You should read the following discussion together with "Selected Financial
Data," and the consolidated financial statements and related notes included in
our Annual Report on Form 10-K for our fiscal year ended
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or present facts or conditions, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the introduction of new merchandise, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Quarterly Report on Form 10-Q reflect our views as of the date of this report about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described in Part I, Item 1A "Risk Factors" in our Annual Report, as amended by the risk factors included in Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q. These factors include without limitation: • uncertainties associated with the Coronavirus (or COVID-19) pandemic,
including closures of our stores, adverse impacts on our sales and
operations, future impairment charges and the risk of global recession;
• failure to successfully implement our growth strategy;
• disruptions in our ability to select, obtain, distribute and market merchandise profitably;
• reliance on merchandise manufactured outside of
• the direct and indirect impact of recent and potential tariffs imposed and proposed bythe United States on foreign imports, including, without limitation, the tariffs themselves, any counter-measures thereto and any indirect effects on consumer discretionary spending, which could increase the cost to us of certain products, lower our margins, increase 15
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our import related expenses, and reduce consumer spending for discretionary items, each of which could have a material adverse effect on our business, financial condition and results of future operations; • the impact of price increases, such as, a reduction in our unit sales,
damage to our reputation with our customers, and our becoming less competitive in the marketplace;
• dependence on the volume of traffic to our stores and website;
• inability to attract and retain qualified employees;
• inability to successfully build, operate or expand our distribution centers or network capacity;
• disruptions to our distribution network or the timely receipt of inventory;
• extreme weather conditions in the areas in which our stores are located could negatively affect our business and results of operations; • the risks of cyberattacks or other cyber incidents, such as the failure to secure customers' confidential or credit card information, or other private data relating to our employees or our company, including the costs associated with protection against or remediation of such incidents; • increased operating costs or exposure to fraud or theft due to customer payment-related risks; • inability to increase sales and improve the efficiencies, costs and effectiveness of our operations; • dependence on our executive officers, senior management and other key personnel or inability to hire additional qualified personnel; • inability to successfully manage our inventory balances and inventory shrinkage;
• inability to meet our lease obligations;
• the costs and risks of constructing and owning real property;
• changes in our competitive environment, including increased competition from other retailers and the presence of online retailers; • increasing costs due to inflation, increased operating costs, wage rate increases or energy prices;
• the seasonality of our business;
• inability to successfully implement our expansion into online retail;
• disruptions to our information technology systems in the ordinary course or as a result of system upgrades;
• the impact of damage or interruptions to our technology systems;
• failure to maintain adequate internal controls;
• complications with the design or implementation of the new enterprise resource system; • natural disasters, adverse weather conditions, pandemic outbreaks (in addition to COVID-19), global political events, war, terrorism or civil unrest;
• the impact of changes in tax legislation;
• current economic conditions and other economic factors;
• the impact of governmental laws and regulations;
• the impact of changes in accounting standards;
• the impact to our financial performance related to insurance programs;
• the costs and consequences of legal proceedings;
• inability to protect our brand name, trademarks and other intellectual property rights; • the costs and liabilities associated with infringement of third-party intellectual property rights;
• the impact of product and food safety claims and effects of legislation;
• inability to obtain additional financing, if needed;
• restrictions imposed by our indebtedness on our current and future operations; and
• regulations related to conflict minerals.
Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this
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Quarterly Report on Form 10-Q are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.
OverviewFive Below, Inc. (collectively referred to herein with its wholly owned subsidiary as "we," "us," or "our") is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the tween and teen customer. We offer a dynamic, edited assortment of exciting products, with most priced at$5 and below, including select brands and licensed merchandise across our category worlds. As ofMay 2, 2020 , we operated 920 stores in 36 states. In fall 2018, we began offering an expanded product assortment with prices exceeding$5 in a select number of our stores (with such product offerings branded as "Ten Below" or "JUST WOW"). In addition, in fall 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. We also offer our merchandise on the internet, through our fivebelow.com e-commerce website. All e-commerce sales, which includes shipping and handling revenue, are included in net sales. Beginning with the third fiscal quarter of 2016, when we launched our e-commerce channel, all e-commerce sales 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. Effect of the COVID-19 Pandemic on our Business and Operations The outbreak of the coronavirus (or COVID-19) has been declared a pandemic by theWorld Health Organization , has significantly disrupted businesses around the world, and has adversely impacted our business operations and results of operations for the first quarter of 2020. OnMarch 13, 2020 , the President ofthe United States declared a national emergency as a result of the outbreak inthe United States . Federal, state and local governments and private entities have mandated various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories, and quarantining of peoplewho may have been exposed to the virus. Such mandates have required reduction of operating hours and forced temporary closures of non-essential retailers and other businesses. It is impossible to predict the effect and ultimate impact of the pandemic as the situation continues to evolve. As a result of these restrictions and out of concern for our customers and employees, we temporarily closed all of our stores as ofMarch 20, 2020 . We began reopening our stores at the end of April in compliance with federal, state and local requirements. As a result of the temporary store closures, we withheld store rent for the closure period. We have been actively negotiating with our landlords on rent deferrals and abatements related to this closure period and have resumed rent payments for reopened locations. Although we expect to favorably resolve these negotiations with our landlords, there can be no assurances in that regard, and all or some of these landlords could claim that our failure to pay rent is a default under our leases. If such claims were made and a significant number of such claims were to prevail, this could have a material adverse impact on our business, financial condition, profitability and cash flows, including our future growth. As ofMay 2, 2020 , 111 stores had been reopened to the general public and as of the date of this filing, approximately 90% of our stores have now been reopened to the general public. Additionally, we launched a new service, offering curbside pick-up, where stores are not otherwise permitted to be reopen to the public. While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business operations and results of operations, including our net sales, earnings and cash flows, will be materially impacted for the foreseeable future, as a result of: • temporary closure of our stores; • decreased customer traffic in stores, including, without limitation, as the result of limitations on the number of persons permitted in stores at one time by certain local and state regulations; • uncertainty of the extent to which customers will maintain purchases through our e-commerce website and through curbside pickup (where stores remain closed to the public); • changes in consumer confidence and consumer spending habits, including spending for the merchandise that we sell, and negative trends in consumer purchasing patterns due to changes in consumers' disposable income, credit availability and debt levels; • disruption to our supply chain including the manufacturing, supply, distribution, transportation and delivery of our products; and 17
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• a slowdown in theU.S. and global economies, and an uncertain global economic outlook or a potential credit crisis. To seek to mitigate the effects of the pandemic and to create financial flexibility, we have taken the following actions: • a majority of our store and distribution center employees were furloughed in March and we covered the cost of health benefits for such furloughed employees through the end of May; • we implemented a voluntary temporary base salary reduction of 50% forJoel Anderson , our Chief Executive Officer, and a 25% base salary reduction for the remainder of the executive leadership team that reports intoMr. Anderson ; • our Board of Directors elected to forgo its quarterly cash retainers for the first quarter of 2020; • we implemented a temporary pay reduction for all salaried corporate associates and certain field and supply chain leadership and delayed annual salary increases for corporate associates; • we elected to defer the payment of the employer's portion of FICA taxes as allowed by the Coronavirus Aid, Relief, and Economic Security ("CARES") Act; • we implemented significant non-payroll expense reductions, including advertising, occupancy and other store operating expenses, distribution and corporate office operating expenses, as well as professional and consulting fees; • we temporarily ceased paying rent on all closed store locations starting in April, are paying rent going forward in connection with store re-openings and plan to negotiate with our landlords on rent adjustments where appropriate for such stores; • we cancelled certain vendor orders and delayed receipts on others in order to manage inventory levels, and extended payment terms for product and non-product vendors; • we significantly reduced our 2020 capital expenditure budget, including reducing the number of new stores to be opened in 2020 and delaying purchase and construction of a new Midwest distribution center; and • we amended our credit facility and increased our line of credit from$50 million to$225 million . How We Assess the Performance of Our Business In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales, comparable sales, cost of goods sold and gross profit, selling, general and administrative expenses and operating income.Net Sales Net sales constitute gross sales net of merchandise returns for damaged or defective goods. Net sales consist of sales from comparable stores, non-comparable stores, and e-commerce, which includes shipping and handling revenue. Revenue from the sale of gift cards is deferred and not included in net sales until the gift cards are redeemed to purchase merchandise or as breakage revenue in proportion to the pattern of redemption of the gift cards by the customer. Our business is seasonal and as a result, our net sales fluctuate from quarter to quarter. Net sales are usually highest in the fourth fiscal quarter due to the year-end holiday season. Comparable Sales Comparable sales include net sales from stores that have been open for at least 15 full months from their opening date, and e-commerce sales. Comparable stores include the following: • Stores that have been remodeled while remaining open; • Stores that have been relocated within the same trade area, to a location that is not significantly different in size, in which the new store opens at about the same time as the old store closes; and • Stores that have expanded, but are not significantly different in size, within their current locations. 18
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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 centers through: ? the last day of the fiscal year in which the store was relocated or expanded (for stores that increased significantly in size); or ? the last day of the fiscal month in which the store re-opens (for all other stores); and • The period beginning on the first anniversary of the date the store received its last merchandise delivery from one of our distribution centers through the first anniversary of the date the store re-opened. Comparable sales exclude the 53rd week of sales for 53-week fiscal years. In the 52-week fiscal year subsequent to a 53-week fiscal year, we exclude the sales in the non-comparable week from the same-store sales calculation. Due to the 53rd week in fiscal 2017, all comparable sales related to any reporting period during the year endedFebruary 2, 2019 are reported on a restated calendar basis using theNational 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 Quarterly Report on Form 10-Q regarding our comparable sales may not be comparable to similar data made available by other retailers. Non-comparable sales are comprised of new store sales, sales for stores not open for a full 15 months, and sales from existing store relocation and expansion projects that were temporarily closed (or not receiving deliveries) and not included in comparable sales. Measuring the change in fiscal year-over-year comparable sales allows us to evaluate how we are performing. Various factors affect comparable sales, including: • consumer preferences, buying trends and overall economic trends; • our ability to identify and respond effectively to customer preferences and trends; • our ability to provide an assortment of high-quality, trend-right and everyday product offerings that generate new and repeat visits to our stores;
• the customer experience we provide in our stores and online;
• the level of traffic near our locations in the power, community and lifestyle centers in which we operate;
• competition;
• changes in our merchandise mix;
• pricing;
• our ability to source and distribute products efficiently;
• the timing of promotional events and holidays;
• the timing of introduction of new merchandise and customer acceptance of new merchandise;
• our opening of new stores in the vicinity of existing stores;
• the number of items purchased per store visit; and
• weather conditions.
Opening new stores is an important part of our growth strategy. As we continue to pursue our growth strategy, we expect that a significant percentage of our net sales will continue to come from new stores not included in comparable sales. Accordingly, comparable sales is only one measure we use to assess the success of our growth strategy. Cost of Goods Sold and Gross Profit Gross profit is equal to our net sales less our cost of goods sold. Gross margin is gross profit as a percentage of our net sales. Cost of goods sold reflects the direct costs of purchased merchandise and inbound freight, as well as shipping and handling costs, store occupancy, distribution and buying expenses. Shipping and handling costs include both internal and third-party fulfillment and shipping costs related to our e-commerce operations. Store occupancy costs include rent, common area maintenance, utilities and property taxes for all store locations. Distribution costs include costs for receiving, processing, warehousing and shipping of merchandise to or from our distribution centers and between store locations. Buying costs include compensation expense and other costs for our internal buying organization, including our merchandising and product development team and our planning and allocation group. These costs are significant and can be expected to continue to increase as our company grows. The components of our cost of goods sold may not be comparable to the components of cost of goods sold or similar measures of our competitors and other retailers. As a result, data in this Quarterly Report on Form 10-Q regarding our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers. 19
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The variable component of our cost of goods sold is higher in higher volume quarters because the variable component of our cost of goods sold generally increases as net sales increase. We regularly analyze the components of gross profit as well as gross margin. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns, and a significant increase in inventory shrinkage or inability to generate sufficient sales leverage on the store occupancy, distribution and buying components of cost of goods sold could have an adverse impact on our gross profit and results of operations. Changes in the mix of our products may also impact our overall cost of goods sold. Selling, General and Administrative Expenses Selling, general and administrative, or SG&A, expenses are composed of payroll and other compensation, marketing and advertising expense, depreciation and amortization expense and other selling and administrative expenses. SG&A expenses as a percentage of net sales are usually higher in lower sales volume quarters and lower in higher sales volume quarters. The components of our SG&A expenses may not be comparable to those of other retailers. We expect that our SG&A expenses will increase in future periods due to our continuing store growth. In addition, any increase in future share-based grants or modifications will increase our share-based compensation expense included in SG&A expenses. Operating Income Operating income equals gross profit less SG&A expenses. Operating income excludes interest expense or income, 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. 20
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Results of Consolidated Operations
The following tables summarize key components of our results of consolidated operations for the periods indicated, both in dollars and as a percentage of our net sales.
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