# Five Below, Inc: Form 10-Q for the period ended Jul 30, 2016

- Company: [Five Below, Inc](/companies/five.md) (CIK 1177609)
- Form: 10-Q
- Filed: 2016-09-01
- Accepted by EDGAR: Sep 1, 2016, 17:04 ET
- Period: 2016-07-30
- Accession: 0001628280-16-019365
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1177609/000162828016019365/form10q_fiveq22016.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1177609/000162828016019365/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-07-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-05-01 to 2016-07-30 | $220.1m | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2016-01-31 to 2016-07-30 | $412.8m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2016-05-01 to 2016-07-30 | $146.8m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2016-01-31 to 2016-07-30 | $279.2m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2016-05-01 to 2016-07-30 | $73.3m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2016-01-31 to 2016-07-30 | $133.6m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2016-05-01 to 2016-07-30 | $57.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2016-01-31 to 2016-07-30 | $107.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-05-01 to 2016-07-30 | $15.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2016-01-31 to 2016-07-30 | $26.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2016-05-01 to 2016-07-30 | $5.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2016-01-31 to 2016-07-30 | $10.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-05-01 to 2016-07-30 | $9.8m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2016-01-31 to 2016-07-30 | $16.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-05-01 to 2016-07-30 | $0.18 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2016-01-31 to 2016-07-30 | $0.30 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-05-01 to 2016-07-30 | $0.18 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2016-01-31 to 2016-07-30 | $0.30 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-05-01 to 2016-07-30 | 55,077,754 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2016-01-31 to 2016-07-30 | 55,039,204 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2016-01-31 to 2016-07-30 | $16.4m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2016-01-31 to 2016-07-30 | $22.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2016-01-31 to 2016-07-30 | $1.8m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2016-07-30 | $67.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-07-30 | $278.9m | us-gaap:AssetsCurrent |
| Total assets | at 2016-07-30 | $421.1m | us-gaap:Assets |
| Current liabilities | at 2016-07-30 | $100.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-07-30 | $151.4m | us-gaap:Liabilities |
| Shareholders' equity | at 2016-07-30 | $269.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 36,768 characters.

*You should read the following discussion together with “Selected Financial Data,” and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for our fiscal year ended January 30, 2016 and referred to herein as the "Annual Report," and the consolidated financial statements and related notes as of and for the thirteen and twenty-six weeks ended July 30, 2016 included in Part I, Item I of this Quarterly Report on Form 10-Q. The statements in this discussion regarding expectations of our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described below in “Special Note Regarding Forward-Looking Statements” and in Part II, Item 1A "Risk Factors." Our actual results may differ materially from those contained in or implied by any forward-looking statements.*

*We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31 of the following year. References to "fiscal year 2016" or "fiscal 2016" refer to the period from January 31, 2016 to January 28, 2017 and consists of a 52-week fiscal year. References to "fiscal year 2015" or "fiscal 2015" refer to the period from February 1, 2015 to January 30, 2016 and consists of a 52-week fiscal year. References to “fiscal year 2014” or “fiscal 2014” refer to the period from February 2, 2014 to January 31, 2015 and consists of a 52-week fiscal year. The fiscal quarters ended July 30, 2016 and August 1, 2015 refer to the thirteen weeks ended as of those dates. The year-to-date periods ended July 30, 2016 and August 1, 2015 refer to the twenty-six weeks ended as of those dates. Historical results are not necessarily indicative of the results to be expected for any future period and results for any interim period may not necessarily be indicative of the results that may be expected for a full year.*

### SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or present facts or conditions, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the introduction of new merchandise, and the implementation of our marketing and branding strategies. 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;*
- *extreme weather conditions in the areas in which our stores are located could negatively affect our business and results of operations;*
- *inability to successfully expand our distribution network capacity;*
- *disruptions to our distribution network or the timely receipt of inventory;*
- *failure to secure customers’ confidential or credit card information, or other private data relating to our employees or our company;*
- *inability to attract and retain qualified employees;*
- *increased operating costs or exposure to fraud or theft due to customer payment-related risk;*
- *inability to increase sales and improve the efficiencies, costs and effectiveness of our operations;*
- *dependence on our executive officers and other key personnel or inability to hire additional qualified personnel;*
- *dependence on the success of shopping centers in which our stores are located;*
- *inability to successfully manage our inventory balances and inventory shrinkage;*
- *our lease obligations;*
- *changes in our competitive environment, including increased competition from other retailers and the presence of online retailers;*
- *increasing costs due to inflation, increased operating costs, wage rate increases or energy prices;*
- *the seasonality of our business;*
- *disruptions to our information technology systems in the ordinary course or as a result of system upgrades;*
- *failure to maintain adequate internal controls;*
- *complications with the design or implementation of the new enterprise resource system;*
- *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;*
- *the costs and consequences of legal proceedings;*
- *inability to protect our brand name, trademarks and other intellectual property rights;*
- *the impact of product and food safety claims and effects of legislation;*
- *inability to obtain additional financing, if needed;*
- *restrictions imposed by our indebtedness on our current and future operations; and*
- *inability to successfully implement our expansion into online retail.*

Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this Quarterly Report on Form 10-Q are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.

### Overview

Five Below 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 July 30, 2016, we operated 491 stores in 30 states.

In August 2016, we commenced selling merchandise on the internet, through our fivebelow.com e-commerce website. We launched our e-commerce operation as an additional channel to service our customers and increase sales. All e-commerce sales, which includes shipping and handling revenue, will be included in net sales and will be included in comparable store sales beginning with the third fiscal quarter of 2016. Our e-commerce expenses will have components classified as both cost of goods sold and selling, general and administrative expenses.

### How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales, comparable 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.

There may be variations in the way in which some of our competitors and other retailers calculate comparable or “same store” sales. As a result, data in this Quarterly Report on Form 10-Q regarding our comparable 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 (or not receiving deliveries) 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, including our merchandising and product development team and our planning and allocation group. These costs are significant and can be expected to continue to increase as our company grows.

The components of our cost of goods sold may not be comparable to the components of cost of goods sold or similar measures of our competitors and other retailers. As a result, data in this Quarterly Report on Form 10-Q regarding our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers.

The variable component of our cost of goods sold is higher in higher volume quarters because the variable component of our cost of goods sold generally increases as net sales increase. We regularly analyze the components of gross profit as well as gross margin. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns, and a significant increase in inventory shrinkage or inability to generate sufficient sales leverage on the store occupancy, distribution and buying components of 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. In addition, any increase in future share-based grants or modifications will increase our share-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.

### Results of Consolidated Operations

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

*(in millions, except percentages and total stores)*

| July 30, 2016 Consolidated Statements of Operations Data (1): | Thirteen Weeks Ended | August 1, 2015 | Twenty-Six Weeks Ended July 30, 2016 | August 1, 2015 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $220.1 | $182.2 | $412.8 | $335.9 |
| Cost of goods sold | 146.8 | 122.4 | 279.2 | 228.9 |
| Gross profit | 73.4 | 59.8 | 133.6 | 107.0 |
| Selling, general and administrative expenses | 57.6 | 48.3 | 107.2 | 88.4 |
| Operating income | 15.7 | 11.6 | 26.5 | 18.6 |
| Interest income (expense), net | 0.1 | — | 0.1 | — |
| Income before income taxes | 15.8 | 11.2 | 26.6 | 18.2 |
| Income tax expense | 5.9 | 4.2 | 10.0 | 6.9 |
| Net income | $9.8 | $7.1 | $16.6 | $11.3 |
| **Percentage of Net Sales (1):** |  |  |  |  |
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Cost of goods sold | 66.7% | 67.2% | 67.6% | 68.2% |
| Gross profit | 33.3% | 32.8% | 32.4% | 31.8% |
| Selling, general and administrative expenses | 26.2% | 26.5% | 26.0% | 26.3% |
| Operating income | 7.1% | 6.3% | 6.4% | 5.5% |
| Interest income (expense), net | —% | —% | —% | —% |
| Income before income taxes | 7.2% | 6.2% | 6.4% | 5.4% |
| Income tax expense | 2.7% | 2.3% | 2.4% | 2.1% |
| Net income | 4.5% | 3.9% | 4.0% | 3.4% |
| **Operational Data:** |  |  |  |  |
| Total stores at end of period | 491 | 417 | 491 | 417 |
| Comparable stores sales growth | 3.1% | 3.0% | 3.9% | 2.4% |
| 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 thirteen and twenty-six weeks ended periods.

### Thirteen Weeks Ended July 30, 2016 Compared to the Thirteen Weeks Ended August 1, 2015

### Net Sales

Net sales increased to $220.1 million in the thirteen weeks ended July 30, 2016 from $182.2 million in the thirteen weeks ended August 1, 2015, an increase of $37.9 million, or 20.8%. The increase was the result of a non-comparable store sales increase of $32.9 million and a comparable store sales increase of $5.0 million. The increase in non-comparable store sales was primarily driven by new stores that opened in fiscal 2016 and the number of stores that opened in fiscal 2015 but have not been open for 15 full months. We plan to open approximately 85 new stores in fiscal 2016.

Comparable store sales increased 3.1% for the thirteen weeks ended July 30, 2016 compared to the thirteen weeks ended August 1, 2015. This increase resulted from an increase of approximately 3.9% in the average dollar value of transactions partially offset by a decrease of approximately 0.8% in the number of transactions in our stores.

### Cost of Goods Sold and Gross Profit

Cost of goods sold increased to $146.8 million in the thirteen weeks ended July 30, 2016 from $122.4 million in the thirteen weeks ended August 1, 2015, an increase of $24.4 million, or 20.0%. The increase in cost of goods sold was primarily the result of an increase in the merchandise costs of goods resulting from the increase in net sales. Also contributing to the increase in cost of goods sold were an increase in store occupancy costs resulting from new store openings and an increase in distribution costs, primarily due to the increase in net sales.

Gross profit increased to $73.4 million in the thirteen weeks ended July 30, 2016 from $59.8 million in the thirteen weeks ended August 1, 2015, an increase of $13.5 million, or 22.6%. Gross margin increased to 33.3% for the thirteen weeks ended July 30, 2016 from 32.8% in the thirteen weeks ended August 1, 2015, an increase of approximately 50 basis points. The increase in gross margin was primarily the result of a decrease as a percentage of sales in distribution costs.

### Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $57.6 million in the thirteen weeks ended July 30, 2016 from $48.3 million in the thirteen weeks ended August 1, 2015, an increase of $9.4 million, or 19.4%. As a percentage of net sales, selling, general and administrative expenses decreased approximately 30 basis points to 26.2% in the thirteen weeks ended July 30, 2016 compared to 26.5% in the thirteen weeks ended August 1, 2015. The increase in selling, general and administrative expense was primarily the result of increases of $6.7 million in store-related expenses to support new store growth and $2.7 million of corporate-related expenses, which includes share-based compensation expense.

### Income Tax Expense

Income tax expense increased to $5.9 million in the thirteen weeks ended July 30, 2016 from $4.2 million in the thirteen weeks ended August 1, 2015, an increase of $1.8 million, or 42.5%. The increase in income tax expense was primarily the result of a $4.6 million increase in pre-tax income. Our effective tax rate for the thirteen weeks ended July 30, 2016 was 37.6% compared to 37.1% in the thirteen weeks ended August 1, 2015. Our effective tax rate for the thirteen weeks ended July 30, 2016 was higher than the comparable period as a result of a change in our average state tax rate.

### Net Income

As a result of the foregoing, net income increased to $9.8 million in the thirteen weeks ended July 30, 2016 from $7.1 million in the thirteen weeks ended August 1, 2015, an increase of $2.8 million or 40.0%.

### Twenty-Six Weeks Ended July 30, 2016 Compared to the Twenty-Six Weeks Ended August 1, 2015

### Net Sales

Net sales increased to $412.8 million in the twenty-six weeks ended July 30, 2016 from $335.9 million in the twenty-six weeks ended August 1, 2015, an increase of $76.9 million, or 22.9%. The increase was the result of a non-comparable store sales increase of $64.6 million and a comparable store sales increase of $12.3 million. The increase in non-comparable store sales was primarily driven by the number of stores that opened in fiscal 2015 but have not been open for 15 full months and new stores that opened in fiscal 2016. We plan to open approximately 85 new stores in fiscal 2016.

Comparable store sales increased 3.9% for the twenty-six weeks ended July 30, 2016 compared to the twenty-six weeks ended August 1, 2015. This increase resulted from an increase of approximately 3.6% in the average dollar value of transactions and an increase of approximately 0.3% in the number of transactions in our stores.

### Cost of Goods Sold and Gross Profit

Cost of goods sold increased to $279.2 million in the twenty-six weeks ended July 30, 2016 from $228.9 million in the thirteen weeks ended August 1, 2015, an increase of $50.3 million, or 22.0%. The increase in cost of goods sold was primarily the result of an increase in the merchandise costs of goods resulting from the increase in net sales. Also contributing to the increase in cost of goods sold were an increase in store occupancy costs resulting from new store openings and an increase in distribution costs, primarily due to the increase in net sales.

Gross profit increased to $133.6 million in the twenty-six weeks ended July 30, 2016 from $107.0 million in the twenty-six weeks ended August 1, 2015, an increase of $26.6 million, or 24.9%. Gross margin increased to 32.4% for the twenty-six weeks ended July 30, 2016 from 31.8% in the twenty-six weeks ended August 1, 2015, an increase of approximately 50 basis points. The increase in gross margin was primarily the result of decreases as a percentage of sales in merchandise costs of goods sold and buying expense.

### Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $107.2 million in the twenty-six weeks ended July 30, 2016 from $88.4 million in the twenty-six weeks ended August 1, 2015, an increase of $18.7 million, or 21.2%. As a percentage of net sales, selling, general and administrative expenses decreased approximately 40 basis points to 26.0% in the twenty-six weeks ended July 30, 2016 compared to 26.3% in the twenty-six weeks ended August 1, 2015. The increase in selling, general and administrative expense was primarily the result of increases of $13.3 million in store-related expenses to support new store growth and $5.4 million of corporate-related expenses, which includes share-based compensation expense.

### Income Tax Expense

Income tax expense increased to $10.0 million in the twenty-six weeks ended July 30, 2016 from $6.9 million in the twenty-six weeks ended August 1, 2015, an increase of $3.1 million, or 45.0%. The increase in income tax expense was primarily the result of an $8.4 million increase in pre-tax income. Our effective tax rate for the twenty-six weeks ended July 30, 2016 was 37.6% compared to 37.8% in the twenty-six weeks ended August 1, 2015. Our effective tax rate for the twenty-six weeks ended July 30, 2016 was lower than the comparable period as a result of a change in our average state tax rate.

### Net Income

As a result of the foregoing, net income increased to $16.6 million in the twenty-six weeks ended July 30, 2016 from $11.3 million in the twenty-six weeks ended August 1, 2015, an increase of 5.3 million or 46.4%.

### Liquidity and Capital Resources

### Overview

Our primary sources of liquidity are cash flows from operations and borrowings under our Revolving Credit Facility (defined in “-*Line of Credit”*). Our primary cash needs are for capital expenditures and working capital.

Capital expenditures typically vary depending on the timing of new store openings and infrastructure-related investments. We plan to make capital expenditures of approximately $40 million in fiscal 2016, which we expect to fund from cash generated from operations. We expect to devote approximately $25 million of our capital expenditure budget in fiscal 2016 to construct and open 85 new stores, with the remainder projected to be spent on store relocations and remodels, our distribution centers, and our corporate infrastructure.

Our primary working capital requirements are for the purchase of store inventory and payment of payroll, rent, other store operating costs and distribution costs. Our working capital requirements fluctuate during the year, rising in the third and fourth fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak, year-end holiday shopping season in the fourth fiscal quarter. Fluctuations in working capital are also driven by the timing of new store openings.

Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with cash on hand, net cash provided by operating activities and borrowings under our Revolving Credit Facility. 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. We did not have any direct borrowings under our Revolving Credit Facility during the twenty-six weeks ended July 30, 2016.

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):

| July 30, 2016 | Twenty-six weeks ended | August 1, 2015 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $16.4 | $26.3 |
| Net cash used in investing activities | (5.0) | (29.9) |
| Net cash provided by financing activities | 2.6 | 1.4 |
| Net increase (decrease) during period in cash and cash equivalents (1) | $14.0 | $(2.3) |

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

### Cash Provided by Operating Activities

Net cash provided by operating activities for the twenty-six weeks ended July 30, 2016 was $16.4 million, a decrease of $9.9 million compared to the twenty-six weeks ended August 1, 2015. The decrease was primarily due to changes in overall working capital partially offset by an increase in operating cash flows from store performance and decrease in income taxes paid.

### Cash Used in Investing Activities

Net cash used in investing activities for the twenty-six weeks ended July 30, 2016 was $5.0 million, a decrease of $24.9 million compared to the twenty-six weeks ended August 1, 2015. The decrease was primarily due to a decrease in net investment securities and a decrease in capital expenditures. The decrease in capital expenditures was primarily due to cash outflows related to our new distribution center in Pedricktown, New Jersey during the twenty-six weeks ended August 1, 2015.

### Cash Provided by Financing Activities

Net cash provided by financing activities for the twenty-six weeks ended July 30, 2016 was $2.6 million, an increase of $1.2 million compared to the twenty-six weeks ended August 1, 2015. The increase was primarily the result of increases in the proceeds from the exercise of options and excess tax benefits related to exercises of stock options and the vesting of restricted stock units offset by an increase in common shares withheld for taxes.

### Line of Credit

The Company has a Revolving Credit Facility that 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 or (ii) 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 approximately $12.0 thousand 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’s covenants, bankruptcy, default on certain other indebtedness or a change in control.

As of July 30, 2016, we had no borrowings under the Revolving Credit Facility and had approximately $20.0 million available on the line of credit.

All obligations under the Revolving Credit Facility are secured by substantially all of our assets and are guaranteed by the Company's subsidiary. As of July 30, 2016 and August 1, 2015, 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 July 30, 2016.

### Contractual Obligations

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

From January 30, 2016 to July 30, 2016, we have entered into 51 new fully executed retail leases with an average term of 10 years and other lease modifications that have future minimum lease payments of approximately $99.3 million.

### Off-Balance Sheet Arrangements

For the quarterly period ended July 30, 2016, 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 November 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes." ASU 2015-17 simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The updated guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. We elected to early adopt this guidance effective in the fourth quarter of fiscal 2015, and we retrospectively applied the change within our consolidated balance sheets.

In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact of the updated guidance on our consolidated financial statements and disclosures.

In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting." ASU No. 2016-09 affects all entities that issue share-based payment awards to their employees. This accounting standards update makes several modifications to the accounting for employee share-based payment transactions, including the requirement that the excess income tax benefits or deficiencies that arise when the tax consequences of share-based compensation differ from amounts previously recognized in the statement of income be recognized as income tax benefit or expense in the statement of income rather than as additional paid-in capital in the balance sheet. The guidance also clarifies the classification of components of share-based awards on the statement of cash flows such that excess income tax benefits should not be presented separately from other income taxes in the statement of cash flows and, thus, should be classified as an operating activity rather than a financing activity as they are under the current guidance. ASU No. 2016-09 is effective for financial statements issued for annual reporting periods beginning after December 15, 2016 and interim periods within those years. Earlier application is permitted. We are currently evaluating the impact of the updated guidance on our consolidated financial statements and disclosures.

## Market risk

As filed, 2,796 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 short-term investment securities that are interest-bearing securities and if there are changes in interest rates, those changes would affect the interest income we earn on these investments and, therefore, impact our cash flows and results of operations. However, due to the short term nature of our investment portfolio, we do not believe an immediate 100 basis point increase or decrease in interest rates would have a material effect on the fair market value of our portfolio, and accordingly we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.

We also have a Revolving Credit Facility which includes a revolving line of credit with advances tied to a borrowing base, which bears interest at a variable rate. Because our Revolving Credit Facility bears interest at a variable rate, we will be exposed to market risks relating to changes in interest rates.

As of July 30, 2016, we had no borrowings outstanding under the Revolving Credit Facility. The Revolving Credit Facility provides for interest on borrowings, at the Company's 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%. 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, 1,896 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) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q pursuant to Rule 13a-15(b) of the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q are effective at a reasonable assurance level in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent or detect all errors and all fraud. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

### Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting during the thirteen weeks ended July 30, 2016 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 3,736 characters.

The following risk factor represents updates and addition to the risk factors previously disclosed in Part I, Item 1A "Risk Factors,” in our Annual Report. You should carefully consider the risks described below and in our Annual Report, which could materially affect our business, financial condition or future results. The risks described below and in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.

***We may not be successful in implementing our expansion into online retail and if we are successful, we will face new risks and challenges, which could adversely affect our results of operations.***

In August 2016, we commenced selling merchandise on the internet, through our fivebelow.com e-commerce website. Our ability to successfully execute our e-commerce strategy may suffer if we are unable to establish an effective online presence and sell our products in a cost-efficient manner while maintaining our $5 and below price point. Because we are in the process of developing our online sales platform, we may not be able to compete as effectively with seasoned online retailers who have a known online presence, well established e-commerce distribution networks and online sales platforms, and more resources than we do. In addition, if we are successful, we will encounter risks and difficulties frequently experienced by internet-based businesses, including risks related to our ability to attract and retain customers on a cost-effective basis and our ability to operate, support, expand and develop our internet operations, website and software and other related operational systems. Although we believe that our participation in both e-commerce and physical store sales will be a distinct advantage for us due to synergies, the potential for new customers and increased brand-recognition nationwide in markets where we do not yet have stores, supporting product offerings through both of these channels could create issues that have the potential to adversely affect our results of operations. For example, if our e-commerce business successfully grows, it may do so in part by attracting existing customers, rather than new customers, who choose to purchase products from us online rather than from our physical stores, thereby reducing the financial performance of our stores. In addition, selling products through the internet exposes us to the potential for fraud associated with “card-not-present” credit card transactions that does not exist for physical store sales. Criminals are using increasingly sophisticated methods to engage in illegal activities such as unauthorized use of credit or debit cards and bank account information. Requirements relating to consumer authentication and fraud detection are more complex for online sales than for physical store sales. We may be denied the revenues associated with orders resulting from the unauthorized use of a cardholder’s card number in an illegal activity even if the associated financial institution approved payment of the orders. As we develop our e-commerce business, the impact of attracting existing rather than new customers, of the increased costs associated with the technology infrastructure and distribution networks, and of opening up our channels to increased internet competition could have a material adverse impact on our business, financial condition, profitability and cash flows, including future growth.

Filed Sep 1, 2016.
Source: SEC EDGAR, the filing index for accession 0001628280-16-019365. Last ingested by Listed: Nov 4, 2026, 20:13 ET. No prices; not investment advice.