intended to suggest future performance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 1/31/2014 | 1/30/2015 | 1/29/2016 | 1/27/2017 | 2/2/2018 | 2/1/2019 | 1/31/2020 | 1/29/2021 | 1/28/2022 | 1/27/2023 | 2/2/2024 |
FIVE BELOW, INC. | | | $ | 138.30 | | $ | 125.70 | | $ | 132.90 | | $ | 141.90 | | $ | 237.50 | | $ | 470.70 | | $ | 427.20 | | $ | 663.13 | | $ | 599.40 | | $ | 736.72 | | $ | 683.43 | |
NASDAQ GLOBAL MARKET COMPOSITE INDEX | | | $ | 138.40 | | $ | 156.30 | | $ | 155.60 | | $ | 190.90 | | $ | 244.10 | | $ | 244.90 | | $ | 308.50 | | $ | 440.70 | | $ | 464.30 | | $ | 391.84 | | $ | 526.95 | |
NASDAQ US BENCHMARK RETAIL INDEX | | | $ | 132.70 | | $ | 161.50 | | $ | 168.00 | | $ | 182.50 | | $ | 242.80 | | $ | 251.70 | | $ | 295.90 | | $ | 457.96 | | $ | 479.00 | | $ | 302.24 | | $ | 411.13 | |
|
| | | | | | | |
| 7/29/2012 | 2/1/2013 | 1/31/2014 | 1/30/2015 | 1/29/2016 | 1/27/2017 | 2/2/2018 |
FIVE BELOW, INC. | $100.00 | $140.00 | $138.30 | $125.70 | $132.90 | $141.90 | $237.50 |
NASDAQ GLOBAL MARKET COMPOSITE INDEX | $100.00 | $107.20 | $138.40 | $156.30 | $155.60 | $190.90 | $244.10 |
NASDAQ US BENCHMARK RETAIL INDEX | $100.00 | $111.00 | $132.70 | $161.50 | $168.00 | $182.50 | $242.80 |
Dividends
During the past five fiscal years, we have not declared, and currently do not plan to declare in the foreseeable future, dividends on shares of our common stock. We currently intend to retain any future earnings for use in the operation and expansion of our business. Any further determination to pay dividends on our capital stock will be at the discretion of our boardBoard of directors,Directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our boardBoard of directorsDirectors considers relevant. In addition, the terms of our revolving credit facility contain restrictions on our ability to pay dividends.
Issuer Purchases of Equity Securities
There were no reportableThe table below sets forth information regarding repurchases of our common stock during the fourth fiscal quarter of 2017.2023:
| | | | | | | | | | | | | | | | | | | | | | | |
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 |
Third Quarter 2023 | — | | | $ | — | | | — | | | $ | 20,000,000 | |
October 29, 2023 - November 25, 2023 | — | | | $ | — | | | — | | | $ | 20,000,000 | |
November 26, 2023 - December 30, 2023 | — | | | $ | — | | | — | | | $ | 100,000,000 | |
December 31, 2023 - February 3, 2024 | — | | | $ | — | | | — | | | $ | 100,000,000 | |
Fourth Quarter 2023 | — | | | $ | — | | | — | | | $ | 100,000,000 | |
(1)On March 21, 2018, we announced that 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. 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 shares through March 31, 2024. 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 comm stock through June 30, 2025. This program was retired on November 27, 2023. On November 27, 2023, our Board of Directors approved a new share repurchase program for up to $100 million of our common shares 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 6. SELECTED FINANCIAL DATA
The following table presents selected financial and other data as of and for the periods indicated. The selected financial data for fiscal 2017, 20162023, 2022 and 20152021 and selected consolidated balance sheet data as of February 3, 20182024 and January 28, 20172023 have been derived from our consolidated financial statements audited by KPMG LLP, our independent registered public accounting firm, included elsewhere in this Annual Report.Report. The selected financial data for fiscal 20142020 and fiscal 2013,2019, and the selected balance sheet data as of January 29, 2022, January 30, 2016,2021, and February 1, 2015, and February 2, 2014,2020, have been derived from our audited consolidated financial statements that have not been included in this Annual Report.Report. The historical results presented below are not necessarily indicative of the results to be expected for any future period. You should read this selected financial data in conjunction with the consolidated financial statements and accompanying notes and the information under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report.Report.
We operate on a fiscal calendar that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31st of the following year. The reporting periods contained in the following table consist of 53 weeks of operations in fiscal 20172023 and 52 weeks of operations in each of fiscal 2016, 2015, 2014,2022, 2021, 2020, and 2013,2019, respectively.
| | |
| | | Fiscal Year |
2023 | |
(in millions, except share and per share data) | |
(in millions, except share and per share data) | |
(in millions, except share and per share data) | |
Consolidated Statements of Operations Data (1): | |
Net sales | |
Net sales | |
Net sales | |
Cost of goods sold (exclusive of items shown separately below) | |
Cost of goods sold (exclusive of items shown separately below) | |
Cost of goods sold (exclusive of items shown separately below) | |
| Selling, general and administrative expenses | |
| Selling, general and administrative expenses | |
| Selling, general and administrative expenses | |
Depreciation and amortization | |
Depreciation and amortization | |
Depreciation and amortization | |
Operating income | |
Operating income | |
Operating income | |
Interest income (expense) and other income (expense), net | |
Interest income (expense) and other income (expense), net | |
Interest income (expense) and other income (expense), net | |
| Income before income taxes | |
| Income before income taxes | |
| Income before income taxes | |
Income tax expense | |
Income tax expense | |
Income tax expense | |
Net income | |
Net income | |
Net income | |
| | | Fiscal Year |
2017 | | 2016 | | 2015 | | 2014 | | 2013 |
(in millions, except share and per share data) | Consolidated Statements of Operations Data (1): | | | | | | | | | |
Net sales | $ | 1,278.2 |
| | $ | 1,000.4 |
| | $ | 832.0 |
| | $ | 680.2 |
| | $ | 535.4 |
|
Cost of goods sold | 814.8 |
| | 643.4 |
| | 540.0 |
| | 442.4 |
| | 347.4 |
|
Gross profit | 463.4 |
| | 357.0 |
| | 291.9 |
| | 237.8 |
| | 188.0 |
|
Selling, general and administrative expenses (2) | 306.0 |
| | 243.1 |
| | 199.0 |
| | 160.8 |
| | 134.3 |
|
Operating income | 157.4 |
| | 114.0 |
| | 92.9 |
| | 77.0 |
| | 53.7 |
|
Interest income, net | 1.5 |
| | 0.3 |
| | — |
| | 0.1 |
| | 1.5 |
|
Loss on debt extinguishment | — |
| | — |
| | — |
| | 0.2 |
| | 0.3 |
|
Other expense | — |
| | — |
| | 0.3 |
| | — |
| | — |
|
Income before income taxes | 158.8 |
| | 114.3 |
| | 92.7 |
| | 76.7 |
| | 52.0 |
|
Income tax expense | 56.4 |
| | 42.4 |
| | 35.0 |
| | 28.6 |
| | 19.8 |
|
Net income | 102.5 |
| | 71.8 |
| | 57.7 |
| | 48.0 |
| | 32.1 |
|
Net income attributable to participating securities | — |
| | — |
| | — |
| | — |
| | (0.5 | ) |
Net income attributable to common shareholders | $ | 102.5 |
| | $ | 71.8 |
| | $ | 57.7 |
| | $ | 48.0 |
| | $ | 31.7 |
|
Per Share Data: | | | | | | | | | |
Basic income per common share (3) | $ | 1.86 |
| | $ | 1.31 |
| | $ | 1.06 |
| | $ | 0.89 |
| | $ | 0.59 |
|
Diluted income per common share (3) | $ | 1.84 |
| | $ | 1.30 |
| | $ | 1.05 |
| | $ | 0.88 |
| | $ | 0.59 |
|
| Per Share Data: | |
| Per Share Data: | |
Basic income per common share (2) | |
Basic income per common share (2) | |
Basic income per common share (2) | |
Diluted income per common share (2) | |
Diluted income per common share (2) | |
Diluted income per common share (2) | |
| Weighted average shares outstanding: | |
| Weighted average shares outstanding: | |
| Weighted average shares outstanding: | | | | | | | | | |
Basic shares | 55,208,246 |
| | 54,845,708 |
| | 54,513,622 |
| | 54,219,801 |
| | 53,294,805 |
|
Basic shares | |
Basic shares | |
Diluted shares | 55,561,472 |
| | 55,128,870 |
| | 54,793,301 |
| | 54,573,855 |
| | 53,741,860 |
|
Diluted shares | |
Diluted shares | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year |
2023 | | 2022 | | 2021 | | 2020 | | 2019 | | | | |
(in millions, except percentages and total stores data) |
Consolidated Statements of Cash Flows Data (1): | | | | | | | | | | | | | |
Net cash provided by (used in): | | | | | | | | | | | | | |
Operating activities | $ | 499.6 | | | $ | 314.9 | | | $ | 327.9 | | | $ | 366.0 | | | $ | 187.0 | | | | | |
Investing activities | $ | (556.3) | | | $ | (3.9) | | | $ | (465.6) | | | $ | (286.9) | | | $ | (193.6) | | | | | |
Financing activities | $ | (95.9) | | | $ | (43.6) | | | $ | (66.1) | | | $ | (12.8) | | | $ | (42.7) | | | | | |
Other Operating and Financial Data (1): | | | | | | | | | | | | | |
Total stores at end of period | 1,544 | | | 1,340 | | | 1,190 | | | 1,020 | | | 900 | | | | | |
Comparable sales increase (decrease) | 2.8 | % | | (2.0) | % | | 30.3 | % | | (5.5) | % | | 0.6 | % | | | | |
Average net sales per store (3) | $ | 2.5 | | | $ | 2.4 | | | $ | 2.5 | | | $ | 2.0 | | | $ | 2.2 | | | | | |
Gross margin (4) | 35.8 | % | | 35.6 | % | | 36.2 | % | | 33.2 | % | | 36.5 | % | | | | |
Capital expenditures | $ | 335.1 | | | $ | 252.0 | | | $ | 288.2 | | | $ | 200.2 | | | $ | 212.3 | | | | | |
Consolidated Balance Sheet Data (1) (5): | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 179.7 | | | $ | 332.3 | | | $ | 65.0 | | | $ | 268.8 | | | $ | 202.5 | | | | | |
Short-term investment securities | 280.3 | | | 66.8 | | | 277.1 | | | 140.9 | | | 59.2 | | | | | |
Total current assets | 1,203.5 | | | 1,066.4 | | | 904.7 | | | 755.4 | | | 665.7 | | | | | |
Total assets | 3,872.0 | | | 3,324.9 | | | 2,880.5 | | | 2,314.8 | | | 1,958.7 | | | | | |
Total current liabilities | 715.9 | | | 602.6 | | | 586.9 | | | 435.7 | | | 351.3 | | | | | |
| | | | | | | | | | | | | |
Total liabilities | 2,287.1 | | | 1,963.0 | | | 1,760.2 | | | 1,432.9 | | | 1,198.9 | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total shareholders’ equity | $ | 1,585.0 | | | $ | 1,361.9 | | | $ | 1,120.3 | | | $ | 881.9 | | | $ | 759.8 | | | | | |
(1)Components may not add to total due to rounding.
(2)Please see Note 4 in our consolidated financial statements included elsewhere in this Annual Report for an explanation of per share calculations.
(3)Only includes stores open before the beginning of the fiscal year.
(4)Gross margin is equal to our net sales less our cost of goods sold as a percentage of our net sales.
(5)Fiscal 2019 Consolidated Balance Sheet data includes adoption of ASU 2016-02 "Leases" based on the modified retrospective method.
|
| | | | | | | | | | | | | | | | | | | |
| Fiscal Year |
2017 | | 2016 | | 2015 | | 2014 | | 2013 |
(in millions, except total stores data) |
Consolidated Statements of Cash Flows Data (1): | | | | | | | | | |
Net cash provided by (used in): | | | | | | | | | |
Operating activities | $ | 167.4 |
| | $ | 106.6 |
| | $ | 87.9 |
| | $ | 61.4 |
| | $ | 31.2 |
|
Investing activities | $ | (139.2 | ) | | $ | (86.8 | ) | | $ | (99.4 | ) | | $ | (32.3 | ) | | $ | (25.9 | ) |
Financing activities | $ | 8.4 |
| | $ | 3.1 |
| | $ | 1.4 |
| | $ | (16.1 | ) | | $ | (11.2 | ) |
Other Operating and Financial Data (1): | | | | | | | | | |
Total stores at end of period | 625 |
| | 522 |
| | 437 |
| | 366 |
| | 304 |
|
Comparable sales growth | 6.5 | % | | 2.0 | % | | 3.4 | % | | 3.4 | % | | 4.0 | % |
Average net sales per store (4) | $ | 2.2 |
| | $ | 2.0 |
| | $ | 2.0 |
| | $ | 1.9 |
| | $ | 1.9 |
|
Capital expenditures | $ | 67.8 |
| | $ | 44.8 |
| | $ | 53.1 |
| | $ | 32.3 |
| | $ | 25.9 |
|
Consolidated Balance Sheet Data (1): | | | | | | | | | |
Cash and cash equivalents | $ | 112.7 |
| | $ | 76.1 |
| | $ | 53.1 |
| | $ | 63.2 |
| | $ | 50.2 |
|
Short-term investment securities | 132.0 |
| | 77.8 |
| | 46.3 |
| | — |
| | — |
|
Total current assets | 479.4 |
| | 339.8 |
| | 264.7 |
| | 199.0 |
| | 156.3 |
|
Total assets | 695.7 |
| | 500.5 |
| | 393.3 |
| | 294.1 |
| | 232.1 |
|
Total current liabilities | 164.5 |
| | 116.6 |
| | 102.2 |
| | 79.4 |
| | 79.7 |
|
Total liabilities | 237.2 |
| | 169.1 |
| | 148.8 |
| | 119.9 |
| | 115.2 |
|
Total shareholders’ equity | $ | 458.6 |
| | $ | 331.4 |
| | $ | 244.5 |
| | $ | 174.3 |
| | $ | 116.9 |
|
| |
(1) | Components may not add to total due to rounding.
|
| |
(2) | Fiscal 2014 and 2013 includes $0.9 million and $6.1 million of share-based compensation expense that relates to the cancellation of certain stock options, in exchange for the grant of restricted shares and on-going expense recognition of the awards over the remaining vesting period. In addition, fiscal 2013 includes $1.0 million of expenses related to legal, accounting, and other fees in connection with secondary public offerings.
|
| |
(3) | Please see Note 2 in our consolidated financial statements included elsewhere in this Annual Report for an explanation of per share calculations.
|
| |
(4) | Only includes stores open during the full fiscal year.
|
ITEM 7. 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 elsewhere in this Annual Report.Report. The statements in this discussion regarding expectations of our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Part I, Item 1A “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.
We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31 of the following year. References to "fiscal year 2018"2024" or "fiscal 2018"2024" refer to the period from February 4, 20182024 to February 2, 2019,1, 2025, which consists of a 52-week fiscal year. References to "fiscal year 2017"2023" or "fiscal 2017"2023" refer to the period from January 29, 20172023 to February 3, 2018,2024, which consists of a 53-week fiscal year. References to "fiscal year 2016"2022" or "fiscal 2016"2022" refer to the period from January 30, 2022 to January 28, 2023, which consists of a 52-week fiscal year. References to "fiscal year 2021" or "fiscal 2021" refer to the period from January 31, 20162021 to January 28, 2017,29, 2022, which consists of a 52-week fiscal year. References to "fiscal year 2020" or "fiscal 2020" refer to the period from February 2, 2020 to January 30, 2021, which consists of a 52-week fiscal year. References to “fiscal year 2015”2019” or “fiscal 2015” refer to the period from February 1, 2015 to January 30, 2016, which consists of a 52-week fiscal year. References to “fiscal year 2014” or “fiscal 2014” refer to the period from February 2, 2014 to January 31, 2015, which consists of a 52-week fiscal year. References to “fiscal year 2013” or “fiscal 2013”2019” refer to the period from February 3, 20132019 to February 1, 2014,2020, which consists of a 52-week fiscal year. Historical results are not necessarily indicative of the results to be expected for any future period and results for any interim period may not necessarily be indicative of the results that may be expected for a full year.
Overview
Five Below, 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 teentween and pre-teenteen customer. We offer a dynamic, edited assortment of exciting products, allwith 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 February 3, 2018,2024, we operated 6251,544 stores in 3243 states. In August 2016, we commenced selling
We also offer our merchandise on the internet, through our fivebelow.com e-commerce website. We launchedwebsite, offering home delivery and the option to buy online and pick up in store. Additionally, we sell merchandise through on-demand third-party delivery services to enable our e-commerce operation as an additional channelcustomers to service our customers.shop online and receive convenient delivery. All e-commerce sales, which includes shipping and handling revenue, are included in net sales and beginning with the third fiscal quarter of 2016, 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.expenses (including depreciation and amortization).
We believe that our business model has resulted in strong financial performance irrespectivewhen considered in light of the economic environment. Our comparable sales increased by 6.5%2.8% in fiscal 2017,2023, decreased by 2.0% in fiscal 20162022, and 3.4%increased by 30.3% in fiscal 2015.2021. Between fiscal 20152021 and fiscal 2017,2023, our net sales increased from $832.0$2,848.4 million to $1,278.2$3,559.4 million, representing a compounded annual growth rate of 24.0%11.8%. Over the same period, our operating income increased from $92.9$379.9 million to $157.4$385.6 million, representing a compounded annual growth rate of 30.1%0.7%. In addition, we expanded our store base from 4371,190 stores at the end of fiscal 20152021 to 6251,544 stores at the end of fiscal 2017. We2023 and we plan to open approximately 125between 225 and 235 new stores in fiscal 2018.2024.
We expect to continue our strong growth in the future. By offering trend-right merchandise at a differentiated price point of $5 and below,points, our stores have been successful in varying geographic regions, population densities and real estate settings. We operateAs of February 3, 2024, we operated stores in 3243 states in the Northeast, South, Midwest and West regions ofthroughout the United States. We are primarily located in power, community and lifestyle shopping centers across a variety of urban, suburban and semi-rural markets with trade areas including at least 100,000 people in the specified market. We continue to believe we have the opportunity to expand our store base in the United States from 6251,544 locations as of February 3, 20182024 to more than 2,5003,500 locations over time. Our ability to open profitable new stores depends on many factors, including our ability to identify suitable markets and sites; negotiate leases with acceptable terms; achieve brand awareness in the new markets; efficiently source and distribute additional merchandise; and achieve sufficient levels of cash flow and financing to support our expansion.
On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted. The TCJA includes a numbers of changes to existing U.S. tax laws that impact us, most notably a reduction of the U.S. corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. We will continue to analyze additional information and guidance related to the TCJA as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. See discussion below under "Income Tax Expense" for further information about the tax benefits and expenses that we recognized this year. As a result of the TCJA, we expect that the effective tax rate in fiscal 2018 will be approximately 24.5%. In fiscal 2018 and future years, we may invest a portion of any savings generated by the TCJA into expenses that could significantly increase and impact the comparability between periods of Cost of Goods Sold and Gross Profit, Selling, General and Administrative Expenses and Operating Income.
We have a proven and highly profitable store model that has produced consistent financial results and returns, and our new stores have achieved average payback periodsperiod of less than one year. Our new store model assumes a store size of approximately 8,0009,500 square feet that achieves annual sales of approximately $1.6$2 million in the first full year of operation. Our new store model also assumes an average new store investment of approximately $0.3$0.4 million. Our new store investment includes our store build-out (net of tenant allowances), inventory (net of payables) and cash pre-opening expenses.
Our planned store expansion will place increased demands on our operational, managerial, administrative and other resources. Managing our growth effectively will require us to continue to maintain adequate distribution capacity, enhance our store management systems, financial and management controls, information systems and other operational system capabilities. In addition, we will be required to hire, train and retain store management and other qualified personnel. For further information, see Part I, Item 1A “Risk Factors-Risk Relating to our Business and Industry.”
Over the past fivenine years, we have invested a significant amount of capital in infrastructure and systems necessary to support our future growth and we expect to incur additional capital expenditures related to expansion of our infrastructure and systems in future periods. In fiscal 2013, we opened our second distribution center in Olive Branch, Mississippi and expanded our corporate headquarters to support our growth. In June 2015, we opened a new distribution center in Pedricktown, New Jersey to support our anticipated growth. We occupy approximately 800,000 square feet in our Pedricktown, New Jersey distribution center and will expand to approximately one million square feet by 2019. We are planning to lease or build new distribution centers that will open in the Southeast in 2019, the Southwest in 2020, and the Midwest in 2021 to support our growth objectives. In fiscal 2015, we invested in a new ERP and began the multi-year implementation of the ERP, which is designed to enhance functionality and provide timely information to the Company's management team related to the operation of the business. In fiscal 2020, we invested in a new Retail Merchandising System and began the multi-year implementation of the Retail Merchandising System, which is designed to manage, control, and perform seamless execution of day-to-day merchandising activities, including purchasing, distribution, order fulfillment, and financial close. In fiscal 2015, we opened a shipcenter in Pedricktown, New Jersey. We occupy approximately 1,000,000 square feet at this shipcenter, having expanded from 800,000 square feet in September 2018. In fiscal 2016, we signed a 15-year lease for a new corporate headquarters location in Philadelphia, Pennsylvania to accommodate our current and anticipated future growth.Pennsylvania. We currently occupy approximately 117,000230,000 square feet of office space with multiple options to expand in the future. In March 2019, we completed the purchase of an approximately 700,000 square foot shipcenter in Forsyth, Georgia. We began operating the shipcenter in April 2019 and will expand intoto approximately 50,0001,000,000 square feet in the first half of additional office space by no later than2024. The total construction cost of the expansion is expected to be approximately $21 million. In August 2019, we acquired land in Conroe, Texas, to build an approximately 860,000 square foot shipcenter for approximately $56 million. We began operating the shipcenter in July 2020. In addition,July 2020, we acquired land in Buckeye, Arizona, to build an approximately 860,000 square foot shipcenter for approximately $65 million. We began operating the timingshipcenter in August 2021 and amountwill expand to approximately 1,200,000 square feet in the second half of investments2024. The total construction costs of the expansion is expected to be approximately $26 million. In March 2021, we acquired land in Indianapolis, Indiana, to build an approximately 1,030,000 square foot shipcenter for approximately $60 million. We began operating the shipcenter in June 2022. As a result of the significant expansion of our network of distribution facilities over the last several years, including the opening in the first half of fiscal 2022 of our Indianapolis, Indiana shipcenter, we ceased operations at our shipcenters in Olive Branch, Mississippi and Cincinnati, Ohio in the first half of fiscal 2022 as well as the e-commerce operations in our infrastructure and systems could affectPedricktown, New Jersey shipcenter in the comparabilityfirst half of our results of operations in future periods.fiscal 2023.
We continuously assess ways to maximize the productivity and efficiency of our existing facilities, infrastructure and systems. The timing and amount of investments in our facilities, infrastructure and systems could affect the comparability of our results of operations in future periods. The completion date and ultimate cost of future projects could differ significantly from initial expectations due to construction-related or other reasons.
We believe our business strategy will continue to offer significant opportunity, but it also presents risks and challenges. These risks and challenges include, but are not limited to, that we may not be able to effectively identify and respond to changing trends and customer preferences, that we may not be able to find desirable locations for new stores and that we may not be able to effectively manage our future growth. In addition, our financial results can be expected to be directly impacted by substantial increases in product costs due to commodity cost increases or general inflation which could lead to a reduction in our sales as well as greater margin pressure as costs may not be able to be passed on to consumers. To date, changes in commodity prices and general inflation have not materially impacted our business. In response to increasing commodity prices or general inflation, we seek to minimize the impact of such events by sourcing our merchandise from different vendors and changing our product mix. See Part I, Item 1A “Risk Factors” for a description of these and other important factors that could adversely impact us and our results of operations.
How We Assess the Performance of Our Business and Non-GAAP Measures
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 (including depreciation and amortization) 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.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 distribution centersshipcenters 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 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 distribution centersshipcenters through the first anniversary of the date the store re-opened.
Comparable sales exclude the 53rd week of sales for 53-week fiscal years. Therefore, Fiscal 20172023 comparable sales were calculated using a 52-week comparable period through the week ending January 27, 2018.2024. 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.calculation on a restated calendar basis using the National Retail Federation's restated calendar comparing similar weeks
There may be variations in the way in which some of our competitors and other retailers calculate comparable or “same store” sales. As a result, data in this Annual Report regarding our comparable 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 our store base iswe 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; and
•weather conditions.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 isare 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 third-partyinternal fulfillment and shipping costs related to our e-commerce operations. Store occupancy costs include rent, common area maintenance, utilities and property taxes for all store locations. Distribution costs include costs for receiving, processing, warehousing and shipping of merchandise to or from our distribution centersshipcenters 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 companyCompany grows.
The components of our cost of goods sold may not be comparable to the components of cost of goods sold or similar measures of our competitors and other retailers. As a result, data in this Annual Report regarding our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers.
The variable component of our cost of goods sold is higher in higher volume quarters because the variable component of our cost of goods sold generally increases as net sales increase. We regularly analyze the components of gross profit, a non-GAAP financial measure, as well as gross margin.margin as it provides a useful and relevant measure to analyze our financial performance. 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 costscost of goods sold could have an adverse impact on our gross profit and results of operations. In addition, current 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 (including Depreciation and Amortization)
Selling, general and administrative (including depreciation and amortization), 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 increaseimpact our share-based compensation expense included in SG&A.&A expenses.
Operating Income
Operating income equals gross profit less SG&A expenses. Operating income excludes interest expense or income, loss on debt extinguishmentother 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. Refer to Item 7 "Results of Consolidated Operations" in our Annual Report on Form 10-K for the year ended January 28, 2023 for a comparison of fiscal years 2022 and 2021. | | | Fiscal Year |
2017 | | 2016 | | 2015 |
(in millions, except total stores) | 2023 | |
2023 | |
2023 | |
(in millions, except percentages and total stores data) | |
(in millions, except percentages and total stores data) | |
(in millions, except percentages and total stores data) | |
Consolidated Statements of Operations Data (1): | | | | | |
Net sales | $ | 1,278.2 |
| | $ | 1,000.4 |
| | $ | 832.0 |
|
Cost of goods sold | 814.8 |
| | 643.4 |
| | 540.0 |
|
Gross profit | 463.4 |
| | 357.0 |
| | 291.9 |
|
Net sales | |
Net sales | |
Cost of goods sold (exclusive of items shown separately below) | |
Cost of goods sold (exclusive of items shown separately below) | |
Cost of goods sold (exclusive of items shown separately below) | |
| Selling, general and administrative expenses | 306.0 |
| | 243.1 |
| | 199.0 |
|
| Selling, general and administrative expenses | |
| Selling, general and administrative expenses | |
Depreciation and amortization | |
Depreciation and amortization | |
Depreciation and amortization | |
Operating income | 157.4 |
| | 114.0 |
| | 92.9 |
|
Interest income, net | 1.5 |
| | 0.3 |
| | — |
|
Other expense | — |
| | — |
| | 0.3 |
|
Operating income | |
Operating income | |
Interest income and other income, net | |
Interest income and other income, net | |
Interest income and other income, net | |
| Income before income taxes | |
| Income before income taxes | |
| Income before income taxes | 158.8 |
| | 114.3 |
| | 92.7 |
|
Income tax expense | 56.4 |
| | 42.4 |
| | 35.0 |
|
Income tax expense | |
Income tax expense | |
Net income | |
Net income | |
Net income | $ | 102.5 |
| | $ | 71.8 |
| | $ | 57.7 |
|
Percentage of Net Sales (1): | | | | | |
Percentage of Net Sales (1): | |
Percentage of Net Sales (1): | |
Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of goods sold | 63.7 | % | | 64.3 | % | | 64.9 | % |
Gross profit | 36.3 | % | | 35.7 | % | | 35.1 | % |
Net sales | |
Net sales | |
Cost of goods sold (exclusive of items shown separately below) | |
Cost of goods sold (exclusive of items shown separately below) | |
Cost of goods sold (exclusive of items shown separately below) | |
| Selling, general and administrative expenses | 23.9 | % | | 24.3 | % | | 23.9 | % |
| Selling, general and administrative expenses | |
| Selling, general and administrative expenses | |
Depreciation and amortization | |
Depreciation and amortization | |
Depreciation and amortization | |
Operating income | 12.3 | % | | 11.4 | % | | 11.2 | % |
Interest income, net | 0.1 | % | | — | % | | — | % |
Other expense | — | % | | — | % | | — | % |
Operating income | |
Operating income | |
Interest income and other income, net | |
Interest income and other income, net | |
Interest income and other income, net | |
| Income before income taxes | |
| Income before income taxes | |
| Income before income taxes | 12.4 | % | | 11.4 | % | | 11.1 | % |
Income tax expense | 4.4 | % | | 4.2 | % | | 4.2 | % |
Income tax expense | |
Income tax expense | |
Net income | |
Net income | |
Net income | 8.0 | % | | 7.2 | % | | 6.9 | % |
Operational Data: | | | | | |
Operational Data: | |
Operational Data: | |
Total stores at end of period | 625 |
| | 522 |
| | 437 |
|
Comparable sales growth | 6.5 | % | | 2.0 | % | | 3.4 | % |
Total stores at end of period | |
Total stores at end of period | |
Comparable sales increase (decrease) | |
Comparable sales increase (decrease) | |
Comparable sales increase (decrease) | |
Average net sales per store (2) | $ | 2.2 |
| | $ | 2.0 |
| �� | $ | 2.0 |
|
Average net sales per store (2) | |
Average net sales per store (2) | |
Gross margin (3) | |
Gross margin (3) | |
Gross margin (3) | |
| |
(1) | Components may not add to total due to rounding. |
| |
(2) | Only includes stores open during the full fiscal year. |
(1)Components may not add to total due to rounding.
(2)Only includes stores open before the beginning of the fiscal year.
(3)Gross margin is equal to our net sales less our cost of goods sold as a percentage of our net sales.
Fiscal Year 20172023 Compared to Fiscal Year 20162022
Net Sales
Net sales increased to $1,278.2$3,559.4 million in fiscal year 20172023 from $1,000.4$3,076.3 million in fiscal year 2016,2022, an increase of $277.8$483.1 million, or 27.8%15.7%. The increase was the result of a non-comparable sales increase of $217.3$400.7 million and a comparable sales increase of $60.5$82.4 million. In fiscal year 2017,2023, we opened 103204 net new stores compared to 85 net150 new stores in fiscal year 2016.2022. The increase in non-comparable sales was primarily driven by new stores that opened in fiscal 20172023, and the number of stores that opened in fiscal 20162022 but have not been open for 15 full months and includes approximately $15.7$48.1 million of sales contributed by the 53rd week in fiscal 2017.2023.
Comparable sales increased 6.5% for fiscal year 2017 compared to fiscal year 2016.2.8%. This increase resulted from an increase of approximately 5.8%3.9% in the number of transactions, and an increasepartially offset by a decrease of approximately 0.7%1.0% in the average dollar value of transactions.
Cost of Goods Sold and Gross Profit
Cost of goods sold increased to $814.8$2,285.5 million in fiscal year 20172023 from $643.4$1,980.8 million in fiscal year 2016,2022, an increase of $171.4$304.7 million, or 26.6%15.4%. The increase in cost of goods sold was primarily the result of an increaseincreases in the merchandise costs of goods resulting from an increaseincreases in sales. Also contributing to the increase in cost of goods sold was an increase innet sales and inventory shrinkage, and store occupancy costs primarily resulting from new store openings.
Gross profit increased to $463.4$1,273.8 million in fiscal year 20172023 from $357.0$1,095.5 million in fiscal year 2016,2022, an increase of $106.4$178.3 million, or 29.8%16.3%. Gross margin increased to 36.3% for fiscal year 2017 from 35.7%35.8% in fiscal year 2016,2023 from 35.6% in fiscal year 2022, an increase of approximately 6020 basis points. The increase in gross margin was primarily the result of decreasesa decrease as a percentage of net sales in store occupancy costs anddistribution costs. Also contributing to the increase in gross margin was a decrease in merchandise cost of goods sold.sold, which includes the impact of higher inventory shrinkage.
Selling, General and Administrative Expenses (including Depreciation and Amortization)
Selling, general and administrative expenses (including depreciation and amortization) increased to $306.0$888.3 million in fiscal year 20172023 from $243.1$750.4 million in fiscal year 2016,2022, an increase of $62.9$137.8 million, or 25.9%18.4%. As a percentage of net sales, selling, general and administrative expenses decreased(including depreciation and amortization) increased approximately 4060 basis points to 23.9%25.0% in fiscal year 20172023 compared to 24.3%24.4% in fiscal year 2016.2022. The increase in selling, general and administrative expenses (including depreciation and amortization) was the result of increasesan increase of $42.0$107.1 million in store-related expenses to support new store growth and our marketing initiatives and $20.9$30.7 million of corporate-related expenses.
Income Tax Expense
Income tax expense increased to $56.4$100.0 million in fiscal year 20172023 from $42.4$86.0 million in fiscal year 2016,2022, an increase of $14.0 million, or approximately 33.0%16.3%. ThisThe increase in income tax expense was primarily the result ofdue to a $44.6$53.6 million increase in pre-tax net income. Our effective tax rate for fiscal year 2017 was 35.5% compared to 37.1% in fiscal year 2016. The decrease in our effective tax rate was primarily drivenincome, partially offset by discrete items, which includeincludes the impact of the adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting,"Accounting" with respect to the requirementrequirements 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,sheets.
Our effective tax rate for fiscal year 2023 was 24.9% compared to 24.7% in fiscal year 2022. The increase in our effective tax rate was primarily driven by changes in the mix of pretax income across state jurisdictions and non-deductible expenses, partially offset by discrete items, which includes the impact of tax reform as a result of the Tax Cuts and Jobs Act ("TCJA").
The TCJA includes a number of changesASU 2016-09, "Improvements to existing U.S. tax laws that impact us, most notably a reduction of the U.S. corporate tax rate from 35% to 21%, for tax years beginning after December 31, 2017. We recorded an additional expense of $1.5 million in deferred income tax expense for the remeasurement of our net deferred tax asset at the 21% tax rate. Additionally, and in accordance with Section 15 of the Internal Revenue Code, we utilized a blended rate of 33.7% for our fiscal 2017 tax year, by applying a prorated percentage of the number of days prior to and subsequent to the January 1, 2018 effective date as compared with the 35% for the 2016 tax year. The effect of this blended rate change is a benefit of $2.0 million. The TCJA also provides for acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning in 2018, including additional limitations on deductibility of executive compensation and employee meal benefits. As a result of the TCJA, we expect that the effective tax rate in fiscal 2018 will be approximately 24.5%.
The net $0.5 million benefit represents what we believe is the impact of the TCJA in the current year. As the benefit is based on currently available information and interpretations, which are continuing to evolve, the benefit should be considered provisional. We will continue to analyze additional information and guidance related to the TCJA as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. The final impacts may differ from the recorded amounts as of February 3, 2018, and we will continue to refine such amounts within the measurement period provided by Staff Accounting Bulletin No. 118.Employee Share-Based Payment Accounting.
Net Income
As a result of the foregoing, net income increased to $102.5$301.1 million in fiscal year 20172023 from $71.8$261.5 million in fiscal year 2016,2022, an increase of approximately $30.7$39.6 million, or 42.6%15.1%.
Fiscal Year 2016 Compared to Fiscal Year 2015
Net Sales
Net sales increased to $1,000.4 million in fiscal year 2016 from $832.0 million in fiscal year 2015, an increase of $168.4 million, or 20.2%. The increase was the result of a non-comparable sales increase of $153.3 million and a comparable sales increase of $15.1 million. In fiscal year 2016, we opened 85 net new stores compared to 71 net new stores in fiscal year 2015. The increase in non-comparable sales was primarily driven by new stores that opened in fiscal 2016 and the number of stores that opened in fiscal 2015 but have not been open for 15 full months.
Comparable sales increased 2.0% for fiscal year 2016 compared to fiscal year 2015. This increase resulted from an increase of approximately 2.4% in the average dollar value of transactions partially offset by a decrease of approximately 0.4% in the number of transactions.
Cost of Goods Sold and Gross Profit
Cost of goods sold increased to $643.4 million in fiscal year 2016 from $540.0 million in fiscal year 2015, an increase of $103.4 million, or 19.1%. The increase in cost of goods sold was primarily the result of an increase in the merchandise costs of goods resulting from an increase in sales. Also contributing to the increase in cost of goods sold was an increase in store occupancy costs resulting from new store openings and an increase in distribution costs, primarily due to the increase in net sales.
Gross profit increased to $357.0 million in fiscal year 2016 from $291.9 million in fiscal year 2015, an increase of $65.1 million, or 22.3%. Gross margin increased to 35.7% for fiscal year 2016 from 35.1% in fiscal year 2015, an increase of approximately 60 basis points. The increase in gross margin was primarily the result of decreases as a percentage of sales in merchandise cost of goods sold and distribution costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $243.1 million in fiscal year 2016 from $199.0 million in fiscal year 2015, an increase of $44.1 million, or 22.2%. As a percentage of net sales, selling, general and administrative expenses increased approximately 40 basis points to 24.3% in fiscal year 2016 compared to 23.9% in fiscal year 2015. The increase in selling, general and administrative expenses was the result of increases of $32.5 million in store-related expenses to support new store growth and our marketing initiatives and $11.6 million of corporate-related expenses, which includes share-based compensation expense.
Income Tax Expense
Income tax expense increased to $42.4 million in fiscal year 2016 from $35.0 million in fiscal year 2015, an increase of $7.4 million, or approximately 21.3%. This increase in income tax expense was primarily the result of a $21.6 million increase in pre-tax net income. Our effective tax rate for fiscal year 2016 was 37.1% compared to 37.7% in fiscal year 2015. The decrease in our effective tax rate was primarily driven by discrete items.
Net Income
As a result of the foregoing, net income increased to $71.8 million in fiscal year 2016 from $57.7 million in fiscal year 2015, an increase of approximately $14.1 million, or 24.5%.
Seasonality
Our business is seasonal in nature with the highest level of net sales and net income generated in the fourth fiscal quarter due to the year-end holiday season and, therefore, operating results for any fiscal quarter are not necessarily indicative of results for the full fiscal year. To prepare for the holiday season, we must order and keep in stock more merchandise than we carry during other parts of the year. We expect inventory levels, along with an increase in accounts payable and accrued expenses, generally to reach their highest levels in the third and fourth fiscal quarters in anticipation of the increased net sales during the year-end holiday season. As a result of this seasonality, and generally because of variation in consumer spending habits, we experience fluctuations in net sales, net income and working capital requirements during the year.
Liquidity and Capital Resources
Overview
Our primary source of liquidity is cash flows from operations. Our primary cash needs are forCash capital expenditures and working capital.
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 $137$365 million in fiscal 2018,2024, which exclude the impact of tenant allowances, and which we expect to fund from cash generated from operations.operations, cash on-hand, investments and, as needed, borrowings under our Revolving Credit Facility. We expect to incur approximately $38$170 million of our cash capital expenditure budget in fiscal 20182024 to construct and open approximately 125between 225 and 235 new stores, with the remainder projected to be spent on distribution centers,our store relocations and remodels, distribution facilities, which includes the expansion of two facilities, and our new corporate headquarters, and corporate infrastructure.
Our primary working capital requirements are for the purchase of store inventory and payment of payroll, rent, other store operating costs and distribution costs. Our working capital requirements fluctuate during the year, rising in the third and fourth fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak, year-end holiday shopping season in the fourth fiscal quarter. Fluctuations in working capital are also driven by the timing of new store openings.
Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with cash on hand, net cash provided by operating activities and borrowings under our Amended Revolving Credit Facility, which expires in September 2027, as needed, and Revolving Credit Facility.we expect that funding to continue. When we have used our Amended Revolving Credit Facility and Revolving Credit Facility, the amount of indebtedness outstanding under it has tended to be the highest in the beginning of the fourth quarter of each fiscal year. To the extent that we have drawn on the facility, we have paid down the borrowings before the end of the fiscal year with cash generated during our peak selling season in the fourth quarter. WeAs of February 3, 2024, we did not have any direct borrowings under our Amended Revolving Credit Facility during fiscal year 2017.and had approximately $216 million available on the line of credit.
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 under this program 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. In fiscal 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 suchadditional 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 Amended 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 Amended Revolving Credit Facility are not sufficient or available to meet our requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance that equity or debt financing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to our then-current shareholders.
Cash Flows
A summary of our cash flows from operating, investing and financing activities is presented in the following table (in millions):
|
| | | | | | | | | | | |
| Fiscal Year |
2017 | | 2016 | | 2015 |
|
Net cash provided by operating activities | $ | 167.4 |
| | $ | 106.6 |
| | $ | 87.9 |
|
Net cash used in investing activities | (139.2 | ) | | (86.8 | ) | | (99.4 | ) |
Net cash provided by financing activities | 8.4 |
| | 3.1 |
| | 1.4 |
|
Net increase (decrease) during period in cash and cash equivalents (1) | $ | 36.6 |
| | $ | 23.0 |
| | $ | (10.1 | ) |
| | | | | | | | | | | | | | | |
| Fiscal Year |
2023 | | 2022 | | | | |
| | |
Net cash provided by operating activities | $ | 499.6 | | | $ | 314.9 | | | | | |
Net cash used in investing activities | (556.3) | | | (3.9) | | | | | |
Net cash used in financing activities | (95.9) | | | (43.6) | | | | | |
Net (decrease) increase during period in cash and cash equivalents (1) | $ | (152.6) | | | $ | 267.4 | | | | | |
(1) Components may not add to total due to rounding.
Cash Provided by Operating Activities
Net cash provided by operating activities for fiscal 20172023 was $167.4$499.6 million, an increase of $60.8$184.7 million compared to fiscal 2016.2022. The increase was primarily due to an increasechanges in operating cash flows from store performance partially offset by an increase in income taxes paid. During fiscal 2017, we added 103 net new stores and expect to add approximately 125 new stores in fiscal 2018.
Net cash provided by operating activities for fiscal 2016 was $106.6 million, an increase of $18.7 million compared to fiscal 2015. The increase was primarily due toworking capital, an increase in operating cash flows from store performance and a decrease in income taxes paid offset by changes in overall working capital. During fiscal 2016, we added 85 net new stores.paid.
Cash Used in Investing Activities
Net cash used in investing activities for fiscal 20172023 was $139.2$556.3 million, an increase of $52.4$552.4 million compared to fiscal 2016.2022. The increase was primarily due to increasesan increase in net purchases of investment securities and other investments and an increase in capital expenditures. The increase in capital expenditures was primarily for our new store construction and our corporate infrastructure, and our distribution facilities.infrastructure.
Cash Used in Financing Activities
Net cash used in investing activities for fiscal 2016 was $86.8 million, a decrease of $12.6 million compared to fiscal 2015. The decrease was primarily due to decreases in capital expenditures and net purchases of investment securities. The decrease in capital expenditures was primarily due to cash outflows related to our new distribution center in Pedricktown, New Jersey during fiscal 2015.
Cash Provided by Financing Activities
Net cash provided by financing activities for fiscal year 20172023 was $8.4$95.9 million, an increase of $5.2$52.2 million compared to fiscal 2016.2022. The increase was primarily the result of increases in the proceeds from the exerciserepurchase and retirement of options to purchase common stock and vesting of restricted and performance-based restricted stock units and a decrease in the common shares withheld for taxes offset by a decrease in excess tax benefits related to exercises of stock options and the vesting of restricted stock units and performance-based restricted stock units driven by the impact of the adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," with respect to excess income tax benefits and deficiencies being classified as an operating activity rather than a financing activity.
Net cash provided by financing activities for fiscal year 2016 was $3.1 million, an increase of $1.7 million compared to fiscal 2015. The increase was primarily the result of increases in the proceeds from the exercise of options and excess tax benefits related to exercises of stock options and the vesting of restricted stock units and performance-based restricted stock units, partially offset by an increase in common shares withheld for taxes.
Line of Credit
On May 10, 2017,September 16, 2022, we entered into a FourthSecond Amendment to Credit Agreement (the "Second Amendment") which amended the Fifth Amended and Restated LoanCredit 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 SecurityRestated Credit Agreement (the “Amended Loanas amended by the First Amendment and Securitythe Second Amendment, the “Credit Agreement”), among Five Belowthe Company, 1616 Holdings, Inc., Five Below Merchandising, Inc.a wholly-owned subsidiary of the Company ("1616 Holdings" and Wells Fargo Bank, National Association. The Amended Loan and Security Agreement amends and restatestogether with the Third Amended and Restated Loan and Security Agreement, dated June 12, 2013, among Five Below Inc.Company, the "Loan Parties"), Five Below Merchandising, Inc. and Wells Fargo Bank, National Association which governed the Revolving Credit Facility.
as administrative agent (the "Agent"), and other lenders party thereto (the "Lenders").
The Amended Loan and SecurityCredit Agreement includesprovides for a secured asset-based revolving line of credit in the amount of up to $20.0$225 million (the “Amended Revolving"Revolving Credit Facility”Facility"). Pursuant to the Amended Loan and Security Agreement, advancesAdvances under the Amended Revolving Credit Facility are no longer tied to a borrowing base; however, webase 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 requireddeferred, with reduced advance rates during the period that such appraisals have not been delivered. Pursuant to maintain eligible inventory at all times in an amount equal to at least $100.0 million. The Amendedthe Second Amendment, the Revolving Credit Facility expires on the earliest to occur of (i) May 10, 2022September 16, 2027 or (ii) an event of default.
The AmendedSecond 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 toby up to $50.0an additional $150.0 million, subject to certain conditions. The Amendedconditions, 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 also includes a $20.0by an aggregate principal amount up to $50 million sub limitwithin the Accordion (the "Committed Increase"). The entire amount of the Revolving Credit Facility is available for the issuance of letters of credit.credit and allows for swingline loans.
The Amended LoanCredit Agreement contains customary covenants that limit, absent lender approval, the ability of the Company and Security Agreement reducescertain 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 interest rate payable on borrowings to be, atnature of our option, a per annum rate equal to (a) a prime ratebusiness, enter sale or (b) a LIBOR-based rate plus a marginleaseback transactions, make investments or dispose of 1.00%. Letter of credit fees are equal to the interest rate payable on LIBOR-based loans. The interest rate and letter of credit fees under the Amended Loan and Security Agreementassets. In some cases, these restrictions are subject to an increasecertain 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 2.00% per annum uponnot 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 10.0% of the loan cap.
If there exists an event of default.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 Amended Loan and SecurityCredit Agreement removes restrictions related to our ability to pay or make dividends and distributions or repurchase our stock, but the Amended Loan and Security Agreement continues to include othercontains customary negative and affirmative covenantsevents of default including, among other things, limitationsfailure to pay obligations when due, initiation of bankruptcy or insolvency proceedings, defaults on our ability to (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) engage in mergers or consolidations; or (vi)other indebtedness, change our business.
The Amended Loan and Security Agreement also removes the provisions that required us to make prepayments on outstanding Amended Revolving Credit Facility balances upon the receiptof control, incurrence of certain proceeds, including those frommaterial judgments that are not stayed, satisfied, bonded or discharged within 30 days, certain ERISA events, invalidity of the salecredit documents, and violation of certain assets.affirmative and negative covenants or breach of representations and warranties set forth in the Credit Agreement. Amounts under the Amended Revolving Credit Facility may become due upon certain events of default including, among other things, our failure(subject to comply with the Amended Revolving Credit Facility’s covenants, bankruptcy, default on certain other indebtednessany applicable grace or a change in control.cure periods).
Under the Amended Loan and Security Agreement, allAll obligations under the Amended Revolving Credit Facility continue to beare guaranteed by our subsidiary1616 Holdings and are secured by substantially all of ourthe assets of the Company and our subsidiary's assets.
1616 Holdings. As of February 3, 2018, we had approximately $20.0 million available on the line of credit. As of2024 and January 28, 2017, the Company had approximately $20.0 million available on the line of credit of which $19.7 million was available and $0.3 million was issued on an outstanding letter of credit obligation.
All obligations under the Amended Revolving Credit Facility are secured by substantially all of our assets and are guaranteed by our subsidiary. As of February 3, 2018,2023, we were in compliance with the covenants applicable to us under the AmendedFirst Amendment and the Revolving Credit Facility.
As of February 3, 2024 and January 28, 2023, we had approximately $216 million and $192 million, respectively, available in the Revolving Credit Facility. Critical Accounting Policies and Estimates
We have identified the policies below as critical to our business operations and understanding of our consolidated results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect our reported and expected financial results. Our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. For a detailed discussion on the application of these and other accounting policies, see Note 1 in our annual consolidated financial statements included elsewhere in this Annual Report.Report.
Inventories
Inventories consist of finished goods purchased for resale, including freight and tariffs, and are stated at the lower of cost and net realizable value, at the individual product level. Cost is determined on a weighted average cost method. The market value used in the lower of cost or market analysis is subject to the effects of consumer demands, customer preferences and the broader economy. The effects of the previously listed criteria are not controllable by management. Our management reviews inventory levels in order to identify obsolete and slow-moving merchandise as these factors can indicate a decline in the market value of inventory on hand. Inventory cost is reduced when the selling price less costs of disposal is below cost. We accrue an estimate for inventory shrink for the period between the last physical count and the balance sheet date. The shrink estimate can be affected by changes in merchandise mix and changes in actual shrink trends. These estimates are derived using available data and our historical experience. Our estimates may be impacted by changes in certain underlying assumptions and may not be indicative of future activity.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Assets are grouped and evaluated for
impairment at the lowest level of which there are identifiable cash flows, which is generally at a store level. Assets are reviewed for impairment using factors including, but not limited to, our future operating plans and projected cash flows. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, then an impairment charge is recognized as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is based on discounted future cash flows of the asset using a discount rate commensurate with the risk. In the event of a store closure, we will record an impairment charge, if appropriate, or accelerate depreciation over the revised useful life of the asset. Based on the analysis performed, our management believes that there was no impairment of long-lived assets for each of the 2017, 20162023, 2022 and 20152021 fiscal years. The impairment loss analysis requires management to apply judgment and make estimates.
Income Taxes
Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
We record a valuation allowance to reduce our deferred tax assets when uncertainty regarding their realizability exists. In assessing the realizability of deferred tax assets, our management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Our management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted. The TCJA includes a numbers of changes to existing U.S. tax laws that impact us, most notably a reduction of the U.S. corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. We will continue to analyze additional information and guidance related to the TCJA as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. In fiscal 2018 and future years, we may invest a portion of any savings generated by the TCJA into expenses that could significantly increase and impact the comparability between periods of Cost of Goods Sold and Gross Profit, Selling, General and Administrative Expenses and Operating Income.
Share-Based Compensation
Our share-based compensation expense is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity grant).
We recognize compensation expense based on the estimated grant date fair value of restricted stock units ("RSU") and performance-based restricted stock units ("PSU"). RSU and PSU vest in accordance with vesting conditions set by the compensation committee of our board of directors. RSU's granted to date have vesting periods ranging from less than one year to five years from the date of grant. PSU's granted to date have vesting periods ranging from one year to five years from the date of grant, including grants that have a cumulative three year performance period, subject to satisfaction of the applicable performance goals established for the respective grant. We periodically assess the probability of achievement of the performance criteria and adjusts the amount of compensation expense accordingly. Compensation is recognized over the vesting period and adjusted for the probability of achievement of the performance criteria.
We recognize compensation expense based on the Black-Scholes option-pricing model for grants of stock options. The determination of the grant date fair value of options using an option-pricing model is affected by a number of assumptions, such as our common stock fair value, our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends. As a result, if any of the inputs or assumptions used in the Black-Scholes model change significantly, share-based compensation for future awards may differ materially compared with the awards granted previously.
There are significant judgments and estimates inherent in the determination of fair value of share-based awards. These judgments and estimates include determinations of an appropriate valuation method and the selection of appropriate inputs to be used in the valuation model. The use of alternative assumptions, including expected term, volatility, risk-free interest rate and dividend yield, could cause share-based compensation to differ significantly from what has been recorded in the past.
Future share-based compensation cost will increase when we grant additional equity awards. Modifications, cancellations or repurchases of awards may require us to accelerate any remaining unearned share-based compensation cost or incur additional cost.
The fair value of restricted stock awards are based on the closing price of our common stock on the grant date and the fair value of stock options are based on the Black-Scholes option-pricing model utilizing the closing price of our common stock on the grant date as the fair value of common stock in the model. We utilize the simplified method to estimate the expected term of the option. The expected volatility incorporates historical and implied volatility of similar entities whose share prices are publicly available. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
Recently Issued Accounting Pronouncements
In May 2014, the FinancialSee "Note 1 - Summary of Significant Accounting Standards Board (“FASB”) issued ASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 clarifies the principles for recognizing revenue from contracts with customers. The update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers: Deferral of the Effective Date." ASU 2015-14 deferred the effective date of ASU 2014-09 to fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim periods within those annual periods. In the first six months of fiscal 2016, the FASB issued guidance clarifying the interpretation of certain principles of ASU 2014-09. On the effective date, we will adopt the provisions of ASU 2014-09 on a modified retrospective basis through an immaterial cumulative adjustment that will impact the opening balance of retained earnings relatedPolicies" to the recognition of gift card breakage. These estimates may be refined as we finalize the implementation effort required to adopt the standard. In order to determine the impact of ASU 2014-09, our assessment included a detailed review of our revenue streams and a comparison of our historical accounting policies and practices to the new standard.
In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 requires that lease arrangements longer than 12 months result in an entity recognizing an asset and a liability. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The standard requires use of the modified retrospective transition approach. While we are currently evaluating this standard, given the significant amount of leases that we are party to, we expect this standard will have a significant impact on our consolidated financial statements from the recognitionincluded in Item 8 "Consolidated Financial Statements and Supplementary Data" of right to use assets and related liabilities. We plan to adopt this standard in the first quarterForm 10-K, for a detailed description of fiscal 2019, coinciding with the standard’s effective date.recently issued accounting pronouncements.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 affects all entities that issue share-based payment awards to their employees. This accounting standards update makes several modifications to the accounting for employee share-based payment transactions, including the requirement that the excess income tax benefits or deficiencies that arise when the tax consequences of share-based compensation differ from amounts previously recognized in the consolidated statement of operations be recognized as income tax benefit or expense in the consolidated statement of operations rather than as additional paid-in capital in the consolidated balance sheet. The guidance also clarifies the classification of components of share-based awards on the consolidated statement of cash flows such that excess income tax benefits should not be presented separately from other income taxes in the consolidated statement of cash flows and, thus, should be classified as an operating activity rather than a financing activity as they are under the current guidance. ASU 2016-09 is effective for financial statements issued for annual reporting periods beginning after December 15, 2016 and interim periods within those years. We adopted this standard prospectively in the first quarter of fiscal 2017. This standard will result in a decrease or increase to our effective tax rate, net income, and earnings per share based upon the requirement to recognize the excess income tax benefits or deficiencies in the consolidated statements of operations and change our earnings per share calculation to exclude excess tax benefits previously assumed under the treasury stock method. No changes were required related to the classification of employee taxes paid for withheld shares in our consolidated statements of cash flows since we have historically classified these within financing cash flows.
Contractual Obligations
The following table summarizes, as of February 3, 2018,2024, our minimum rental commitments under operating lease agreements including assumed extensions, minimum payments for long-term debt and other obligations in future periods:
|
| | | | | | | | | | | | | | | | | | | |
(In millions) | Payments Due By Period |
Total (1) | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Operating lease obligations (2) | $ | 948.0 |
| | $ | 117.6 |
| | $ | 244.1 |
| | $ | 220.4 |
| | $ | 365.9 |
|
Purchase obligations (3) | 4.9 |
| | 4.9 |
| | — |
| | — |
| | — |
|
Total | $ | 952.9 |
| | $ | 122.5 |
| | $ | 244.1 |
| | $ | 220.4 |
| | $ | 365.9 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Payments Due By Period |
Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Operating lease obligations (1) | $ | 2,099.2 | | | $ | 305.6 | | | $ | 591.4 | | | $ | 507.3 | | | $ | 694.8 | |
Purchase obligations (2) | 5.6 | | | 5.6 | | | — | | | — | | | — | |
Total | $ | 2,104.8 | | | $ | 311.2 | | | $ | 591.4 | | | $ | 507.3 | | | $ | 694.8 | |
| |
(1) | The amounts in this table exclude obligations under employment agreements. For a discussion of the compensation of our executive officers, see Part III, Item 11 “Executive Compensation”. |
| |
(2) | Our store leases generally have initial lease terms of 10 years and include renewal options on substantially the same terms and conditions as the original lease. Also included in operating leases are our leases for the corporate office, distribution centers and other. |
| |
(3) | Purchase obligations are primarily for materials that will be used in the construction of new stores and purchase commitments for infrastructure and systems that will be used by the corporate office and distribution centers. |
(1)Our store leases generally have initial lease terms of 10 years and include renewal options on substantially the same terms and conditions as the original lease. Also included in operating leases are our leases for the corporate office, shipcenters and other.
(2)Purchase obligations are primarily for materials that will be used in the construction of new stores and purchase commitments for infrastructure and systems that will be used by the corporate office and shipcenters.
From February 4, 20182024 to March 22, 2018,21, 2024, we committed to 1525 new store leases with terms of 10 years that have future minimum lease payments of approximately $28.9$52.2 million.
Off Balance Sheet Arrangements
For the fiscal year endedFebruary 3, 2018, except for operating leases entered into in the normal course of business, we were not party to any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, net sales, expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our principal market risk relates to interest rate sensitivity, which is the risk that future changes in interest rates will reduce our net income or net assets. We have short-term investment securities that are interest-bearing securities and if there are changes in interest rates, those changes would affect the interest income we earn on these investments and, therefore, impact our cash flows and results of operations. However, due to the short term nature of our investment portfolio, we do not believe an immediate 100 basis point increase or decrease in interest rates would have a material effect on the fair market value of our portfolio, and accordingly we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.
We also have an Amendeda Revolving Credit Facility which includes a revolving line of credit, which bears interest at a variable rate. Because our Amended Revolving Credit Facility bears interest at a variable rate, we will be exposed to market risks relating to changes in interest rates.rates, which could materially impact our consolidated statements of operations should we have any material borrowings under our Revolving Credit Facility.
As of February 3, 2018,2024, we had approximately $20approximately $216 million available on the line of credit. The Amended Revolving Credit Facility reducesAgreement provides that the interest rate payable on borrowings toshall be, at the ourCompany's option, a per annum rate equal to (a) a primebase rate plus an applicable margin ranging from 0.125% to 0.50% or (b) a LIBOR-based rateSOFR plus a margin of 1.00%ranging from 1.12% to 1.50%. Letter of credit fees are equalrange from 1.125% to the interest rate payable on LIBOR-based loans. The interest rate and letter of credit fees under the Amended Revolving Credit Facility are subject to an increase of 2.00% per annum upon an event of default.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 cannot assure you, however, that our results of operations and financial condition will not be materially impacted by inflation in the future.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIVE BELOW, INC.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Five Below, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Five Below, Inc. and subsidiaries (the “Company”)Company) as of February 3, 20182024 and January 28, 2017,2023, the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the fiscal years in the three-year period ended February 3, 2018,2024, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February 3, 20182024 and January 28, 2017,2023, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended February 3, 2018,2024, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the Company’s internal control over financial reporting as of February 3, 2018,2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 22, 201821, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Slow-moving and obsolete inventories at net realizable value
As discussed in Note 1 to the consolidated financial statements, the Company monitors inventory levels in order to identify slow-moving or obsolete merchandise as these factors can indicate a decline in the market value of the inventory on hand. The Company’s inventory balance was $585 million as of February 3, 2024. Inventory cost is reduced to net realizable value when cost exceeds the selling price less the cost of disposal. The market value is subject to the effects of consumer demands, customer preferences, and the broader economy.
We identified the evaluation of slow-moving and obsolete inventories at net realizable value as a critical audit matter because a high degree of auditor judgment was required to evaluate the Company’s ability to sell certain products.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the critical audit matter. This included controls related to the review of historical product sales and inventory quantities on hand, and the estimate of net realizable value of slow-moving and obsolete inventories and adjustments of inventory cost to net realizable value. We evaluated the Company’s methodology for determining slow-moving and obsolete merchandise. We selected certain products determined to be slow-moving or obsolete and considered current market trends or seasonal impacts by assessing the nature of the slow-moving and obsolete merchandise. We assessed the Company’s adjustments of inventory costs to net realizable value for certain slow-moving and obsolete inventories by (1) comparing the historical estimate for net realizable value adjustments to actual adjustments of inventory costs, and (2) analyzing sales subsequent to the measurement date.
/s/ KPMG LLP
We have served as the Company's auditor since 2002.
Philadelphia, Pennsylvania
March 22, 201821, 2024
FIVE BELOW, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
| | | February 3, 2018 | | January 28, 2017 |
| February 3, 2024 | |
| February 3, 2024 | |
| February 3, 2024 | |
Assets | |
Assets | |
Assets | | | |
Current assets: | | | |
Current assets: | |
Current assets: | |
Cash and cash equivalents | |
Cash and cash equivalents | |
Cash and cash equivalents | $ | 112,669 |
| | $ | 76,088 |
|
Short-term investment securities | 131,958 |
| | 77,791 |
|
Short-term investment securities | |
Short-term investment securities | |
| Inventories | 187,037 |
| | 154,448 |
|
Prepaid income taxes | 2,264 |
| | 1,552 |
|
| Inventories | |
| Inventories | |
Prepaid income taxes and tax receivable | |
Prepaid income taxes and tax receivable | |
Prepaid income taxes and tax receivable | |
| Prepaid expenses and other current assets | |
| Prepaid expenses and other current assets | |
| Prepaid expenses and other current assets | 45,434 |
| | 29,910 |
|
Total current assets | 479,362 |
| | 339,789 |
|
Total current assets | |
Total current assets | |
Property and equipment, net | 180,349 |
| | 138,376 |
|
Deferred income taxes | 6,676 |
| | 11,039 |
|
Property and equipment, net | |
Property and equipment, net | |
Operating lease assets | |
Operating lease assets | |
Operating lease assets | |
| Long-term investment securities | |
| Long-term investment securities | |
| Long-term investment securities | 27,702 |
| | 10,514 |
|
Other assets | 1,619 |
| | 818 |
|
Other assets | |
Other assets | |
| $ | |
| $ | |
| $ | |
| $ | 695,708 |
| | $ | 500,536 |
|
Liabilities and Shareholders’ Equity | |
| Liabilities and Shareholders’ Equity | |
| | | |
Liabilities and Shareholders’ Equity | | | |
Current liabilities: | | | |
Current liabilities: | |
Current liabilities: | |
Line of credit | $ | — |
| | $ | — |
|
Line of credit | |
Line of credit | |
| Accounts payable | |
| Accounts payable | |
| Accounts payable | 73,033 |
| | 51,178 |
|
Income taxes payable | 25,275 |
| | 23,939 |
|
Income taxes payable | |
Income taxes payable | |
Accrued salaries and wages | |
Accrued salaries and wages | |
Accrued salaries and wages | 22,906 |
| | 10,794 |
|
Other accrued expenses | 43,246 |
| | 30,652 |
|
Other accrued expenses | |
Other accrued expenses | |
| Operating lease liabilities | |
| Operating lease liabilities | |
| Operating lease liabilities | |
Total current liabilities | 164,460 |
| | 116,563 |
|
Deferred rent and other | 72,690 |
| | 52,568 |
|
Total current liabilities | |
Total current liabilities | |
| Other long-term liabilities | |
| Other long-term liabilities | |
| Other long-term liabilities | |
Deferred income taxes | |
Deferred income taxes | |
Deferred income taxes | |
Long-term operating lease liabilities | |
Long-term operating lease liabilities | |
Long-term operating lease liabilities | |
Total liabilities | 237,150 |
| | 169,131 |
|
Commitments and contingencies (note 4) |
|
| |
|
|
Total liabilities | |
Total liabilities | |
Commitments and contingencies (note 6) | |
Commitments and contingencies (note 6) | |
Commitments and contingencies (note 6) | |
Shareholders’ equity:
| | | |
Common stock, $0.01 par value. Authorized 120,000,000 shares; issued and outstanding 55,438,089 and 54,904,954 shares, respectively. | 554 |
| | 549 |
|
Shareholders’ equity: | |
Shareholders’ equity: | |
Common stock, $0.01 par value. Authorized 120,000,000 shares; issued and outstanding 55,197,875 and 55,537,221 shares, respectively. | |
Common stock, $0.01 par value. Authorized 120,000,000 shares; issued and outstanding 55,197,875 and 55,537,221 shares, respectively. | |
Common stock, $0.01 par value. Authorized 120,000,000 shares; issued and outstanding 55,197,875 and 55,537,221 shares, respectively. | |
Additional paid-in capital | |
Additional paid-in capital | |
Additional paid-in capital | 346,300 |
| | 321,603 |
|
Retained earnings | 111,704 |
| | 9,253 |
|
Retained earnings | |
Retained earnings | |
Total shareholders’ equity | 458,558 |
| | 331,405 |
|
| $ | 695,708 |
| | $ | 500,536 |
|
Total shareholders’ equity | |
Total shareholders’ equity | |
| $ | |
| $ | |
| $ | |
See accompanying notes to consolidated financial statements.
FIVE BELOW, INC.
Consolidated Statements of Operations
(in thousands, except share and per share data)
| | | | Fiscal Year | | Fiscal Year |
2017 | | 2016 | | 2015 |
Net sales | $ | 1,278,208 |
| | $ | 1,000,410 |
| | $ | 831,954 |
|
Cost of goods sold | 814,795 |
| | 643,373 |
| | 540,020 |
|
Gross profit | 463,413 |
| | 357,037 |
| | 291,934 |
|
Net sales | |
Net sales | |
Cost of goods sold (exclusive of items shown separately below) | |
Cost of goods sold (exclusive of items shown separately below) | |
Cost of goods sold (exclusive of items shown separately below) | |
| Selling, general and administrative expenses | 306,022 |
| | 243,075 |
| | 198,993 |
|
| Selling, general and administrative expenses | |
| Selling, general and administrative expenses | |
Depreciation and amortization | |
Depreciation and amortization | |
Depreciation and amortization | |
Operating income | 157,391 |
| | 113,962 |
| | 92,941 |
|
Interest income, net | 1,458 |
| | 299 |
| | 40 |
|
Other expense | — |
| | — |
| | 325 |
|
Operating income | |
Operating income | |
Interest income (expense) and other income (expense), net | |
Interest income (expense) and other income (expense), net | |
Interest income (expense) and other income (expense), net | |
| Income before income taxes | |
| Income before income taxes | |
| Income before income taxes | 158,849 |
| | 114,261 |
| | 92,656 |
|
Income tax expense | 56,398 |
| | 42,421 |
| | 34,976 |
|
Income tax expense | |
Income tax expense | |
Net income | $ | 102,451 |
| | $ | 71,840 |
| | $ | 57,680 |
|
Net income | |
Net income | |
| Basic income per common share | |
| Basic income per common share | |
| Basic income per common share | $ | 1.86 |
| | $ | 1.31 |
| | $ | 1.06 |
|
Diluted income per common share | $ | 1.84 |
| | $ | 1.30 |
| | $ | 1.05 |
|
Diluted income per common share | |
Diluted income per common share | |
| Weighted average shares outstanding: | |
| Weighted average shares outstanding: | |
| Weighted average shares outstanding: |
| |
| |
|
Basic shares | 55,208,246 |
| | 54,845,708 |
| | 54,513,622 |
|
Basic shares | |
Basic shares | |
Diluted shares | 55,561,472 |
| | 55,128,870 |
| | 54,793,301 |
|
Diluted shares | |
Diluted shares | |
See accompanying notes to consolidated financial statements.
FIVE BELOW, INC.
See accompanying notes to consolidated financial statements.
FIVE BELOW, INC.