# Five Below, Inc: Form 10-Q for the period ended Aug 3, 2013

- Company: [Five Below, Inc](/companies/five.md) (CIK 1177609)
- Form: 10-Q
- Filed: 2013-09-10
- Accepted by EDGAR: Sep 10, 2013, 21:27 ET
- Period: 2013-08-03
- Accession: 0001445305-13-002254
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1177609/000144530513002254/q22013fivebelowform10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1177609/000144530513002254/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-08-03.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-05-05 to 2013-08-03 | $117.1m | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2013-02-03 to 2013-08-03 | $212.7m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2013-05-05 to 2013-08-03 | $77.7m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2013-02-03 to 2013-08-03 | $143.1m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2013-05-05 to 2013-08-03 | $39.4m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2013-02-03 to 2013-08-03 | $69.6m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2013-05-05 to 2013-08-03 | $32.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2013-02-03 to 2013-08-03 | $59.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2013-05-05 to 2013-08-03 | $7.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2013-02-03 to 2013-08-03 | $10.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2013-05-05 to 2013-08-03 | $2.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2013-02-03 to 2013-08-03 | $3.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-05-05 to 2013-08-03 | $4.1m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2013-02-03 to 2013-08-03 | $5.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-05-05 to 2013-08-03 | $0.07 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2013-02-03 to 2013-08-03 | $0.10 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2013-05-05 to 2013-08-03 | $0.08 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2013-02-03 to 2013-08-03 | $0.10 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2013-05-05 to 2013-08-03 | 53,804,539 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2013-02-03 to 2013-08-03 | 53,601,459 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2013-02-03 to 2013-08-03 | −$5.7m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2013-02-03 to 2013-08-03 | $15.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2013-08-03 | $21.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2013-08-03 | $121.4m | us-gaap:AssetsCurrent |
| Total assets | at 2013-08-03 | $187.5m | us-gaap:Assets |
| Current liabilities | at 2013-08-03 | $50.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2013-08-03 | $105.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2013-08-03 | $82.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 45,686 characters.

*You should read the following discussion together with “Selected Financial Data” and the financial statements and related notes included in our Annual Report on Form 10-K for our fiscal year ended February 2, 2013 and referred to herein as the “Annual Report,” and the consolidated financial statements and related notes as of and for the thirteen and twenty-six weeks ended August 3, 2013 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 2013” or “fiscal 2013” refer to the period from February 3, 2013 to February 1, 2014 and consists of a 52-week fiscal year. References to “fiscal year 2012” or “fiscal 2012” refer to the period from January 29, 2012 to February 2, 2013 and consisted of a 53-week fiscal year. The fiscal quarters and year-to-date periods ended August 3, 2013 and July 28, 2012 refer to the 13-week and 26-week periods ended as of those dates. Historical results are not necessarily indicative of the results to be expected for any future period and results for any interim period may not necessarily be indicative of the results that may be expected for a full year.*

### SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or present facts or conditions, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the introduction of new merchandise, and the implementation of our marketing and branding strategies. 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:

- *failure to successfully implement our growth strategy;*
- *disruptions in our ability to select, obtain, distribute and market merchandise profitably;*
- *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;*
- *dependence on our executive officers and other key personnel or our inability to hire additional qualified personnel;*
- *ability to successfully manage our inventory balances and inventory shrinkage;*
- *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;*
- *failure to maintain adequate internal controls;*
- *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;*
- *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, Inc. 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 August 3, 2013, we operated 276 stores in 19 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 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 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 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.

We had historically excluded stores that are relocated or expanded during the period of construction and pre-opening starting when the store closed. During the second quarter of 2013, we changed our comparable store sales calculation to exclude relocated or expanded stores starting when a store receives its last merchandise delivery from one of our distribution centers. This change would not significantly impact our historical comparable store sales calculations as previously reported.

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;
- 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 store sales. Accordingly, comparable store 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 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 centers 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.

### 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 millions, except total stores)*

| August 3, 2013 Statements of Operations Data: (1) | Thirteen Weeks Ended | July 28, 2012 | Twenty-Six Weeks Ended August 3, 2013 | July 28, 2012 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $117.1 | $86.8 | $212.7 | $158.6 |
| Cost of goods sold | 77.7 | 58.1 | 143.1 | 106.9 |
| Gross profit | 39.4 | 28.7 | 69.6 | 51.8 |
| Selling, general and administrative expenses | 32.2 | 24.0 | 59.2 | 49.0 |
| Operating income | 7.2 | 4.7 | 10.4 | 2.8 |
| Interest expense, net | 0.4 | 1.3 | 0.9 | 1.3 |
| Loss on debt extinguishment | 0.3 | 1.6 | 0.3 | 1.6 |
| Other income | — | (0.3) | — | (0.3) |
| Income before income taxes | 6.5 | 2.1 | 9.2 | 0.2 |
| Income tax expense | 2.5 | 0.8 | 3.6 | 0.1 |
| Net income | $4.1 | $1.2 | $5.6 | $0.1 |
| **Percentage of Net Sales:** |  |  |  |  |
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Cost of goods sold | 66.3% | 66.9% | 67.3% | 67.4% |
| Gross profit | 33.7% | 33.1% | 32.7% | 32.6% |
| Selling, general and administrative expenses | 27.5% | 27.7% | 27.9% | 30.9% |
| Operating income | 6.1% | 5.5% | 4.9% | 1.7% |
| Interest expense, net | 0.3% | 1.5% | 0.4% | 0.8% |
| Loss on debt extinguishment | 0.2% | 1.8% | 0.1% | 1.0% |
| Other income | —% | (0.3)% | —% | (0.2)% |
| Income before income taxes | 5.6% | 2.4% | 4.3% | 0.1% |
| Income tax expense | 2.1% | 1.0% | 1.7% | —% |
| Net income | 3.5% | 1.4% | 2.7% | 0.1% |
| **Operational Data:** |  |  |  |  |
| Total stores at end of period | 276 | 226 | 276 | 226 |
| Comparable store sales growth | 6.6% | 8.6% | 5.4% | 9.4% |
| Average net sales per store (2) | $0.4 | $0.4 | $0.8 | $0.8 |

(1) Components may not add to total due to rounding.

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

### Thirteen Weeks Ended August 3, 2013 Compared to the Thirteen Weeks Ended July 28, 2012

### Net Sales

Net sales increased to $117.1 million in the thirteen weeks ended August 3, 2013 from $86.8 million in the thirteen weeks ended July 28, 2012, an increase of $30.3 million, or 34.9%. The increase was the result of a non-comparable store sales increase of $25.2 million and a comparable store sales increase of $5.1 million. The increase in non-comparable store sales was driven by stores that opened in fiscal 2012 but have not been open for 15 full months and new stores. We plan to open 60 net new stores during fiscal 2013.

Comparable store sales increased 6.6% for the thirteen weeks ended August 3, 2013 compared to the thirteen weeks ended July 28, 2012. This increase resulted from an increase of approximately 5.9% in the number of transactions in our stores and an increase in the average dollar value of transactions of approximately 0.7%.

### Cost of Goods Sold and Gross Profit

Cost of goods sold increased to $77.7 million in the thirteen weeks ended August 3, 2013 from $58.1 million in the thirteen weeks ended July 28, 2012, an increase of $19.6 million, or 33.8%. The increase in cost of goods sold was primarily the result of a $14.7 million increase in the merchandise costs of goods resulting from an increase in sales, a $2.6 million increase in store occupancy costs as a result of new store openings, and a $1.8 million increase in distribution costs primarily due to an increase in sales as well as the opening of a second distribution center.

Gross profit increased to $39.4 million in the thirteen weeks ended August 3, 2013 from $28.7 million in the thirteen weeks ended July 28, 2012, an increase of $10.7 million, or 37.1%. Gross margin increased to 33.7% in the thirteen weeks ended August 3, 2013 from 33.1% for the thirteen weeks ended July 28, 2012, an increase of approximately 60 basis points. The increase in gross margin was primarily the result of the store occupancy costs increasing at a lower rate than the increase in net sales as well as the timing of new store openings, which increased margin by approximately 110 basis points. This increase was partially offset by the increase in distribution costs due to the opening of a second distribution center, which decreased margin by approximately 60 basis points.

### Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $32.2 million in the thirteen weeks ended August 3, 2013 from $24.0 million in the thirteen weeks ended July 28, 2012, an increase of $8.2 million, or 34.2%. As a percentage of net sales, selling, general and administrative expenses decreased approximately 20 basis points to 27.5% in the thirteen weeks ended August 3, 2013 compared to 27.7% in the thirteen weeks ended July 28, 2012. The increase in selling, general and administrative expense was primarily the result of increases of $4.8 million in store-related expenses primarily to support new store growth, $2.0 million of corporate related expenses, and $1.0 million of fees incurred for our secondary public offering.

### Interest Expense, Net

Interest expense, net decreased to $0.4 million in the thirteen weeks ended August 3, 2013 from $1.3 million of interest expense, net in the thirteen weeks ended July 28, 2012, a decrease of $0.9 million. The decrease in interest expense resulted from the decrease in the outstanding balance of our Term Loan Facility (see –“Liquidity and Capital Resources*-Term Loan Facility”* section below).

### Loss on Debt Extinguishment

Loss on debt extinguishment decreased to $0.3 million in the thirteen weeks ended August 3, 2013 from $1.6 million in the thirteen weeks ended July 28, 2012, a decrease of $1.3 million. The decrease in the loss on debt extinguishment is due to the $15.0 million repayment on the $100.0 million Term Loan Facility during the thirteen weeks ended August 3, 2013 compared to the $65.3 million repayment that we made during the thirteen weeks ended July 28, 2012.

### Income Tax Expense

Income tax expense for the thirteen weeks ended August 3, 2013 was $2.5 million compared to $0.8 million in income tax expense for the thirteen weeks ended July 28, 2012, an increase of $1.6 million. This increase in income tax expense was primarily the result of a $4.4 million increase in pre-tax income. Our effective tax rate was 37.7% for the thirteen weeks ended August 3, 2013 compared to 40.3% for the thirteen weeks ended July 28, 2012. Our effective tax rate for the thirteen weeks ended August 3, 2013 was lower than the comparable period as a result of changes in the mix of projected pretax income across state jurisdictions and the Company's operating entities as a result of the Restructuring. For the remainder of fiscal 2013, we believe our effective tax rate will be approximately 38.8%.

### Net Income

As a result of the foregoing, net income increased to $4.1 million in the thirteen weeks ended August 3, 2013 from net income of $1.2 million in the thirteen weeks ended July 28, 2012, an increase of $2.8 million, or 226.3%.

### Twenty-Six Weeks Ended August 3, 2013 Compared to the Twenty-Six Weeks Ended July 28, 2012

### Net Sales

Net sales increased to $212.7 million in the twenty-six weeks ended August 3, 2013 from $158.6 million in the twenty-six weeks ended July 28, 2012, an increase of $54.0 million, or 34.1%. The increase was the result of a non-comparable store sales increase of $46.0 million and a comparable store sales increase of $8.0 million. The increase in non-comparable store sales was driven by stores that opened in fiscal 2012 but have not been open for 15 full months and new stores. We plan to open 60 net new stores during fiscal 2013.

Comparable store sales increased 5.4% for the twenty-six weeks ended August 3, 2013 compared to the twenty-six weeks ended July 28, 2012. This increase resulted from an increase of approximately 4.4% in the number of transactions in our stores and an increase in the average dollar value of transactions of approximately 1.0%.

### Cost of Goods Sold and Gross Profit

Cost of goods sold increased to $143.1 million in the twenty-six weeks ended August 3, 2013 from $106.9 million in the twenty-six weeks ended July 28, 2012, an increase of $36.2 million, or 33.9%. The increase in cost of goods sold was primarily the result of a $26.5 million increase in the merchandise costs of goods resulting from an increase in sales, a $5.7 million increase in store occupancy costs as a result of new store openings, and a $3.2 million increase in distribution costs primarily due to an increase in sales as well as the opening of a second distribution center.

Gross profit increased to $69.6 million in the twenty-six weeks ended August 3, 2013 from $51.8 million in the twenty-six weeks ended July 28, 2012, an increase of $17.8 million, or 34.5%. Gross margin increased to 32.7% in the twenty-six weeks ended August 3, 2013 from 32.6% for the twenty-six weeks ended July 28, 2012, an increase of approximately 10 basis points. The increase in gross margin was primarily the result of the increase in store occupancy and buying expense increasing at a lower rate than the increase in net sales as well as the timing of new store openings, which increased margin by approximately 80 basis points. This increase was partially offset by the increase in distribution costs due to the opening of a second distribution center, which decreased margin by approximately 60 basis points.

### Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $59.2 million in the twenty-six weeks ended August 3, 2013 from $49.0 million in the twenty-six weeks ended July 28, 2012, an increase of $10.2 million, or 20.9%. As a percentage of net sales, selling, general and administrative expenses decreased approximately 300 basis points to 27.9% in the twenty-six weeks ended August 3, 2013 compared to 30.9% in the twenty-six weeks ended July 28, 2012. The increase in selling, general and administrative expense was primarily the result of increases of $9.5 million in store-related expenses to support new store growth, $3.5 million of corporate related expenses, and $1.0 million of fees incurred for our secondary public offering, partially offset by a decrease of $3.7 million in stock-based compensation expense primarily related to the cancellation of certain stock options in exchange for the grant of restricted shares in March 2012.

### Interest Expense, Net

Interest expense, net decreased to $0.9 million in the twenty-six weeks ended August 3, 2013 from $1.3 million of interest expense, net in the twenty-six weeks ended July 28, 2012, a decrease of $0.4 million. The decrease in interest expense resulted mainly from the decrease in the outstanding balance of our Term Loan Facility (see –“Liquidity and Capital Resources*-Term Loan Facility”* section below).

### Loss on Debt Extinguishment

Loss on Debt Extinguishment decreased to $0.3 million in the twenty-six weeks ended August 3, 2013 from $1.6 million in the twenty-six weeks ended July 28, 2012, a decrease of $1.3 million. The decrease in the loss on debt extinguishment is due to the $15.0 million repayment on the $100.0 million Term Loan Facility during the twenty-six weeks ended August 3, 2013 compared to the $65.3 million repayment that was made during the twenty-six weeks ended July 28, 2012.

### Income Tax Expense

Income tax expense for the twenty-six weeks ended August 3, 2013 was $3.6 million compared to a $0.1 million income tax expense for the twenty-six weeks ended July 28, 2012, an increase of $3.5 million. This increase in income tax expense was primarily the result of a $9.0 million increase in pre-tax income. Our effective tax rate was 38.8% for the twenty-six weeks ended August 3, 2013 compared to 44.4% for the twenty-six weeks ended July 28, 2012. Our effective tax rate for the twenty-six weeks ended August 3, 2013 was lower than the comparable period as a result of changes in the mix of projected pretax income across state jurisdictions and the Company's operating entities as a result of the Restructuring. For the remainder of fiscal 2013, we believe our effective tax rate will be approximately 38.8%.

### Net Income

As a result of the foregoing, net income increased to $5.6 million in the twenty-six weeks ended August 3, 2013 from net income of $0.1 million in the twenty-six weeks ended July 28, 2012, an increase of $5.5 million.

### 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 fiscal 2012, we also entered into a Term Loan Facility (defined in “-*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 $28 million in fiscal 2013, which we expect to fund from cash generated from operations. We expect to devote approximately $16 million of our capital expenditure budget in fiscal 2013 to construct and open 60 net new stores with the remainder projected to be spent on store relocations, remodels, and expansion projects, the distribution centers, 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 and borrowings under our Revolving Credit Facility. We did not have any direct borrowings under our Revolving Credit Facility during the twenty-six weeks ended August 3, 2013. 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.

On June 12, 2013, we completed an internal business restructuring pursuant to which we formed Five Below Merchandising, Inc., a wholly-owned subsidiary (the “Subsidiary”), and transferred to the Subsidiary assets, operations and employees related to our merchandising operations (the “Restructuring”). Following the Restructuring, the Subsidiary purchases and sells to us certain goods for sale at our retail locations and we provide to the Subsidiary back office support, office space and other services, in each case, pursuant to agreements between us and the Subsidiary. In connection with the Restructuring, on June 12, 2013, we amended and restated the Loan and Security Agreement (defined in “-*Line of Credit”*) and certain other ancillary documents to our Revolving Credit Facility in order to, among other things, allow us to form and capitalize the Subsidiary and make the Subsidiary a party to the Loan and Security Agreement as a guarantor of our obligations thereunder. The Subsidiary also acceded to the credit agreement and certain ancillary documents to our Term Loan Facility as a guarantor of our obligations thereunder. For accounting purposes, our consolidated financial statements include the accounts of Five Below, Inc. and the Subsidiary. All intercompany transactions and accounts are eliminated in consolidation.

The balance outstanding under the Term Loan Facility was $19.5 million as of August 3, 2013. Pursuant to the terms of the Term Loan Facility, due to the repayment of $65.3 million of principal under the Term Loan Facility in July 2012, we are no longer required to make minimum quarterly payments. In May 2013, we repaid $15.0 million of principal on the Term Loan Facility. This amount was classified as a current liability as of February 2, 2013. The remaining unpaid balance will be due upon maturity.

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) (1)*

| August 3, 2013 | Twenty-Six Weeks Ended | July 28, 2012 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(5.7) | $(20.6) |
| Net cash used in investing activities | (15.1) | (11.6) |
| Net cash (used in) provided by financing activities | (14.2) | 8.6 |
| Net decrease during period in cash and cash equivalents | $(35.0) | $(23.6) |

(1) Components may not add to total due to rounding.

### Cash Used in Operating Activities

Net cash used in operating activities for the twenty-six weeks ended August 3, 2013 was $5.7 million, a decrease of approximately $14.9 million compared to the twenty-six weeks ended July 28, 2012. The decrease in net cash used in operating activities was primarily the result of an increase in operating cash flows from the addition of new stores and existing store performance, as well as a decrease in bonus payments of approximately $4.4 million primarily driven by a decrease in payments to certain executive officers.

### Cash Used in Investing Activities

Net cash used in investing activities for the twenty-six weeks ended August 3, 2013 was $15.1 million, an increase of $3.5 million compared to the twenty-six weeks ended July 28, 2012 related solely to capital expenditures. The increase in capital expenditures was primarily for the build-out of our second distribution center, our new store construction, and corporate infrastructure.

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

Net cash used in financing activities for the twenty-six weeks ended August 3, 2013 was $14.2 million, an increase of $22.7 million compared to the net cash provided by financing activities for the twenty-six weeks ended July 28, 2012. The increase in net cash used in financing activities was primarily the result of the $15.0 million principal repayment on the Term Loan Facility (see below) during the twenty-six weeks ended August 3, 2013 compared to $100.0 million of proceeds from our Term Loan Facility and $74.3 million of net proceeds from our initial public offering, partially offset by $99.5 million of dividend payments, and a $65.3 million principal repayment on the Term Loan Facility during the twenty-six weeks ended July 28, 2012.

### Term Loan Facility

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 (the “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.

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 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 our initial public offering (the "IPO"). We closed the IPO on

July 24, 2012. In July 2012, we repaid $65.3 million of principal against the Term Loan Facility and $0.7 million of interest. In October 2012 and May 2013, we repaid $0.3 million and $15.0 million, respectively, of principal on the Term Loan Facility. As of August 3, 2013, the balance outstanding under the Term Loan Facility was $19.5 million bearing interest at a rate of 5.25%. Pursuant to the terms of the Term Loan Facility, due to the repayment of $65.3 million of principal under the Term Loan Facility in July 2012, we are no longer required to make minimum quarterly payments. The remaining 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 consolidated statements of operations. In connection with the $65.3 million principal repayment on the Term Loan Facility in July 2012 and the $15.0 million principal repayment on the Term Loan Facility in May 2013, approximately $1.6 million and $0.3 million, respectively, of the deferred financing costs were written off and included in loss on debt extinguishment in the consolidated statements of operations for the thirteen and twenty-six weeks ended July 28, 2012 and August 3, 2013. The remaining deferred financing costs, net of amortization, are included in other assets on the balance sheet at August 3, 2013.

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.

On June 12, 2013, in connection with the Restructuring, the Subsidiary acceded to the credit agreement and certain ancillary documents to the Company's Term Loan Facility as a guarantor of the Company's obligations thereunder.

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

the Subsidiary. As of August 3, 2013, 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 June 12, 2013 (as amended and restated, the “Revolving Credit Facility”), generally to extend the maturity date, increase maximum borrowings, adjust the applicable interest rates, permit the formation and capitalization of subsidiaries, make the Subsidiary a party to the agreement as a guarantor of our obligations 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 if the Term Loan Facility remains outstanding 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 sub limit 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.

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.

As of August 3, 2013, we had no borrowings outstanding and had approximately $19.1 million of the $20.0 million available on the line of credit under the Revolving Credit Facility as approximately $0.9 million was outstanding in letters of credit.

All obligations under the Revolving Credit Facility are secured by substantially all of our assets and are guaranteed by the Subsidiary. As of August 3, 2013, we were in compliance with the covenants applicable to us under the Revolving Credit Facility.

### Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from estimates in amounts that may be material to the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements. Our critical accounting policies and estimates are discussed in the Annual Report. We believe that there have been no significant changes to our critical accounting policies during the twenty-six weeks ended August 3, 2013.

### Contractual Obligations

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

From February 2, 2013 to August 3, 2013 we have entered into 23 new fully executed retail leases with an average term of 10 years and other lease modifications that have future minimum lease payments of approximately $37.5 million. In addition, as of August 3, 2013, the balance outstanding under the Term Loan Facility was $19.5 million. Pursuant to the terms of the Term Loan Facility, due to the repayment of $65.3 million of principal under the Term Loan Facility in July 2012, we are no longer required to make minimum quarterly payments. The remaining unpaid balance will be due upon maturity. The balance bears an interest rate of 5.25%.

### Off Balance Sheet Arrangements

As of and for the twenty-six weeks ended August 3, 2013, 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.

## Market risk

As filed, 3,027 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 August 3, 2013, we had no borrowings outstanding and had approximately $19.1 million of the $20.0 million available on the line of credit under the Revolving Credit Facility as approximately $0.9 million was outstanding in letters of credit. 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%.

As of August 3, 2013, the principal amount of the Term Loan Facility was $19.5 million. 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 LIBOR-based rate with a 1.00% floor plus a margin of 4.25%. Based on a sensitivity analysis at August 3, 2013, a 100 basis point increase in market interest rates would increase our annual interest expense on the Term Loan Facility by approximately $0.2 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, 1,873 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 August 3, 2013 that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 2,255 characters.

Risk factors that affect our business and financial results are discussed in Part I, “Item 1A. Risk Factors,” in our Annual Report. Except as set forth below, there have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report and below, which could materially affect our business, financial condition or future results. The risks described in our Annual Report and below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.

***New regulations related to conflict minerals could adversely impact our business.***

The Securities and Exchange Commission has promulgated final rules mandated by the Dodd-Frank Act regarding disclosure 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 conflict in the DRC. The first conflict minerals report required by the new rules is due by May 31, 2014 and annually thereafter. While we do not manufacture products, we may be deemed to contract to manufacture products. There will be costs associated with complying with these disclosure requirements, including costs to determine the origin of conflict minerals used in any products we are deemed to contract to manufacture. In addition, the implementation of these rules could adversely affect the sourcing, supply 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.

Filed Sep 10, 2013.
Source: SEC EDGAR, the filing index for accession 0001445305-13-002254. Last ingested by Listed: Nov 4, 2026, 20:13 ET. No prices; not investment advice.