# Five Below, Inc: Form 10-Q for the period ended Oct 27, 2012

- Company: [Five Below, Inc](/companies/five.md) (CIK 1177609)
- Form: 10-Q
- Filed: 2012-11-30
- Accepted by EDGAR: Nov 30, 2012, 02:00 ET
- Period: 2012-10-27
- Accession: 0001193125-12-486203
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1177609/000119312512486203/d424972d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1177609/000119312512486203/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-10-27.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-07-29 to 2012-10-27 | $86.6m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2012-01-29 to 2012-10-27 | $245.2m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2012-07-29 to 2012-10-27 | $59.7m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2012-01-29 to 2012-10-27 | $166.5m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2012-07-29 to 2012-10-27 | $26.9m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2012-01-29 to 2012-10-27 | $78.7m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2012-07-29 to 2012-10-27 | $25.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2012-01-29 to 2012-10-27 | $74.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-07-29 to 2012-10-27 | $1.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2012-01-29 to 2012-10-27 | $4.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2012-07-29 to 2012-10-27 | $555.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2012-01-29 to 2012-10-27 | $627.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-07-29 to 2012-10-27 | $729.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2012-01-29 to 2012-10-27 | $819.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-07-29 to 2012-10-27 | $0.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2012-01-29 to 2012-10-27 | −$2.21 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-07-29 to 2012-10-27 | $0.01 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2012-01-29 to 2012-10-27 | −$2.21 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-07-29 to 2012-10-27 | 52,959,169 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2012-01-29 to 2012-10-27 | 29,282,385 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2012-01-29 to 2012-10-27 | −$23.8m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2012-01-29 to 2012-10-27 | $17.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2012-10-27 | $7.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-10-27 | $113.8m | us-gaap:AssetsCurrent |
| Total assets | at 2012-10-27 | $169.0m | us-gaap:Assets |
| Current liabilities | at 2012-10-27 | $55.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2012-10-27 | $119.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2012-10-27 | $49.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 44,076 characters.

*You should read the following discussion together with “Selected Financial and Other Data,” and the financial statements and related notes included in our prospectus, as amended, filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on July 19, 2012, which we refer to as the “Prospectus” and the financial statements and related notes as of and for the thirteen and thirty-nine weeks ended October 27, 2012 included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The statements in this discussion regarding expectations of our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described below in “Special Note Regarding Forward-Looking Statements” and in Part II. Item 1A. “Risk Factors.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.*

*We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31 of the following year. References to “fiscal year 2012” or “fiscal 2012” refer to the fiscal year ended February 2, 2013 and consists of a 53-week period and references to “fiscal year 2011” or “fiscal 2011” refer to the fiscal year ended January 28, 2012 and consists of a 52-week period. The quarters and year-to-date periods ended October 27, 2012 and October 29, 2011, respectively, each contain 13 and 39 weeks. Historical results are not necessarily indicative of the results to be expected for any future period and results for any interim period may not necessarily be indicative of the results that may be expected for a full year.*

### SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning 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 below and in Part II. Item 1A “Risk Factors.” These factors include without limitation:

- *failure to successfully implement our growth strategy;*
- *disruptions in our ability to select, obtain, distribute and market merchandise profitably;*
- *our ability to successfully expand our distribution network capacity;*
- *disruptions to our distribution network or the timely receipt of inventory;*
- *inability to attract and retain qualified employees;*
- *ability to increase sales and improve the efficiencies, costs and effectiveness of our operations;*
- *our dependence on our executive officers and other key personnel or our inability to hire additional qualified personnel;*
- *our ability to successfully manage our inventory balances and inventory shrinkage;*
- *our lease obligations;*
- *changes in our competitive environment, including increased competition from other retailers;*
- *increasing costs due to inflation, increased operating costs or energy prices;*
- *the seasonality of our business;*
- *disruptions to our information technology systems in the ordinary course or as a result of system upgrades;*
- *our failure to maintain adequate internal controls;*
- *our ability to obtain additional financing;*
- *failure to secure customers’ confidential or credit card information, or other private data relating to our employees or our company;*
- *natural disasters, unusual weather conditions, pandemic outbreaks, global political events, war and terrorism;*
- *current economic conditions and other economic factors;*
- *the impact of governmental laws and regulations and the outcomes of legal proceedings;*
- *our inability to protect our brand name, trademarks and other intellectual property rights;*
- *increased costs as a result of being a public company; and*
- *restrictions imposed by our indebtedness on our current and future operations.*

Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this quarterly report are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.

### Overview

Five Below is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the teen and pre-teen customer. We offer a dynamic, edited assortment of exciting products, all priced at $5 and below, including select brands and licensed merchandise across our category worlds. As of October 27, 2012, we operated 243 stores in 18 states.

### How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales, comparable store sales, cost of goods sold, 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 and non-comparable stores. Revenue from the sale of gift cards is deferred and not included in net sales until the gift cards are redeemed to purchase merchandise.

Our business is seasonal and as a result, our net sales fluctuate from quarter to quarter. Net sales are usually highest in the fourth fiscal quarter due to the year-end holiday season.

### Comparable Store Sales

Comparable store sales include net sales from stores that have been open for at least 15 full months from their opening date.

Comparable stores include the following:

- Stores that have been remodeled while remaining open;
- Stores that have been relocated within the same trade area, to a location that is not significantly different in size, in which the new store opens at about the same time as the old store closes; and
- Stores that have expanded, but are not significantly different in size, within their current locations.

For stores that are relocated or expanded, the following periods are excluded when calculating comparable store sales:

- The period of construction and pre-opening during which the store is closed 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 closed for construction through the first anniversary of the date the store re-opened.

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 regarding our comparable store sales may not be comparable to similar data made available by other retailers. Non-comparable store sales are comprised of new store sales, sales for stores not open for a full 15 months, and sales from existing store relocation and expansion projects that were temporarily closed and not included in comparable store sales.

Measuring the change in fiscal year-over-year comparable store sales allows us to evaluate how our store base is performing. Various factors affect comparable store sales, including:

- consumer preferences, buying trends and overall economic trends;
- our ability to identify and respond effectively to customer preferences and trends;
- our ability to provide an assortment of high-quality, trend-right and everyday product offerings that generate new and repeat visits to our stores;
- the customer experience we provide in our stores;
- 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; and
- the number of items purchased per store visit.

Opening new stores is an important part of our growth strategy. As we continue to pursue our growth strategy, we expect that a significant percentage of our net sales will continue to come from new stores not included in comparable store sales. Accordingly, comparable store sales are 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 store occupancy, distribution and buying expenses. Store occupancy costs include rent, common area maintenance, utilities and property taxes for all store locations. Distribution costs include costs for receiving, processing, warehousing and shipping of merchandise to or from our distribution center and between store locations. Buying costs include compensation expense and other costs for our internal buying organization.

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 regarding our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers.

The variable component of our cost of goods sold is higher in higher volume quarters because the variable component of our cost of goods sold generally increases as net sales increase. We regularly analyze the components of gross profit as well as gross margin. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns, and a significant increase in inventory shrinkage or inability to generate sufficient sales leverage on the store occupancy, distribution and buying components of costs of goods sold could have an adverse impact on our gross profit and results of operations. Changes in the mix of our products may also impact our overall cost of goods sold.

### Selling, General and Administrative Expenses

Selling, general and administrative, or SG&A, expenses are composed of payroll and other compensation, marketing and advertising expense, depreciation and amortization expense and other selling and administrative expenses. SG&A expenses as a percentage of net sales are usually higher in lower sales volume quarters and lower in higher sales volume quarters.

The components of our SG&A expenses may not be comparable to those of other retailers. We expect that our SG&A expenses will increase in future periods due to our continuing store growth and in part due to additional legal, accounting, insurance and other expenses we expect to incur as a result of being a public company. Among other things, we expect that compliance with the Sarbanes-Oxley Act of 2002 and related rules and regulations could result in significant incremental legal, accounting and other overhead costs. In addition, any increase in future stock option or other stock-based grants or modifications will increase our stock-based compensation expense included in SG&A.

### Operating Income

Operating income equals gross profit less SG&A expenses. Operating income excludes interest expense or income 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.

### Stock Split

On July 17, 2012, we amended our articles of incorporation to reflect a 0.3460-for-1 reverse stock split of our common stock. The amendment also changed the authorized shares of our common stock to 120,000,000 shares. Concurrent with the reverse stock split, we adjusted (i) the conversion price of our Series A 8% convertible preferred stock, (ii) the number of shares subject to and the exercise price of our outstanding stock option awards under our equity incentive plan and (iii) the number of shares subject to and the exercise price of our outstanding warrants to equitably reflect the split. All common stock share and per-share data presented in this quarterly report gives effect to the reverse stock split and the change in authorized shares and have been adjusted retroactively for all periods presented.

### Initial Public Offering

On July 24, 2012, we completed our initial public offering (the “IPO”) of 11,057,692 shares of common stock at a price of $17.00 per share. The common stock was listed on The NASDAQ Global Select Market under the symbol “FIVE.” The shares sold in the IPO were registered under the Securities Act of 1933, as amended, pursuant to our Registration Statement on Form S-1 (File No. 333-180780), which was declared effective by the Securities and Exchange Commission on July 18, 2012. Of the 11,057,692 shares sold in the IPO, we issued 4,807,692 shares, and 6,250,000 shares were sold by selling shareholders, including 1,442,308 shares sold pursuant to the exercise in full of the underwriters’ over-allotment option. We did not receive any proceeds from shares sold by the selling shareholders. We received proceeds of approximately $73.3 million, net of approximately $8.5 million in underwriting discounts and legal, accounting and other fees incurred in connection with the IPO. Of the $73.3 million net proceeds received from the IPO, approximately $65.3 million and $0.7 million, respectively, were used to repay principal and interest under our Term Loan Facility (defined in “—Financing Transactions”) that existed as of the date of the IPO. The remaining net proceeds of the IPO were used for general corporate purposes, including working capital.

### Results of Operations

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net sales.

*(in thousands, except total stores)*

| Statements of Operations Data: | Thirteen Weeks Ended October 27, 2012 | October 29, 2011 | Thirty-nine Weeks Ended October 27, 2012 | October 29, 2011 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $86,587 | $61,895 | $245,236 | $171,288 |
| Cost of goods sold | 59,656 | 43,522 | 166,538 | 118,317 |
| Gross profit | 26,931 | 18,373 | 78,698 | 52,971 |
| Selling, general and administrative expenses | 25,090 | 17,634 | 74,087 | 46,883 |
| Operating income | 1,841 | 739 | 4,611 | 6,088 |
| Interest expense, net | 550 | 6 | 1,829 | 8 |
| Loss on debt extinguishment | 7 | — | 1,594 | — |
| Other income | — | — | (258) | — |
| Income before income taxes | 1,284 | 733 | 1,446 | 6,080 |
| Income tax expense | 555 | 293 | 627 | 2,429 |
| Net income | $729 | $440 | $819 | $3,651 |
| **Percentage of Net Sales:** |  |  |  |  |
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Cost of goods sold | 68.9% | 70.3% | 67.9% | 69.1% |
| Gross profit | 31.1% | 29.7% | 32.1% | 30.9% |
| Selling, general and administrative expenses | 29.0% | 28.5% | 30.2% | 27.4% |
| Operating income | 2.1% | 1.2% | 1.9% | 3.6% |
| Interest expense, net | 0.6% | —% | 0.7% | —% |
| Loss on debt extinguishment | —% | —% | 0.6% | —% |
| Other income | —% | —% | (0.1)% | —% |
| Income before income taxes | 1.5% | 1.2% | 0.6% | 3.5% |
| Income tax expense | 0.6% | 0.5% | 0.3% | 1.4% |
| Net income | 0.8% | 0.7% | 0.3% | 2.1% |
| **Operational Data:** |  |  |  |  |
| Total stores at end of period | 243 | 189 | 243 | 189 |
| Comparable store sales growth | 8.8% | 7.6% | 9.2% | 5.1% |
| Average net sales per store(1) | $358 | $333 | $1,123 | $1,022 |

(1) Only includes stores open during the full period.

### Thirteen Weeks Ended October 27, 2012 Compared to the Thirteen Weeks Ended October 29, 2011

### Net Sales

Net sales increased to $86.6 million in the thirteen weeks ended October 27, 2012 from $61.9 million in the thirteen weeks ended October 29, 2011, an increase of $24.7 million, or 39.9%. The increase was the result of a non-comparable store sales increase of $20.3 million and a comparable store sales increase of $4.4 million. We plan to open one additional store during the remainder of the fiscal year. The increase in non-comparable store sales was driven by new stores and stores that opened in fiscal 2011 but have not been open for 15 full months.

Comparable store sales increased 8.8% for the thirteen weeks ended October 27, 2012 compared to the thirteen weeks ended October 29, 2011. This increase resulted from an increase of approximately 8.2% in the number of transactions in our stores and an increase in the average dollar value of transactions of approximately 0.6%.

### Cost of Goods Sold and Gross Profit

Cost of goods sold increased to $59.7 million in the thirteen weeks ended October 27, 2012 from $43.5 million in the thirteen weeks ended October 29, 2011, an increase of $16.1 million, or 37.1%. The increase in cost of goods sold was primarily the result of a $12.2 million increase in the direct costs of goods resulting from an increase in sales and a $2.8 million increase in store occupancy costs as a result of new store openings.

Gross profit increased to $26.9 million in the thirteen weeks ended October 27, 2012 from $18.4 million from the thirteen weeks ended October 29, 2011, an increase of $8.6 million, or 46.6%. Gross margin increased to 31.1% in the thirteen weeks ended October 27, 2012 from 29.7% for the thirteen weeks ended October 29, 2011, an increase of 142 basis points. The increase in gross margin was primarily the result of the combined increase in store occupancy, distribution and buying expense, increasing at a lower rate than the increase in net sales and increased margin by 110, 14 and 11 basis points, respectively.

### Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $25.1 million in the thirteen weeks ended October 27, 2012 from $17.6 million in the thirteen weeks ended October 29, 2011, an increase of $7.5 million, or 42.3%. As a percentage of net sales, selling, general and administrative expenses increased 49 basis points to 29.0% in the thirteen weeks ended October 27, 2012 compared to 28.5% in the thirteen weeks ended October 29, 2011. The increase in selling, general and administrative expense was primarily the result of increases of $3.8 million of store-related expenses to support new store growth, $1.6 million of stock-based compensation expense primarily associated with the ongoing expense recognition over the remaining vesting period related to the cancellation of certain stock options in exchange for the grant of restricted shares in March 2012 and $2.0 million in corporate-related expense.

### Interest Expense, Net

Interest expense, net increased to $0.6 million in the thirteen weeks ended October 27, 2012 from $6,000 in the thirteen weeks ended October 29, 2011, an increase of $0.5 million. The increase in interest expense resulted from the outstanding balance of our Term Loan Facility (defined below).

### Income Tax Expense

Income tax expense for the thirteen weeks ended October 27, 2012 was $0.6 million compared to $0.3 million for the thirteen weeks ended October 29, 2011, an increase of $0.3 million, or 89.4%. This increase in income tax expense was primarily the result of a $0.6 million increase in pre-tax income. Our effective tax rate was 43.2% for the thirteen weeks ended October 27, 2012 compared to 40.0% for October 29, 2011. For the remainder of fiscal 2012, we believe our effective tax rate will be approximately 40.5%.

### Net Income

As a result of the foregoing, net income increased to $0.7 million in the thirteen weeks ended October 27, 2012 from $0.4 million in the thirteen weeks ended October 29, 2011, an increase of $0.3 million, or 65.7%.

### Thirty-Nine Weeks Ended October 27, 2012 Compared to the Thirty-Nine Weeks Ended October 29, 2011

### Net Sales

Net sales increased to $245.2 million in the thirty-nine weeks ended October 27, 2012 from $171.3 million in the thirty-nine weeks ended October 29, 2011, an increase of approximately $73.9 million, or 43.2%. The increase was the result of a comparable store sales increase of $13.6 million and a non-comparable store sales increase of $60.3 million. During the thirty-nine weeks ended October 27, 2012, we opened 51 new stores compared to 47 net new stores during the thirty-nine weeks ended October 29, 2011. We plan to open one additional store during the remainder of the fiscal year. The primary driver for our increase in non-comparable store sales was from the increase in the number of stores that opened in fiscal 2011 but have not been open for 15 full months, as well as new stores.

Comparable store sales increased 9.2% for the thirty-nine weeks ended October 27, 2012 compared to the thirty-nine weeks ended October 29, 2011. This increase resulted from an increase of approximately 8.7% in the number of transactions in our stores and an increase in the average dollar value of transactions of approximately 0.5%.

### Cost of Goods Sold and Gross Profit

Cost of goods sold increased to $166.5 million in the thirty-nine weeks ended October 27, 2012 from $118.3 million in the thirty-nine weeks ended October 29, 2011, an increase of $48.2 million, or 40.8%. The increase in cost of goods sold was primarily the result of a $36.5 million increase in the direct costs of goods resulting from an increase in sales and an $8.7 million increase in store occupancy costs as a result of new store openings.

Gross profit increased to $78.7 million in the thirty-nine weeks ended October 27, 2012 from $53.0 million in the thirty-nine weeks ended October 29, 2011, an increase of $25.7 million, or 48.6%. Gross margin increased to 32.1% in the thirty-nine weeks ended October 27, 2012 from 30.9% for the thirty-nine weeks ended October 29, 2011, an increase of 117 basis points. The increase in gross margin was primarily the result of the combined increase in store occupancy and distribution expense, increasing at a lower rate than the increase in net sales and increased margin by 67 and 38 basis points, respectively.

### Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $74.1 million in the thirty-nine weeks ended October 27, 2012 from $46.9 million in the thirty-nine weeks ended October 29, 2011, an increase of $27.2 million, or 58.0%. As a percentage of net sales, selling, general and administrative expenses increased 284 basis points to 30.2% in the thirty-nine weeks ended October 27, 2012 compared to 27.4% in the thirty-nine weeks ended October 29, 2011. The increase in selling, general and administrative expense was primarily the result of increases of $12.4 million of store-related expenses to support new store growth, $9.0 million of stock-based compensation expense associated with the cancellation of certain stock options in exchange for the grant of restricted shares and $5.8 million in corporate-related expense.

### Interest Expense, Net

Interest expense, net increased to $1.8 million in the thirty-nine weeks ended October 27, 2012 from $8,000 in the thirty-nine weeks ended October 29, 2011, an increase of $1.8 million. The increase in interest expense resulted from the outstanding balance of our Term Loan Facility.

### Loss on Debt Extinguishment

In connection with the $65.3 million repayment of the $100.0 million Term Loan Facility, we wrote-off $1.6 million of deferred financing costs in the thirty-nine weeks ended October 27, 2012.

### Income Tax Expense

Income tax expense for the thirty-nine weeks ended October 27, 2012 was $0.6 million compared to $2.4 million for the thirty-nine weeks ended October 29, 2011, a decrease of $1.8 million, or 74.2%. This decrease in income tax was primarily the result of a $4.6 million decrease in pre-tax income. Our effective tax rate was 43.4% during the thirty-nine weeks ended October 27, 2012 and 40.0% during the thirty-nine weeks ended October 29, 2011. For the remainder of fiscal 2012, we believe our effective tax rate will be approximately 40.5%.

### Net Income

As a result of the foregoing, net income decreased to $0.8 million in the thirty-nine weeks ended October 27, 2012 from $3.7 million in the thirty-nine weeks ended October 29, 2011, a decrease of $2.8 million, or 77.6%.

### Liquidity and Capital Resources

### Overview

Our primary sources of liquidity are cash flows from operations, historical equity financings and borrowings under our Revolving Credit Facility (defined in “-Line of Credit”). Our primary cash needs are for capital expenditures and working capital. During the thirty-nine weeks ended October 27, 2012, we also entered into a Term Loan Facility and used the proceeds to pay a dividend in May 2012.

Capital expenditures typically vary depending on the timing of new store openings and infrastructure-related investments. We plan to make capital expenditures of approximately $22.9 million in fiscal 2012, which we expect to fund from cash generated from operations. We expect to devote approximately $16.8 million of our capital expenditure budget in fiscal 2012 to construct and open 52 new stores and a new distribution center, which will continue into fiscal 2013, with the remainder projected to be spent on corporate infrastructure and store relocations and remodels. As of October 27, 2012, material commitments for capital expenditures included: (1) our new lease for our second distribution center located in Olive Branch, Mississippi, which has an initial lease term of ten years and future minimum lease payments of approximately $16.7 million and (2) the purchase and installation of the distribution center’s infrastructure and systems, which is approximately $3.1 million.

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 and borrowings under our Revolving Credit Facility. We did not have any direct borrowings under our Revolving Credit Facility during the thirty-nine weeks ended October 27, 2012. When we have used our Revolving Credit Facility, the amount of indebtedness outstanding under it has tended to be the highest in the beginning of the fourth quarter of each fiscal year. Over the past three fiscal years, 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.

Based on our growth plans, we believe that our cash position, net cash provided by operating activities and availability under our Revolving Credit Facility will be adequate to finance our planned capital expenditures, working capital requirements and debt service over the next 12 months and for the foreseeable future thereafter. If cash flows from operations and borrowings under our 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)*

|  | Thirty-nine Weeks Ended October 27, 2012 | October 29, 2011 |
| --- | ---: | ---: |
| Net cash (used in) provided by operating activities | $(23.8) | $5.2 |
| Net cash used in investing activities | (17.4) | (15.4) |
| Net cash provided by (used in) financing activities | 7.2 | (0.1) |
| Net decrease during period in cash and cash equivalents | $(34.0) | $(10.4) |

### Cash (Used in) Provided by Operating Activities

Net cash used in operating activities for the thirty-nine weeks ended October 27, 2012 was $23.8 million, a decrease of approximately $29.0 million compared to the thirty-nine weeks ended October 29, 2011. The increase in net cash used in operating activities was primarily the result of an increase in income taxes paid of $10.4 million, the settlement of $6.8 million of book overdrafts that were outstanding at January 28, 2012, the payment of $6.0 million of non-contractual bonuses to certain executive officers for performance which were accrued at January 28, 2012 and an increase in working capital needs to support our growth. Partially offsetting the increases were increased operating cash flows from store performance.

### Cash Used in Investing Activities

Net cash used in investing activities for the thirty-nine weeks ended October 27, 2012 was $17.4 million, an increase of $2.0 million compared to the thirty-nine weeks ended October 29, 2011 related solely to capital expenditures. The increase in capital expenditures was primarily for our new store construction and corporate infrastructure.

### Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities for the thirty-nine weeks ended October 27, 2012 was $7.2 million, an increase of $7.4 million compared to the thirty-nine weeks ended October 29, 2011. The increase in net cash provided by financing activities was primarily the result of $100.0 million of proceeds from our Term Loan Facility and $73.3 million of proceeds from our IPO, partially offset by $99.5 million of dividend payments, a $65.5 million repayment of the Term Loan Facility and $2.8 million in debt financing costs. See “—Financing Transactions” for further details.

### Financing Transactions

On May 16, 2012, we entered into a $100.0 million Term Loan Facility with Goldman Sachs Bank USA as administrative agent for a syndicate of lenders (“Term Loan Facility”). We used the net proceeds from the Term Loan Facility and cash on hand to pay a dividend on our common and preferred stock, totaling $99.5 million. On the same day, we amended and restated our existing senior secured Revolving Credit Facility with Wells Fargo Bank, National Association, which is described below under “—Line of Credit.” We refer to the Term Loan Facility, the Revolving Credit Facility and related transactions as the “Financing Transactions.”

The Term Loan Facility provided for a term loan of $100.0 million and matures on the earlier of (i) May 16, 2015 and (ii) the date on which such facility is accelerated following the occurrence of an event of default. The Term Loan Facility provides for interest on borrowings, at our option, at an alternate base rate which is the greater of (i) the administrative agent’s prime rate in effect on such day and (ii) the federal funds effective rate in effect on such day plus 0.50% with a 2.00% floor, plus a margin of 3.25%, or a London Interbank Offer Rate (“LIBOR”) based rate with a 1.00% floor plus a margin of 4.25%. The credit agreement for the Term Loan Facility includes a maximum consolidated net leverage ratio financial covenant, the calculation of which allows us to net up to $10.0 million of our cash and cash equivalents against our indebtedness. Our leverage ratio must not exceed 3.25x for the testing periods in calendar year 2012, 2.75x to 2.50x for the testing periods in calendar year 2013, 2.00x for the testing periods in calendar year 2014 and 1.75x thereafter.

The credit agreement for the Term Loan Facility also includes customary negative and affirmative covenants including, among others, limitations on our ability to: (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or other restricted payments; (vi) engage in mergers or consolidations; or (vii) change our business.

The Term Loan Facility is subject to repayment upon the receipt of certain proceeds, including those from the sale of certain assets, insurance proceeds and indebtedness not otherwise permitted. The Term Loan Facility was also subject to repayment of $50.0 million upon the receipt of proceeds from the IPO. We closed the IPO on July 24, 2012. On July 27, 2012, we repaid $65.3 million of principal against the Term Loan Facility and $0.7 million of interest. On October 26, 2012, the Company repaid $0.3 million of principal on the Term Loan Facility. As of October 27, 2012, the balance outstanding under the Term Loan Facility was $34.5 million bearing interest at a rate of 5.25%. Pursuant to the terms of the Term Loan Facility, due to our repayment of $65.3 million of principal under the Term Loan Facility in July, we are no longer required to make minimum quarterly payments and the unpaid balance will be due upon maturity. In connection with the Term Loan Facility, we incurred deferred financing costs of $2.7 million which are being amortized over the term of the Term Loan Facility. The amortization is included in interest expense, net, in the statements of operations. In connection with the repayment in July 2012, $1.6 million of the deferred financing costs were written off. The remaining deferred financing costs, net of amortization, are included in other assets in the balance sheet at October 27, 2012.

Amounts under the credit agreement for the Term Loan Facility may become due upon certain events of default including, among others, failure to comply with the credit agreement’s covenants, bankruptcy, default on certain other indebtedness or a change in control. The default rate under the Term Loan Facility is 2.00% per annum.

All obligations under the Term Loan Facility are secured by substantially all of our assets.

As of October 27, 2012, we were in compliance with the financial covenant and other covenants applicable to us under the Term Loan Facility.

### Line of Credit

On August 18, 2006, we entered into a loan and security agreement (the “Loan and Security Agreement”) with a bank that included a revolving line of credit with advances tied to a borrowing base. The Loan and Security Agreement has been amended and/or restated several times, the latest on May 16, 2012 (as amended and restated, the “Revolving Credit Facility”), generally to extend the maturity date, increase maximum borrowings, adjust the applicable interest rates and modify certain definitions. The Revolving Credit Facility allows maximum borrowings of $20.0 million with advances tied to a borrowing base and expires on the earliest to occur of (i) May 16, 2017, (ii) the date which is 45 days prior to the maturity date of the Term Loan Facility or (iii) upon the occurrence of an event of default. The Revolving Credit Facility may be increased to $30.0 million upon certain conditions. The Revolving Credit Facility includes a $5.0 million sublimit for the issuance of letters of credit. The borrowing base is 90% of eligible credit card receivables plus 90% of the net recovery percentage of eligible inventory less established reserves. In connection with the Revolving Credit Facility, we incurred deferred financing costs of $50,000 in May 2012 which are being amortized over the remaining term of the Revolving Credit Facility.

The Revolving Credit Facility provides for interest on borrowings, at our option, at (a) a prime rate plus a margin of (i) 0.75% if excess availability is greater than or equal to 75%, (ii) 1.0% if excess availability is less than 75% but greater than or equal to 33% or (iii) 1.25% if excess availability is less than 33% or (b) a LIBOR-based rate plus a margin of (i) 1.75% if excess availability is greater than or equal to 75%, (ii) 2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. The Revolving Credit Facility further provides for a letter of credit fee equal to the LIBOR-based rate plus (i) 1.75% if excess availability is greater than or equal to 75%, (ii) 2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. The Revolving Credit Facility also contains an unused credit facility fee of 0.375% per annum and is subject to a servicing fee of $12,000 per year.

The Revolving Credit Facility includes a covenant which requires us to maintain minimum excess collateral availability of no less than the greater of (i) 10% of the then effective maximum credit and (ii) $3.0 million.

The Revolving Credit Facility also includes customary negative and affirmative covenants including, among others, limitations on our ability to (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or other restricted payments; (vi) engage in mergers or consolidations; or (vii) change our business.

Additionally, the Revolving Credit Facility is subject to payment upon the receipt of certain proceeds, including those from the sale of certain assets and is subject to an increase in the interest rate on borrowings and the letter of credit fee of 2.0% upon an event of default. Amounts under the Revolving Credit Facility may become due upon certain events of default including among others, failure to comply with the Revolving Credit Facility covenants, bankruptcy, default on certain other indebtedness or a change in control.

All obligations under the Revolving Credit Facility are secured by substantially all of our assets.

As of October 27, 2012, we were in compliance with the covenants applicable to us under the Revolving Credit Facility. During the thirty-nine weeks ended October 27, 2012, there were no borrowings under the Revolving Credit Facility.

### Note Payable

On December 10, 2010 we entered into a loan and security agreement (the “Note”) for $250,000 with a governmental authority. At May 13, 2012, a portion of the note ($200,000) was converted to a grant upon us meeting certain non-financial conditions and the remainder of $50,000 was paid back in full along with interest outstanding.

### Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from estimates in amounts that may be material to the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements. Our critical accounting policies and estimates are discussed in the Prospectus. We believe that there have been no significant changes to our critical accounting policies during the thirty-nine weeks ended October 27, 2012.

### Contractual Obligations

Except as set forth below, there have been no material changes to our contractual obligations as disclosed in the Prospectus, other than those which occur in the ordinary course of business.

Since January 28, 2012, we have entered into 48 new fully executed retail leases with an average term of 10 years and other lease modifications that have future minimum lease payments of approximately $93.2 million, a second distribution center lease with an initial term of 10 years that has future minimum lease payments of approximately $16.7 million and purchase commitments for infrastructure and systems that will be implemented in the construction of the second distribution center of approximately $3.1 million. In addition, we entered into the Term Loan Facility in May 2012 increasing our notes payable to $34.5 million as of October 27, 2012. The balance bears an interest rate of 5.25%.

### Off Balance Sheet Arrangements

As of and for the thirty-nine weeks ended October 27, 2012, 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.

### Recently Issued Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2011-04, *Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs*. The amendments in ASU No. 2011-04 result in common fair value measurement and disclosure requirements in U.S. generally accepted accounting principles, or U.S. GAAP, and international financial reporting standards, or IFRS, and change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. ASU No. 2011-04 is effective during interim and annual periods beginning after December 15, 2011. The adoption of the new requirements of ASU No. 2011-04 did not have an impact on our financial position or results of operations.

## Market risk

As filed, 1,921 characters.

### 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 a Revolving Credit Facility which includes a revolving line of credit with advances tied to a borrowing base, and a Term Loan Facility, both of which bear interest at a variable rate. Because our Revolving Credit Facility and Term Loan Facility bear interest at a variable rate, we will be exposed to market risks relating to changes in interest rates.

As of October 27, 2012, we had no outstanding borrowings under our Revolving Credit Facility, nor did we have any borrowings during fiscal year 2012.

As of October 27, 2012, the principal amount of the Term Loan Facility was $34.5 million. The Term Loan Facility carries a variable interest rate that is tied to our lender’s prime rate, the federal funds effective rate plus 0.50% with a 2.0% floor plus a margin of 3.25% or a LIBOR-based rate with a 1.0% floor plus a margin of 4.25%. Based on a sensitivity analysis at October 27, 2012, a 100 basis point increase in market interest rates would increase our annual interest expense on the Term Loan Facility by approximately $0.3 million. 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.

## Controls and procedures

As filed, 1,875 characters.

### Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e), as of the end of the period covered by this Quarterly Report on Form 10-Q pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q are effective at a reasonable assurance level in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent or detect all errors and all fraud. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

### Changes in Internal Control over Financial Reporting

There was no change to our internal control over financial reporting during the thirteen weeks ended October 27, 2012 that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 297 characters.

Risk factors that affect our business and financial results are discussed under the heading “Risk Factors” beginning on page 11 of the Prospectus. There have been no material changes in our risk factors from those previously disclosed in the Prospectus, which are incorporated herein by reference.

Filed Nov 30, 2012.
Source: SEC EDGAR, the filing index for accession 0001193125-12-486203. Last ingested by Listed: Nov 4, 2026, 20:13 ET. No prices; not investment advice.