Company Quick10K Filing
Quick10K
Five Below
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$125.71 56 $7,035
10-Q 2019-08-03 Quarter: 2019-08-03
10-Q 2019-05-04 Quarter: 2019-05-04
10-K 2019-02-02 Annual: 2019-02-02
10-Q 2018-11-03 Quarter: 2018-11-03
10-Q 2018-08-04 Quarter: 2018-08-04
10-Q 2018-05-05 Quarter: 2018-05-05
10-K 2018-02-03 Annual: 2018-02-03
10-Q 2017-10-28 Quarter: 2017-10-28
10-Q 2017-07-29 Quarter: 2017-07-29
10-Q 2017-04-29 Quarter: 2017-04-29
10-K 2017-01-28 Annual: 2017-01-28
10-Q 2016-10-29 Quarter: 2016-10-29
10-Q 2016-07-30 Quarter: 2016-07-30
10-Q 2016-04-30 Quarter: 2016-04-30
10-K 2016-01-30 Annual: 2016-01-30
10-Q 2015-10-31 Quarter: 2015-10-31
10-Q 2015-08-01 Quarter: 2015-08-01
10-Q 2015-05-02 Quarter: 2015-05-02
10-K 2015-01-31 Annual: 2015-01-31
10-Q 2014-11-01 Quarter: 2014-11-01
10-Q 2014-08-02 Quarter: 2014-08-02
10-Q 2014-05-03 Quarter: 2014-05-03
10-K 2014-02-01 Annual: 2014-02-01
8-K 2019-11-11 Officers
8-K 2019-08-28 Earnings, Exhibits
8-K 2019-06-18 Shareholder Vote
8-K 2019-06-05 Earnings, Exhibits
8-K 2019-03-27 Earnings, Exhibits
8-K 2019-01-15 Regulation FD, Exhibits
8-K 2018-12-06 Earnings, Exhibits
8-K 2018-11-27 Code of Ethics
8-K 2018-10-02 Officers, Amend Bylaw, Code of Ethics, Exhibits
8-K 2018-09-06 Earnings, Exhibits
8-K 2018-06-19 Shareholder Vote
8-K 2018-06-06 Earnings, Exhibits
8-K 2018-03-21 Earnings, Officers, Other Events, Exhibits
8-K 2018-03-05 Officers, Other Events, Exhibits
8-K 2018-01-08 Regulation FD, Exhibits
COST Costco Wholesale 129,514
DG Dollar General 35,842
M Macy's 4,543
BJ BJ's 3,655
OLLI Ollie's Bargain Outlet 3,578
DDS Dillard's 1,618
BIG Big Lots 859
JCP JC Penney 231
TUES Tuesday Morning 64
FRED Freds 10
FIVE 2019-08-03
Part I - Financial Information
Item 1. Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.30 form10qq22019fiveex1030.htm
EX-31.1 form10qq22019fiveex311.htm
EX-31.2 form10qq22019fiveex312.htm
EX-32.1 form10qq22019fiveex321.htm
EX-32.2 form10qq22019fiveex322.htm

Five Below Earnings 2019-08-03

FIVE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
Form 10-Q
 
(mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 2019.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             
Commission file number: 001-35600
 
Five Below, Inc.
(Exact name of Registrant as Specified in its Charter)
 
Pennsylvania
 
75-3000378
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
701 Market Street
 
 
Suite 300
 
 
Philadelphia
 
 
Pennsylvania
 
19106
(Address of Principal Executive Offices)
 
(Zip Code)
(215) 546-7909
(Registrant’s Telephone Number, Including Area Code)
 

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock
FIVE
NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
Emerging growth company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of August 28, 2019 was 55,667,271.




INDEX
 
 
 
Page
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
  





3


PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

FIVE BELOW, INC.
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and per share data) 
 
August 3, 2019
 
February 2, 2019
 
August 4, 2018
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
178,800

 
$
251,748

 
$
133,256

Short-term investment securities
90,325

 
85,412

 
131,441

Inventories
272,689

 
243,636

 
228,109

Prepaid income taxes
10,853

 
1,337

 
7,358

Prepaid expenses and other current assets
52,436

 
60,124

 
50,210

Total current assets
605,103

 
642,257

 
550,374

Property and equipment, net of accumulated depreciation and amortization of $187,070, $168,588, and $147,031, respectively.
337,193

 
301,297

 
214,923

Operating lease assets
709,325

 

 

Deferred income taxes
2,924

 
6,126

 
3,949

Long-term investment securities
1,043

 

 
1,404

Other assets
3,830

 
2,584

 
1,687


$
1,659,418

 
$
952,264

 
$
772,337


 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Line of credit
$

 
$

 
$

Accounts payable
108,667

 
103,692

 
103,891

Income taxes payable
593

 
20,626

 
407

Accrued salaries and wages
14,218

 
24,586

 
13,509

Other accrued expenses
83,876

 
104,201

 
66,933

Operating lease liabilities
98,507

 

 

Total current liabilities
305,861

 
253,105

 
184,740

Deferred rent and other

 
84,065

 
79,639

Long-term operating lease liabilities
701,621

 

 

Total liabilities
1,007,482

 
337,170

 
264,379

Commitments and contingencies (note 6)


 


 


Shareholders’ equity:
 
 
 
 
 
Common stock, $0.01 par value. Authorized 120,000,000 shares; issued and outstanding 55,851,643, 55,759,048, and 55,723,267 shares, respectively.
558

 
557

 
557

Additional paid-in capital
335,050

 
352,702

 
348,344

Retained earnings
316,328

 
261,835

 
159,057

Total shareholders’ equity
651,936

 
615,094

 
507,958

 
$
1,659,418

 
$
952,264

 
$
772,337

See accompanying notes to consolidated financial statements.

4


FIVE BELOW, INC.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except share and per share data) 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
August 3, 2019
 
August 4, 2018
 
August 3, 2019
 
August 4, 2018
Net sales
$
417,400

 
$
347,734

 
$
782,162

 
$
644,056

Cost of goods sold
271,229

 
225,982

 
516,006

 
425,066

Gross profit
146,171

 
121,752

 
266,156

 
218,990

Selling, general and administrative expenses
110,142

 
91,330

 
205,658

 
163,862

Operating income
36,029

 
30,422

 
60,498

 
55,128

Interest income, net
1,512

 
983

 
3,199

 
2,062

Income before income taxes
37,541

 
31,405

 
63,697

 
57,190

Income tax expense
8,710

 
6,342

 
9,204

 
10,323

Net income
$
28,831

 
$
25,063

 
$
54,493

 
$
46,867

Basic income per common share
$
0.52

 
$
0.45

 
$
0.97

 
$
0.84

Diluted income per common share
$
0.51

 
$
0.45

 
$
0.97

 
$
0.84

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic shares
55,950,733

 
55,730,621

 
55,930,313

 
55,671,729

Diluted shares
56,294,109

 
56,191,984

 
56,286,632

 
56,110,361

See accompanying notes to consolidated financial statements.


5


FIVE BELOW, INC.
Consolidated Statements of Shareholders’ Equity
(Unaudited)
(in thousands, except share data)
 

 
Common stock
 
Additional
paid-in capital
 
Retained earnings
 
Total
shareholders’ equity
 
 
Shares
 
Amount
 
 
Balance, February 2, 2019
 
55,759,048

 
$
557

 
$
352,702

 
$
261,835

 
$
615,094

 
Share-based compensation expense
 

 

 
2,822

 

 
2,822

 
Issuance of unrestricted stock awards
 
307

 

 
45

 

 
45

 
Exercise of options to purchase common stock
 
72,365

 
1

 
2,246

 

 
2,247

 
Vesting of restricted stock units and performance-based restricted stock units
 
203,429

 
2

 

 

 
2

 
Common shares withheld for taxes
 
(79,256
)
 
(1
)
 
(9,872
)
 

 
(9,873
)
 
Net income
 

 

 

 
25,662

 
25,662

 
Balance, May 4, 2019
 
55,955,893

 
$
559

 
$
347,943

 
$
287,497

 
$
635,999

 
Share-based compensation expense
 

 

 
3,055

 

 
3,055

 
Issuance of unrestricted stock awards
 
411

 

 
45

 

 
45

 
Exercise of options to purchase common stock
 
24,688

 

 
685

 

 
685

 
Vesting of restricted stock units and performance-based restricted stock units
 
17,099

 

 

 

 

 
Common shares withheld for taxes
 
(2,110
)
 

 
(275
)
 

 
(275
)
 
Repurchase and retirement of common stock
 
(146,185
)
 
(1
)
 
(16,598
)
 

 
(16,599
)
 
Issuance of common stock to employees under employee stock purchase plan
 
1,847

 

 
195

 

 
195

 
Net income
 

 

 

 
28,831

 
28,831

 
Balance, August 3, 2019
 
55,851,643

 
$
558

 
$
335,050

 
$
316,328

 
$
651,936


See accompanying notes to consolidated financial statements.







6



FIVE BELOW, INC.
Consolidated Statements of Shareholders’ Equity
(Unaudited)
(in thousands, except share data)
 
 
 
Common stock
 
Additional
paid-in capital
 
Retained earnings
 
Total
shareholders’ equity
 
 
Shares
 
Amount
 
 
Balance, February 3, 2018
 
55,438,089

 
$
554

 
$
346,300

 
$
111,704

 
$
458,558

 
Cumulative effect of ASC 606 adoption
 

 

 

 
486

 
486

 
Share-based compensation expense
 

 

 
2,692

 

 
2,692

 
Issuance of unrestricted stock awards
 
876

 

 
62

 

 
62

 
Exercise of options to purchase common stock
 
39,237

 

 
1,222

 

 
1,222

 
Vesting of restricted stock units and performance-based restricted stock units
 
243,745

 
2

 

 

 
2

 
Common shares withheld for taxes
 
(101,928
)
 
(1
)
 
(6,907
)
 

 
(6,908
)
 
Net income
 

 

 

 
21,804

 
21,804

 
Balance, May 5, 2018
 
55,620,019

 
$
555

 
$
343,369

 
$
133,994

 
$
477,918

 
Share-based compensation expense
 

 

 
3,360

 

 
3,360

 
Issuance of unrestricted stock awards
 
449

 

 
28

 

 
28

 
Exercise of options to purchase common stock
 
70,030

 
1

 
2,141

 

 
2,142

 
Vesting of restricted stock units and performance-based restricted stock units
 
39,359

 
1

 

 

 
1

 
Common shares withheld for taxes
 
(8,223
)
 

 
(722
)
 

 
(722
)
 
Issuance of common stock to employees under employee stock purchase plan
 
1,633

 

 
168

 

 
168

 
Net income
 

 

 

 
25,063

 
25,063

 
Balance, August 4, 2018
 
55,723,267

 
$
557

 
$
348,344

 
$
159,057

 
$
507,958


See accompanying notes to consolidated financial statements.


7


FIVE BELOW, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
 
Twenty-Six Weeks Ended
August 3, 2019
 
August 4, 2018
Operating activities:
 
 
 
Net income
$
54,493

 
$
46,867

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
25,459

 
19,367

Share-based compensation expense
5,986

 
6,157

Deferred income tax expense
3,202

 
2,727

Other non-cash expenses
(58
)
 
43

Changes in operating assets and liabilities:

 

Inventories
(29,053
)
 
(41,072
)
Prepaid income taxes
(9,516
)
 
(5,094
)
Prepaid expenses and other assets
6,442

 
(4,844
)
Accounts payable
6,502

 
35,424

Income taxes payable
(20,033
)
 
(24,868
)
Accrued salaries and wages
(10,368
)
 
(9,397
)
Deferred rent
(92,382
)
 
7,013

Operating leases
90,803

 

Other accrued expenses
15,567

 
12,066

Net cash provided by operating activities
47,044

 
44,389

Investing activities:
 
 


Purchases of investment securities
(95,753
)
 
(59,569
)
Sales, maturities, and redemptions of investment securities
89,797

 
86,384

Capital expenditures
(100,139
)
 
(46,522
)
Net cash used in investing activities
(106,095
)
 
(19,707
)
Financing activities:
 
 

Net proceeds from issuance of common stock
195

 
168

Repurchase and retirement of common stock
(6,878
)
 

Proceeds from exercise of options to purchase common stock and vesting of restricted and performance-based restricted stock units
2,934

 
3,367

Common shares withheld for taxes
(10,148
)
 
(7,630
)
Net cash used in financing activities
(13,897
)
 
(4,095
)
Net (decrease) increase in cash and cash equivalents
(72,948
)
 
20,587

Cash and cash equivalents at beginning of period
251,748

 
112,669

Cash and cash equivalents at end of period
$
178,800

 
$
133,256

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Non-cash investing activities
 
 
 
(Decrease) increase in accrued purchases of property and equipment
$
(38,842
)
 
$
6,056

See accompanying notes to consolidated financial statements.

8

FIVE BELOW, INC.
Notes to Consolidated Financial Statements
(Unaudited)


(1)
Summary of Significant Accounting Policies
(a)
Description of Business
Five Below, Inc. (collectively referred to herein with its wholly owned subsidiary as the "Company") is a specialty value retailer offering merchandise targeted at the tween and teen demographic. The Company offers an edited assortment of products priced at $5 and below.
The Company’s edited assortment of products includes select brands and licensed merchandise. The Company believes its merchandise is readily available, and that there are a number of potential vendors that could be utilized, if necessary, under approximately the same terms the Company is currently receiving; thus, it is not dependent on a single vendor or a group of vendors.
The Company is incorporated in the Commonwealth of Pennsylvania and, as of August 3, 2019, operated in 36 states that include Pennsylvania, New Jersey, Delaware, Maryland, Virginia, Massachusetts, New Hampshire, West Virginia, North Carolina, New York, Connecticut, Rhode Island, Ohio, Illinois, Indiana, Michigan, Missouri, Georgia, Texas, Tennessee, Maine, Alabama, Kentucky, Kansas, Florida, South Carolina, Mississippi, Louisiana, Wisconsin, Oklahoma, Minnesota, California, Arkansas, Iowa, Nebraska, and Arizona. As of August 3, 2019 and August 4, 2018, the Company operated 833 stores and 692 stores, respectively, each operating under the name “Five Below”, and sells merchandise on the internet, through the Company's fivebelow.com e-commerce website.
(b)
Fiscal Year
The Company operates on a 52/53-week fiscal year ending on the Saturday closest to January 31. References to "fiscal year 2019" or "fiscal 2019" refer to the period from February 3, 2019 to February 1, 2020, which is a 52-week fiscal year. References to "fiscal year 2018" or "fiscal 2018" refer to the period from February 4, 2018 to February 2, 2019, which is a 52-week fiscal year. The fiscal quarters ended August 3, 2019 and August 4, 2018 refer to the thirteen weeks ended as of those dates. The year-to-date periods ended August 3, 2019 and August 4, 2018 refer to the twenty-six weeks ended as of those dates.
(c) Basis of Presentation
The consolidated balance sheets as of August 3, 2019 and August 4, 2018, the consolidated statements of operations for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018, the consolidated statements of shareholders’ equity for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018 and the consolidated statements of cash flows for the twenty-six weeks ended August 3, 2019 and August 4, 2018 have been prepared by the Company in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim reporting and are unaudited. In the opinion of management, the aforementioned financial statements include all known adjustments (which consist primarily of normal, recurring accruals, estimates and assumptions that impact the financial statements) necessary to present fairly the financial position at the balance sheet dates and the results of operations and cash flows for the periods ended August 3, 2019 and August 4, 2018. The balance sheet as of February 2, 2019, presented herein, has been derived from the audited balance sheet included in the Company's Annual Report on Form 10-K for fiscal 2018 as filed with the Securities and Exchange Commission on March 28, 2019 and referred to herein as the “Annual Report,” but does not include all annual disclosures required by U.S. GAAP. These consolidated financial statements should be read in conjunction with the financial statements for the fiscal year ended February 2, 2019 and footnotes thereto included in the Annual Report. The consolidated results of operations for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018 are not necessarily indicative of the consolidated operating results for the year ending February 1, 2020 or any other period. The Company's business is seasonal and as a result, the Company's net sales fluctuate from quarter to quarter. Net sales are usually highest in the fourth fiscal quarter due to the year-end holiday season.
(d) Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 clarifies the principles for recognizing revenue from contracts with customers and outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. On February 4, 2018, the Company adopted the pronouncement using the modified retrospective method by recognizing the cumulative effect of gift card breakage as an adjustment to retained earnings resulting in a $0.5 million increase to retained earnings.

9


In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than 12 months. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. On February 3, 2019, the Company adopted this pronouncement on a modified retrospective basis and applied the new standard to all leases. As a result, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which includes, among other things, the ability to carry forward the existing lease classification. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. At adoption, the new standard had a material impact on the Company's balance sheets resulting in an increase in net assets and liabilities of approximately $618 million, as the Company has a significant number of leases for its stores. Although the standard impacts the treatment of certain initial direct leases costs that were previously capitalizable, it did not materially impact the Company's consolidated statements of operations and had no impact on the Company's cash flows.
The following is a discussion of the Company’s lease policy under the new lease accounting standard:
The Company determines if an arrangement contains a lease at the inception of a contract. Operating lease assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease assets and operating lease liabilities are recognized at the commencement date based on the present value of the remaining future minimum lease payments. As the interest rate implicit in the Company’s leases is not readily determinable, the Company discounts the lease liability utilizing its estimated incremental borrowing rate, on a collateralized basis over a similar term, that the Company would have incurred to borrow the funds necessary to purchase the leased asset. The operating lease assets also include lease payments made before commencement and exclude lease incentives.
The Company’s real estate leases typically contain options that permit renewals for additional periods of up to five years each. For real estate leases, except for renewals that generally take the lease to a ten-year term, the options to renew are not considered reasonably certain at lease commencement because the Company reevaluates each lease on a regular basis to consider the economic and strategic incentives of exercising the renewal options, and regularly opens, relocates or closes stores to align with its operating strategy. Generally, except for renewals that generally take the lease to a ten-year term, the renewal option periods are not included within the lease term and the associated payments are not included in the measurement of the operating lease asset and operating lease liability as the exercise of such options is not reasonably certain. Similarly, renewal options are not included in the lease term for non-real estate leases because they are not considered reasonably certain of being exercised at lease commencement. Leases with an initial term of 12 months or less are not recorded on the balance sheets and lease expense is recognized on a straight-line basis over the term of the short-term lease.
For certain real estate leases, the Company accounts for lease components and nonlease components as a single lease component. Certain real estate leases require additional payments based on sales volume, as well as reimbursement for real estate taxes, common area maintenance and insurance, which are expensed as incurred as variable lease costs. Other real estate leases contain one fixed lease payment that includes real estate taxes, common area maintenance and insurance. These fixed payments are considered part of the lease payment and included in the operating lease assets and operating lease liabilities.
See Note 3 ‘‘Leases’’ for additional information.

10


Impact of New Lease Standard on Balance Sheet Line Items
As a result of applying the new lease standard using the modified retrospective method, the following adjustments were made to accounts on the consolidated balance sheet as of February 3, 2019 (in thousands):
 
Impact of ASC 842 Adoption
 
As Reported February 2, 2019
 
Adjustments
 
Adjusted February 3, 2019
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Prepaid expenses and other current assets
60,124

 
(11,077
)
 
49,047

Total current assets
642,257

 
(11,077
)
 
631,180

Operating lease assets

 
628,924

 
628,924

 
$
952,264

 
$
617,847

 
$
1,570,111

 
 
 
 
 

Liabilities and Shareholders’ Equity
 
 
 
 

Current liabilities:
 
 
 
 

Other accrued expenses
104,201

 
(8,033
)
 
96,168

Total current liabilities
253,105

 
(8,033
)
 
245,072

Deferred rent and other
84,065

 
(84,065
)
 

Long-term operating lease liabilities

 
709,945

 
709,945

Total liabilities
337,170

 
617,847

 
955,017

Shareholders’ equity:
 
 
 
 

Total shareholders’ equity
615,094

 

 
615,094

 
$
952,264

 
$
617,847

 
$
1,570,111


In August 2018, the FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." ASU 2018-15 requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the noncancelable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. The effective date of this pronouncement is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. The standard can be adopted either using the prospective or retrospective transition approach. During the thirteen weeks ended November 3, 2018, the Company adopted the pronouncement using the prospective transition method and it did not have a significant impact to the Company's financial statements.
(e) Use of Estimates
The preparation of the consolidated financial statements requires management of the Company to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, valuation allowances for inventories, income taxes, share-based compensation expense and the incremental borrowing rate utilized in operating lease liabilities.
(f) Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation at the measurement date:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Inputs, other than Level 1, that are either directly or indirectly observable.
Level 3: Unobservable inputs developed using the Company’s estimates and assumptions which reflect those that market participants would use.

11


The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement.
The Company’s financial instruments consist primarily of cash equivalents, short-term and long-term investment securities, accounts payable, and borrowings, if any, under a line of credit. The Company believes that: (1) the carrying value of cash equivalents and accounts payable are representative of their respective fair value due to the short-term nature of these instruments; and (2) the carrying value of the borrowings, if any, under the line of credit approximates fair value because the line of credit’s interest rates vary with market interest rates. Under the fair value hierarchy, the fair market values of the short-term and long-term investments in corporate bonds are level 1 while the short-term and long-term investments in municipal bonds are level 2. The fair market values of level 2 instruments are determined by management with the assistance of a third party pricing service. Since quoted prices in active markets for identical assets are not available, these prices are determined by the third party pricing service using observable market information such as quotes from less active markets and quoted prices of similar securities.
As of August 3, 2019, February 2, 2019, and August 4, 2018, the Company had cash equivalents of $167.9 million, $215.7 million and $63.9 million, respectively. The Company’s cash equivalents consist of credit and debit card receivables, money market funds, and corporate bonds with original maturities of 90 days or less. Fair value for cash equivalents was determined based on level 1 inputs.
As of August 3, 2019, February 2, 2019, and August 4, 2018, the Company's short-term and long-term investment securities are classified as held-to-maturity since the Company has the intent and ability to hold the investments to maturity. Such securities are carried at amortized cost plus accrued interest and consist of the following (in thousands):
 
 
As of August 3, 2019
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Market Value
Short-term:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
89,018

 
$
7

 
$

 
$
89,025

Municipal bonds
 
1,307

 
1

 

 
1,308

Total
 
$
90,325

 
$
8

 
$

 
$
90,333

 
 
 
 
 
 
 
 
 
Long-term:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
1,043

 
$

 
$

 
$
1,043

Total
 
$
1,043

 
$


$


$
1,043

 
 
As of February 2, 2019
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Market Value
Short-term:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
83,128

 
$

 
$
63

 
$
83,065

Municipal bonds
 
2,284

 

 
2

 
2,282

Total
 
$
85,412

 
$

 
$
65

 
$
85,347


12


 
 
As of August 4, 2018
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Market Value
Short-term:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
125,027

 
$

 
$
222

 
$
124,805

Municipal bonds
 
6,414

 

 
5

 
6,409

Total
 
$
131,441

 
$

 
$
227

 
$
131,214

 
 
 
 
 
 
 
 
 
Long-term:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
1,404

 
$

 
$

 
$
1,404

Total
 
$
1,404

 
$

 
$

 
$
1,404

Short-term investment securities as of August 3, 2019, February 2, 2019, and August 4, 2018 all mature in one year or less. Long-term investment securities as of August 3, 2019 and August 4, 2018 all mature after one year but in less than three years.
(g) Prepaid Expenses and Other Current Assets
Prepaid expenses as of August 3, 2019, February 2, 2019, and August 4, 2018 were $19.6 million, $26.1 million, and $32.7 million, respectively. Other current assets as of August 3, 2019, February 2, 2019, and August 4, 2018 were $32.8 million, $34.0 million, and $17.5 million, respectively.
(h) Other Accrued Expenses
Other accrued expenses include accrued capital expenditures of $16.8 million, $54.2 million, and $15.6 million as of August 3, 2019, February 2, 2019, and August 4, 2018, respectively.
(2)
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 clarifies the principles for recognizing revenue from contracts with customers. The Company adopted the standard during the thirteen weeks ended May 5, 2018 using the modified retrospective method by recognizing the cumulative effect as an adjustment to retained earnings.
Revenue Transactions
Revenue from store operations is recognized at the point of sale when control of the product is transferred to the customer at such time. Internet sales, through the Company's fivebelow.com e-commerce website, are recognized when the consumer receives the product as control transfers upon delivery. Returns subsequent to the period end are immaterial; accordingly, no reserve has been recorded. Gift card sales to customers are initially recorded as liabilities and recognized as sales upon redemption for merchandise or as breakage revenue in proportion to the pattern of redemption of the gift cards by the customer in net sales.
The transaction price for the Company’s sales is based on the item’s stated price. To the extent that the Company charges customers for shipping and handling on e-commerce sales, the Company records such amounts in net sales. Shipping and handling costs, which include fulfillment and shipping costs related to the Company's e-commerce operations, are included in costs of goods sold. The Company has chosen the pronouncement's policy election which allows it to exclude all sales taxes from net sales in the accompanying consolidated statements of operations.

13


Disaggregation of Revenue
The following table provides information about disaggregated revenue by groups of products: leisure, fashion and home, and party and snack (in thousands):
 
Thirteen Weeks Ended
 
Thirteen Weeks Ended
 
August 3, 2019
 
August 4, 2018
 
Amount
 
Percentage of Net Sales
 
Amount
 
Percentage of Net Sales
Leisure
$
220,703

 
52.9
%
 
$
187,279

 
53.9
%
Fashion and home
122,105

 
29.3
%
 
100,255

 
28.8
%
Party and snack
74,592

 
17.8
%
 
60,200

 
17.3
%
Total
$
417,400

 
100.0
%
 
$
347,734

 
100.0
%
 
Twenty-Six Weeks Ended
 
Twenty-Six Weeks Ended
 
August 3, 2019
 
August 4, 2018
 
Amount
 
Percentage of Net Sales
 
Amount
 
Percentage of Net Sales
Leisure
$
399,023

 
51.0
%
 
$
332,011

 
51.5
%
Fashion and home
231,953

 
29.7
%
 
191,838

 
29.8
%
Party and snack
151,186

 
19.3
%
 
120,207

 
18.7
%
Total
$
782,162

 
100.0
%
 
$
644,056

 
100.0
%

Financial Statement Impact of Adopting ASU 2014-09
All of the Company's revenue is recognized from contracts with customers and, therefore, is subject to ASU 2014-09. The Company adopted ASU 2014-09 using a modified retrospective approach during the thirteen weeks ended May 5, 2018 and recognized the cumulative effect as an adjustment by increasing retained earnings by $0.5 million and income taxes payable by $0.1 million, and reducing accrued expenses by $0.7 million and deferred tax asset by $0.1 million. The cumulative adjustment was related to the recognition of gift card breakage.
(3)
Leases
The Company leases property and equipment under noncancelable operating leases. Certain retail store lease agreements provide for contingent rental payments if the store’s net sales exceed stated levels (percentage rents) and/or contain escalation clauses, which provide for increases in base rental payments for increases in future operating costs. Many of the Company’s leases provide for one or more renewal options for periods of five years. The Company’s operating lease agreements, including assumed renewals, which are generally those that take the lease to a ten-year term, expire through fiscal 2033.
During the thirteen weeks ended August 3, 2019, the Company committed to 32 new store leases with terms of 10 to 15 years that have future minimum lease payments of approximately $52.1 million.
All of the Company's leases are classified as operating leases and the associated assets and liabilities are presented as separate captions in the consolidated balance sheets. As of August 3, 2019, the weighted average remaining lease term for the Company's operating leases is 7.6 years, and the weighted average discount rate is 7.4%. For the twenty-six weeks ended August 3, 2019, cash paid for amounts included in the measurement of operating lease liabilities of $62.0 million was reflected in cash flows from operating activities in the consolidated statements of cash flows.
The following table is a summary of the Company's components for net lease costs as of August 3, 2019 (in thousands):
 
 
August 3, 2019
Lease Cost
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
Operating lease cost
 
$
35,319

 
$
69,031

Variable lease cost
 
9,922

 
19,212

Net lease cost*
 
$
45,241

 
$
88,243

* Excludes short-term lease cost, which is immaterial

14


The following table summarizes the maturity of lease liabilities under operating leases as of August 3, 2019 (in thousands):
Maturity of Lease Liabilities
 
Operating Leases
2019
 
$
75,373

2020
 
150,558

2021
 
145,284

2022
 
135,842

2023
 
125,697

After 2023
 
422,200

Total lease payments
 
1,054,954

Less: imputed interest
 
254,826

Present value of lease liabilities
 
$
800,128


(4)
Income Per Common Share
Basic income per common share amounts are calculated using the weighted average number of common shares outstanding for the period. Diluted income per common share amounts are calculated using the weighted average number of common shares outstanding for the period and include the dilutive impact of exercised stock options as well as assumed vesting of restricted stock awards and shares currently available for purchase under the Company's Employee Stock Purchase Plan, using the treasury stock method. Performance-based restricted stock units are considered contingently issuable shares for diluted income per common share purposes and the dilutive impact, if any, is not included in the weighted average shares until the performance conditions are met.
The following table reconciles net income and the weighted average common shares outstanding used in the computations of basic and diluted income per common share (in thousands, except for share and per share data):
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
August 3, 2019
 
August 4, 2018
 
August 3, 2019
 
August 4, 2018
Numerator:
 
 
 
 
 
 
 
Net income
$
28,831

 
$
25,063

 
$
54,493

 
$
46,867

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
55,950,733

 
55,730,621

 
55,930,313

 
55,671,729

Dilutive impact of options, restricted stock units and employee stock purchase plan
343,376

 
461,363

 
356,319

 
438,632

Weighted average common shares outstanding - diluted
56,294,109

 
56,191,984

 
56,286,632

 
56,110,361

Per common share:
 
 
 
 
 
 
 
Basic income per common share
$
0.52

 
$
0.45

 
$
0.97

 
$
0.84

Diluted income per common share
$
0.51

 
$
0.45

 
$
0.97

 
$
0.84


The effects of the assumed vesting of restricted stock units for 4,592 and 2,296 shares of common stock for the thirteen weeks ended and twenty-six weeks ended August 4, 2018, respectively, were excluded from the calculation of diluted net income per share, as their impact would have been anti-dilutive.
The aforementioned excluded shares do not reflect the impact of any incremental repurchases under the treasury stock method.
(5)
Line of Credit
On May 10, 2017, the Company entered into a Fourth Amended and Restated Loan and Security Agreement (the “Amended Loan and Security Agreement”), among the Company, 1616 Holdings, Inc. (formerly known as Five Below Merchandising, Inc.), a wholly-owned subsidiary of the Company, and Wells Fargo Bank, National Association. The Amended Loan and Security Agreement amends and restates the Third Amended and Restated Loan and Security Agreement, dated June 12, 2013, among the Company, 1616 Holdings, Inc. and Wells Fargo Bank, National Association, which governed the Revolving Credit Facility.

15


The Amended Loan and Security Agreement includes a revolving line of credit in the amount of up to $20.0 million (the “Amended Revolving Credit Facility”). Pursuant to the Amended Loan and Security Agreement, advances under the Amended Revolving Credit Facility are no longer tied to a borrowing base; however, the Company is required to maintain eligible inventory at all times in an amount equal to at least $100.0 million. The Amended Revolving Credit Facility expires on the earliest to occur of (i) May 10, 2022 or (ii) an event of default. The Amended Revolving Credit Facility may be increased to up to $50.0 million, subject to certain conditions. The Amended Revolving Credit Facility also includes a $20.0 million sub-limit for the issuance of letters of credit.
The Amended Loan and Security Agreement reduces the interest rate payable on borrowings to be, at the Company’s option, a per annum rate equal to (a) a prime rate or (b) a LIBOR-based rate plus a margin of 1.00%. Letter of credit fees are equal to the interest rate payable on LIBOR-based loans. The interest rate and letter of credit fees under the Amended Loan and Security Agreement are subject to an increase of 2.00% per annum upon an event of default.
The Amended Loan and Security Agreement removes restrictions on the Company’s ability to pay or make dividends and distributions or repurchase its stock, but the Amended Loan and Security Agreement continues to include other customary negative and affirmative covenants including, among other things, limitations on the Company’s ability to (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) engage in mergers or consolidations; or (vi) change its business.
The Amended Loan and Security Agreement also removes the provisions that required the Company to make prepayments on outstanding Amended Revolving Credit Facility balances upon the receipt of certain proceeds, including those from the sale of certain assets. Amounts under the Amended Revolving Credit Facility may become due upon certain events of default including, among other things, the Company’s failure to comply with the Amended Revolving Credit Facility’s covenants, bankruptcy, default on certain other indebtedness or a change in control.
Under the Amended Loan and Security Agreement, all obligations under the Amended Revolving Credit Facility continue to be guaranteed by 1616 Holdings, Inc. and are secured by substantially all of the assets of the Company and 1616 Holdings, Inc.
As of August 3, 2019, the Company had no borrowings under the Amended Revolving Credit Facility and had approximately $20.0 million available on the line of credit.
All obligations under the Amended Revolving Credit Facility are secured by substantially all of the Company's assets and are guaranteed by the Company's subsidiary. As of August 3, 2019 and August 4, 2018, the Company was in compliance with the covenants applicable to it under the Amended Revolving Credit Facility.
(6)
Commitments and Contingencies
Commitments
Other contractual commitments
As of August 3, 2019, the Company has other purchase commitments of approximately $3.4 million consisting of purchase agreements for materials that will be used in the construction of new stores.
During the thirteen weeks ended May 4, 2019, the Company completed the purchase of an approximately 700,000 square foot build-to-suit distribution center in Forsyth, Georgia for approximately $42 million, for land and building, to support the Company's anticipated growth.
During the thirteen weeks ended August 3, 2019, the Company signed a purchase agreement to acquire land and a construction agreement to build a distribution center located in Conroe, Texas, which the Company expects will be approximately 860,000 square feet, for approximately $47 million, for land and building, to support the Company’s anticipated growth. Subsequent to the thirteen weeks ended August 3, 2019, the Company closed on the land purchase. The Company expects to occupy the distribution center in Conroe, Texas in 2020.
Contingencies
Legal Matters
From time to time, the Company is involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcome of such actions will not have a material adverse effect on the Company’s financial condition or results of operations.

16


(7)
Share-Based Compensation
Equity Incentive Plan
Pursuant to the Company's 2002 Equity Incentive Plan (the “Plan”), the Company’s board of directors may grant stock options, restricted shares, and restricted stock units to officers, directors, key employees and professional service providers. The Plan, as amended, allows for the issuance of up to a total of 7.6 million shares under the Plan. As of August 3, 2019, approximately 3.3 million stock options, restricted shares, or restricted stock units were available for grant.
Common Stock Options
All stock options have a term not greater than ten years. Stock options vest and become exercisable in whole or in part, in accordance with vesting conditions set by the Company’s board of directors. Options granted to date generally vest over four years from the date of grant.
Stock option activity during the twenty-six weeks ended August 3, 2019 was as follows:
 
Options
Outstanding
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
(in years)
Balance as of February 2, 2019
374,257

 
$
30.23

 
5.1
Forfeited
(862
)
 
39.39

 

Exercised
(97,053
)
 
30.21

 

Balance as of August 3, 2019
276,342

 
30.21

 
4.5
Exercisable as of August 3, 2019
264,785

 
$
29.98

 
4.4


The fair value of each option award granted to employees, including outside directors, is estimated on the date of grant using the Black-Scholes option-pricing model. There were no stock options granted during the twenty-six weeks ended August 3, 2019.
Restricted Stock Units and Performance-Based Restricted Stock Units
All restricted stock units ("RSU") and performance-based restricted stock units ("PSU") vest in accordance with vesting conditions set by the compensation committee of the Company’s board of directors. RSUs granted to date have vesting periods ranging from less than one year to five years from the date of grant. PSUs granted to date have vesting periods ranging from one year to five years from the date of grant, including grants that have a cumulative three year performance period, subject to satisfaction of the applicable performance goals established for the respective grant. The Company periodically assesses the probability of achievement of the performance criteria and adjusts the amount of compensation expense accordingly. Compensation is recognized over the vesting period and adjusted for the probability of achievement of the performance criteria.
RSU and PSU activity during the twenty-six weeks ended August 3, 2019 was as follows:
 
Restricted Stock Units
 
Performance-Based Restricted Stock Units
 
Number
 
Weighted-Average Grant Date Fair Value
 
Number
 
Weighted-Average Grant Date Fair Value
Non-vested balance as of February 2, 2019
292,888

 
$
53.52

 
416,200

 
$
47.38

Granted
82,586

 
119.10

 
83,363

 
116.94

Vested
(103,391
)
 
43.60

 
(117,137
)
 
39.21

Forfeited
(10,558
)
 
66.43

 
(27,836
)
 
45.23

Non-vested balance as of August 3, 2019
261,525

 
$
77.63

 
354,590

 
$
66.60



17


In connection with the vesting of RSUs and PSUs during the twenty-six weeks ended August 3, 2019, the Company withheld 81,366 shares with an aggregate value of $10.1 million in satisfaction of minimum tax withholding obligations due upon vesting.
In connection with the vesting of RSUs and PSUs during the twenty-six weeks ended August 4, 2018, the Company withheld 110,151 shares with an aggregate value of $7.6 million in satisfaction of minimum tax withholding obligations due upon vesting.
As of August 3, 2019, there was $25.6 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements (including stock options, RSUs and PSUs) granted under the Plan. The cost is expected to be recognized over a weighted average vesting period of 2.5 years.
Share Repurchase Program
On March 20, 2018, the Company's board of directors approved a share repurchase program authorizing the repurchase of up to $100 million of our common stock through March 31, 2021, on the open market, in privately negotiated transactions, or otherwise. In December 2018, the Company purchased 21,810 shares under this program at an aggregate cost of approximately $2.0 million, or an average price of $91.07 per share. During the thirteen weeks ended August 3, 2019, the Company purchased 146,185 shares under this program at an aggregate cost of approximately $16.6 million, or an average price of $113.55 per share. Subsequent to the thirteen weeks ended August 3, 2019, the Company purchased 191,367 shares under this program at an aggregate cost of approximately $20.3 million, or an average price of $106.00 per share. There can be no assurances that any additional repurchases will be completed, or as to the timing or amount of any repurchases. The share repurchase program may be modified or discontinued at any time.
(8)
Income Taxes
The following table summarizes the Company’s income tax expense and effective tax rates for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018 (dollars in thousands):
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
August 3, 2019
 
August 4, 2018
 
August 3, 2019
 
August 4, 2018
Income before income taxes
$
37,541

 
$
31,405

 
$
63,697

 
$
57,190

Income tax expense
$
8,710

 
$
6,342

 
$
9,204

 
$
10,323

Effective tax rate
23.2
%
 
20.2
%
 
14.4
%
 
18.1
%

The effective tax rates for the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018 were based on the Company’s forecasted annualized effective tax rates and were adjusted for discrete items that occurred within the periods presented. The effective tax rate for the thirteen weeks ended August 3, 2019 was higher than the thirteen weeks ended August 4, 2018 primarily due to discrete items, which includes the impact of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," with respect to the requirement to recognize excess income tax benefits or deficiencies as income tax benefit or expense in the consolidated statements of operations rather than as additional paid-in capital in the consolidated balance sheets. The effective tax rate for the twenty-six weeks ended August 3, 2019 was lower than the twenty-six weeks ended August 4, 2018 primarily due to discrete items, which includes the impact of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting."
The Company had no material accrual for uncertain tax positions or interest and/or penalties related to income taxes on the Company’s balance sheets as of August 3, 2019, February 2, 2019, or August 4, 2018 and has not recognized any material uncertain tax positions or interest and/or penalties related to income taxes in the consolidated statements of operations for the thirteen and twenty-six weeks ended August 3, 2019 or August 4, 2018.
The Company files a federal income tax return as well as state tax returns. The Company’s U.S. federal income tax returns for the fiscal years ended January 30, 2015 and thereafter remain subject to examination by the U.S. Internal Revenue Service. State returns are filed in various state jurisdictions, as appropriate, with varying statutes of limitation and remain subject to examination for varying periods up to three to four years depending on the state.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with “Selected Financial Data,” and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for our fiscal year ended February 2, 2019 and referred to herein as the "Annual Report," and the consolidated financial statements and related notes as of and for the thirteen weeks ended and twenty-six weeks ended August 3, 2019 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 2019" or "fiscal 2019" refer to the period from February 3, 2019 to February 1, 2020, which is a 52-week fiscal year. References to "fiscal year 2018" or "fiscal 2018" refer to the period from February 4, 2018 to February 2, 2019, which is a 52-week fiscal year. The fiscal quarters ended August 3, 2019 and August 4, 2018 refer to the thirteen weeks ended as of those dates. The year-to-date periods ended August 3, 2019 and August 4, 2018 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.

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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;
reliance on merchandise manufactured outside of the United States;
the direct and indirect impact of recent and potential tariffs imposed and proposed by the United States on foreign imports, including, without limitation, the tariffs themselves, any counter-measures thereto and any indirect effects on consumer discretionary spending, which could increase the cost to us of certain products, lower our margins, increase our import related expenses, and reduce consumer spending for discretionary items, each of which could have a material adverse effect on our business, financial condition and results of future operations;
the impact of price increases, such as, a reduction in our unit sales, damage to our reputation with our customers, and our becoming less competitive in the marketplace;
dependence on the volume of traffic to our stores and website;
inability to attract and retain qualified employees;
inability to successfully build, operate or expand our distribution centers or network capacity;
disruptions to our distribution network or the timely receipt of inventory;
extreme weather conditions in the areas in which our stores are located could negatively affect our business and results of operations;
the risks of cyberattacks or other cyber incidents, such as the failure to secure customers' confidential or credit card information, or other private data relating to our employees or our company, including the costs associated with protection against or remediation of such incidents;
increased operating costs or exposure to fraud or theft due to customer payment-related risks;
inability to increase sales and improve the efficiencies, costs and effectiveness of our operations;
dependence on our executive officers, senior management and other key personnel or inability to hire additional qualified personnel;
inability to successfully manage our inventory balances and inventory shrinkage;
inability to meet our lease obligations;
the costs and risks of constructing and owning real property;
changes in our competitive environment, including increased competition from other retailers and the presence of online retailers;
increasing costs due to inflation, increased operating costs, wage rate increases or energy prices;
the seasonality of our business;
inability to successfully implement our expansion into online retail;
disruptions to our information technology systems in the ordinary course or as a result of system upgrades;

19


the impact of damage or interruptions to our technology systems;
failure to maintain adequate internal controls;
complications with the design or implementation of the new enterprise resource system;
natural disasters, adverse weather conditions, pandemic outbreaks, global political events, war and terrorism;
the impact of changes in tax legislation;
current economic conditions and other economic factors;
the impact of governmental laws and regulations;
the impact of changes in accounting standards;
the impact to our financial performance related to insurance programs;
the costs and consequences of legal proceedings;
inability to protect our brand name, trademarks and other intellectual property rights;
the costs and liabilities associated with infringement of third party intellectual property rights;
the impact of product and food safety claims and effects of legislation;
inability to obtain additional financing, if needed;
restrictions imposed by our indebtedness on our current and future operations;
regulations related to conflict minerals.
Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this 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, Inc. (collectively referred to herein with its wholly owned subsidiary as "we," "us," or "our") is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the tween and teen customer. We offer a dynamic, edited assortment of exciting products priced at $5 and below, including select brands and licensed merchandise across our category worlds. As of August 3, 2019, we operated 833 stores in 36 states.
We also offer our merchandise on the internet, through our fivebelow.com e-commerce website. All e-commerce sales, which includes shipping and handling revenue, are included in net sales. Beginning with the third fiscal quarter of 2016, when we launched our e-commerce channel, all e-commerce sales are included in comparable sales. Our e-commerce expenses will have components classified as both cost of goods sold and selling, general and administrative expenses.
On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted. The TCJA includes a number of changes to existing U.S. tax laws that impact us, most notably a reduction of the U.S. corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. In fiscal 2018 and future years, we may invest a portion of any savings generated by the TCJA into expenses that could significantly increase and impact the comparability between periods of Cost of Goods Sold and Gross Profit, Selling, General and Administrative Expenses and Operating Income.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales, comparable sales, cost of goods sold and gross profit, selling, general and administrative expenses and operating income.
Net Sales
Net sales constitute gross sales net of merchandise returns for damaged or defective goods. Net sales consist of sales from comparable stores, non-comparable stores, and e-commerce, which includes shipping and handling revenue. Revenue from the sale of gift cards is deferred and not included in net sales until the gift cards are redeemed to purchase merchandise or as breakage revenue in proportion to the pattern of redemption of the gift cards by the customer.

20


Our business is seasonal and as a result, our net sales fluctuate from quarter to quarter. Net sales are usually highest in the fourth fiscal quarter due to the year-end holiday season.
Comparable Sales
Comparable sales include net sales from stores that have been open for at least 15 full months from their opening date, and e-commerce sales. Comparable stores include the following:
Stores that have been remodeled while remaining open;
Stores that have been relocated within the same trade area, to a location that is not significantly different in size, in which the new store opens at about the same time as the old store closes; and
Stores that have expanded, but are not significantly different in size, within their current locations.
For stores that are relocated or expanded, the following periods are excluded when calculating comparable sales:
The period beginning when the closing store receives its last merchandise delivery from one of our distribution centers through:
the last day of the fiscal year in which the store was relocated or expanded (for stores that increased significantly in size); or
the last day of the fiscal month in which the store re-opens (for all other stores); and
The period beginning on the first anniversary of the date the store received its last merchandise delivery from one of our distribution centers through the first anniversary of the date the store re-opened.
Comparable sales exclude the 53rd week of sales for 53-week fiscal years. In the 52-week fiscal year subsequent to a 53-week fiscal year, we exclude the sales in the non-comparable week from the same-store sales calculation. Due to the 53rd week in fiscal 2017, all comparable sales related to any reporting period during the year ended February 2, 2019 are reported on a restated calendar basis using the National Retail Federation's restated calendar comparing similar weeks.
There may be variations in the way in which some of our competitors and other retailers calculate comparable or “same store” sales. As a result, data in this Quarterly Report on Form 10-Q regarding our comparable sales may not be comparable to similar data made available by other retailers. Non-comparable sales are comprised of new store sales, sales for stores not open for a full 15 months, and sales from existing store relocation and expansion projects that were temporarily closed (or not receiving deliveries) and not included in comparable sales.
Measuring the change in fiscal year-over-year comparable sales allows us to evaluate how our store base is performing. Various factors affect comparable sales, including:
consumer preferences, buying trends and overall economic trends;
our ability to identify and respond effectively to customer preferences and trends;
our ability to provide an assortment of high-quality, trend-right and everyday product offerings that generate new and repeat visits to our stores;
the customer experience we provide in our stores and online;
the level of traffic near our locations in the power, community and lifestyle centers in which we operate;
competition;
changes in our merchandise mix;
pricing;
our ability to source and distribute products efficiently;
the timing of promotional events and holidays;
the timing of introduction of new merchandise and customer acceptance of new merchandise;
our opening of new stores in the vicinity of existing stores;
the number of items purchased per store visit; and
weather conditions.
Opening new stores is an important part of our growth strategy. As we continue to pursue our growth strategy, we expect that a significant percentage of our net sales will continue to come from new stores not included in comparable sales. Accordingly, comparable sales is only one measure we use to assess the success of our growth strategy.

21


Cost of Goods Sold and Gross Profit
Gross profit is equal to our net sales less our cost of goods sold. Gross margin is gross profit as a percentage of our net sales. Cost of goods sold reflects the direct costs of purchased merchandise and inbound freight, as well as shipping and handling costs, store occupancy, distribution and buying expenses. Shipping and handling costs include both internal and third-party fulfillment and shipping costs related to our e-commerce operations. Store occupancy costs include rent, common area maintenance, utilities and property taxes for all store locations. Distribution costs include costs for receiving, processing, warehousing and shipping of merchandise to or from our distribution centers and between store locations. Buying costs include compensation expense and other costs for our internal buying organization, including our merchandising and product development team and our planning and allocation group. These costs are significant and can be expected to continue to increase as our company grows.
The components of our cost of goods sold may not be comparable to the components of cost of goods sold or similar measures of our competitors and other retailers. As a result, data in this Quarterly Report on Form 10-Q regarding our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers.
The variable component of our cost of goods sold is higher in higher volume quarters because the variable component of our cost of goods sold generally increases as net sales increase. We regularly analyze the components of gross profit as well as gross margin. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns, and a significant increase in inventory shrinkage or inability to generate sufficient sales leverage on the store occupancy, distribution and buying components of cost of goods sold could have an adverse impact on our gross profit and results of operations. Changes in the mix of our products may also impact our overall cost of goods sold.
Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses are composed of payroll and other compensation, marketing and advertising expense, depreciation and amortization expense and other selling and administrative expenses. SG&A expenses as a percentage of net sales are usually higher in lower sales volume quarters and lower in higher sales volume quarters.
The components of our SG&A expenses may not be comparable to those of other retailers. We expect that our SG&A expenses will increase in future periods due to our continuing store growth. In addition, any increase in future share-based grants or modifications will increase our share-based compensation expense included in SG&A expenses.
Operating Income
Operating income equals gross profit less SG&A expenses. Operating income excludes interest expense or income, and income tax expense or benefit. We use operating income as an indicator of the productivity of our business and our ability to manage SG&A expenses. Operating income percentage measures operating income as a percentage of our net sales.
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.
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
August 3, 2019
 
August 4, 2018
 
August 3, 2019
 
August 4, 2018
(in millions, except percentages and total stores)
Consolidated Statements of Operations Data (1):
 
 
 
 
 
 
 
Net sales
$
417.4

 
$
347.7

 
$
782.2

 
$
644.1

Cost of goods sold
271.2

 
226.0

 
516.0

 
425.1

Gross profit
146.2

 
121.8

 
266.2

 
219.0

Selling, general and administrative expenses
110.1