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1818 market street, suite 2000
philadelphia, pa 19103
215-546-7909
fivebelow.com
sports. tech. crafts. party. candy. room. style. now.everythingExEcutivE OfficErs David schlessingerExecutive Chairman and Founder thomas G. velliosPresident, Chief Executive Officer and Founder Kenneth r. BullChief Financial Officer, Secretary and TreasurerBOarD Of DirEctOrs steven J. collinsManaging Director, Advent Internationalandrew W. crawford Principal, Advent InternationalMichael f. Devine, iii Former Chief Financial Officer and Executive Vice President, Coach, Inc.David M. Mussafer Managing Partner, Advent Internationalthomas M. ryanFormer Chairman, President and Chief Executive Officer, CVS Caremark Corporation ronald L. sargentChairman and Chief Executive Officer, Staples, Inc.David schlessingerExecutive Chairman and Founder, Five Below, Inc. thomas G. velliosPresident, Chief Executive Officer and Founder, Five Below, Inc. corporate HeadquartersFive Below1818 Market StreetSuite 2000Philadelphia, PA 19103fivebelow.comindependent registered Public accounting firmKPMG LLP1601 Market StreetPhiladelphia, PA 19103transfer agentRegistrar and Transfer Company10 Commerce DriveCranford, NJ 07016stock Exchange ListingThe NASDAQ Global Select MarkettickerFIVEannual MeetingThe 2014 Annual Meeting of Shareholders of Five Below, Inc. will be held on Tuesday, June 24, 2014 at 9:00 A.M. Eastern Daylight Time at the offices of:Pepper Hamilton LLP3000 Two Logan Square, 18th and Arch StreetsPhiladelphia, PA 19103investor relationsICR, Inc. Farah Soi203-682-8200farah.soi@icrinc.com UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(cid:2)(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934(cid:3)
For the fiscal year ended February 1, 2014
OR
(cid:4)(cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934(cid:3)
For the transition period from
to
Commission file number: 001-35600
Five Below, Inc.
(Exact name of Registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of
incorporation or organization)
1818 Market Street
Suite 2000 Philadelphia, PA 19103 (Address of
Principal Executive Office)
Title of each class
Common Stock, $0.01 par value per share
Title of each class
Not applicable
(215) 546-7909
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Securities registered pursuant to Section 12(g) of the Exchange Act:
75-3000378
(I.R.S. Employer
Identification Number)
19103
(Zip Code)
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Name of each exchange on which registered
Not applicable
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the securities act. Yes (cid:2) No (cid:4)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:4) No (cid:2)
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 (cid:2) No (cid:4)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 and post such
files). Yes (cid:2) No (cid:4)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:2)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer (cid:2)(cid:3)
Accelerated Filer
(cid:4)(cid:3)
Non-Accelerated Filer
(cid:4)(cid:3)
Smaller Reporting Company
(cid:4)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:4)No (cid:2)
As of August 2, 2013, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of common stock (based upon the last
reported sales price on The NASDAQ Global Select Market) held by non-affiliates of the registrant was approximately $1,327,056,843.
The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of March 24, 2014 was 54,193,901.
Portions of the registrant's Proxy Statement for the 2014 Annual Meeting of Shareholders to be held on June 24, 2014 (hereinafter referred to as the “Proxy Statement”) are
incorporated by reference into Part III of this report.
DOCUMENTS INCORPORATED BY REFERENCE
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, or Annual Report, 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 Annual Report reflect our views as of the date of this report about future
events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual
activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions,
levels of activity, performance or achievements. A number of important factors could cause actual results to differ materially
from those indicated by the forward-looking statements, including, but not limited to, those factors described below, in Part I,
Item 1A “Risk Factors,” and in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” 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;
• our ability to successfully expand our distribution network capacity;
• disruptions to our distribution network or the timely receipt of inventory;
•
inability to attract and retain qualified employees;
• ability to increase sales and improve the efficiencies, costs and effectiveness of our operations;
• our dependence on our executive officers and other key personnel or our inability to hire additional qualified personnel;
• our ability to successfully manage our inventory balances and inventory shrinkage;
• our lease obligations;
• changes in our competitive environment, including increased competition from other retailers and the presence of online retailers;
•
increasing costs due to inflation, increased operating costs or energy prices;
•
the seasonality of our business;
• disruptions to our information technology systems in the ordinary course or as a result of system upgrades;
• our failure to maintain adequate internal controls;
• our ability to obtain additional financing;
•
failure to secure customers’ confidential or credit card information, or other private data relating to our employees or our company;
• natural disasters, unusual weather conditions, pandemic outbreaks, global political events, war and terrorism;
• current economic conditions and other economic factors;
•
the impact of governmental laws and regulations and the outcomes of legal proceedings;
• our inability to protect our brand name, trademarks and other intellectual property rights;
•
increased costs as a result of being a public company; and
• restrictions imposed by our indebtedness on our current and future operations.
Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not
to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this
Annual Report are based on information available to us on the date of this report. We undertake no obligation to publicly
update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as
otherwise required by law.
INDEX
PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
SIGNATURES
PART IV
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ITEM 1. BUSINESS
PART I
General
Five Below, Inc. was incorporated in Pennsylvania in January 2002. Our principal executive office is located at 1818
Market Street, Suite 2000, Philadelphia, PA 19103 and our telephone number is (215) 546-7909. Our corporate website address
is www.fivebelow.com. The information contained on, or accessible through, our corporate website does not constitute part of
this Annual Report. As used herein, “Five Below,” the “Company,” “we,” “us,” “our” or “our business” refers to Five Below,
Inc. (individually and/or collectively with its wholly owned subsidiary), except as expressly indicated or unless the context
otherwise requires.
We purchase products in reaction to existing marketplace trends and, hence, refer to our products as “trend-right.” We use
the term “dynamic” merchandise to refer to the broad range and frequently changing nature of the products we display in our
stores. We use the term “power” shopping center to refer to an unenclosed shopping center with 250,000 to 750,000 square feet
of gross leasable area that contains three or more “big box” retailers (large retailers with floor space over 50,000 square feet)
and various smaller retailers with a common parking area shared by the retailers. We use the term “lifestyle” shopping center to
refer to a shopping center or commercial development that is often located in suburban areas and combines the traditional retail
functions of a shopping mall with leisure amenities oriented towards upscale consumers. We use the term “community”
shopping center to refer to a shopping area designed to serve a trade area of 40,000 to 150,000 people with a minimum of
435,000 square feet (10 acres) in area, where the lead tenant is a variety discount or junior department store. We use the term
“trade area” to refer to the geographic area from which the majority of a given retailer's customers come from. Trade areas vary
by market based on geographic size, population density, demographics and proximity to alternative shopping opportunities.
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 2014” or “fiscal
2014” refer to the period from February 2, 2014 to January 31, 2015, which consists of a 52-week fiscal year. References to
“fiscal year 2013” or “fiscal 2013” refer to the period from February 3, 2013 to February 1, 2014, which consists of a 52-week
fiscal year. References to “fiscal year 2012” or “fiscal 2012” refer to the period from January 29, 2012 to February 2, 2013,
which consists of a 53-week fiscal year. References to “fiscal year 2011” or “fiscal 2011” refer to the period from January 30,
2011 to January 28, 2012, which consists of a 52-week fiscal year. References to 2014, 2013, 2012, and 2011 are to our fiscal
years unless otherwise specified.
Our Company
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 a number of our category worlds: Style, Room, Sports, Tech
(also known as "Media"), Crafts, Party, Candy and Now (also known as "Seasonal"). We believe we are transforming the
shopping experience of our target demographic with a unique merchandising strategy and high-energy retail concept that our
customers consider fun and exciting. Based on management’s experience and industry knowledge, we believe our compelling
value proposition and the dynamic nature of our merchandise offering has fostered universal appeal to teens and pre-teens, as
well as customers across a variety of age groups beyond our target demographic.
We opened the first Five Below store in the greater Philadelphia area in 2002 and, since then, have been expanding across
the Northeast, South and Midwest regions of the United States of America. As of February 1, 2014, we operated a total of 304
locations across 19 states. Our new store model assumes a store size of approximately 7,500 square feet and is typically located
within power, community and lifestyle shopping centers across a variety of urban, suburban and semi-rural markets. We opened
60 net new stores in fiscal 2013 and plan to open approximately 62 new stores in fiscal 2014. We believe that we have the
opportunity to grow our store base to more than 2,000 locations over time.
We believe our business model has resulted in strong financial performance irrespective of the economic environment:
• We have achieved positive comparable store sales during each of the last 31 fiscal quarters.
• Our comparable store sales increased by 4.0% in fiscal 2013, 7.1% in fiscal 2012, and 7.9% in fiscal 2011.
• We expanded our store base from 192 stores at the end of fiscal year 2011 to 304 stores at the end of fiscal
year 2013, representing a compounded annual growth rate of 25.8%.
• Between fiscal 2011 and 2013, our net sales increased from $297.1 million to $535.4 million, representing a
compounded annual growth rate of 34.2%. Over the same period, our operating income increased from $26.2
million to $53.7 million, representing a compounded annual growth rate of 43.2%.
4
Our Competitive Strengths
We believe the following strengths differentiate Five Below from competitors and are the key drivers of our success:
• Unique Focus on the Teen and Pre-Teen Customer. We target an attractive customer segment of teens and
pre-teens with trend-right merchandise at a differentiated price point of $5 and below. We have built our
concept to appeal to this customer base, which we believe to be economically influential and resilient based
on our industry knowledge and experience, as well as their parents and others who shop for them. Our brand
concept, merchandising strategy and store ambience work in concert to create an upbeat and vibrant retail
experience that is designed to appeal to our target audience, drive traffic to our stores and keep our customers
engaged throughout their visits. We monitor trends in the ever-changing teen and pre-teen markets and are
able to quickly identify and respond to trends that become mainstream. Our price points enable teens and pre-
teens to shop independently, often using their own money to make frequent purchases of items geared
primarily to them and to exercise self-expression through their independent retail purchases.
• Broad Assortment of Trend-Right, High-Quality Merchandise with Universal Appeal. We deliver an
edited assortment of trend-right as well as everyday products within each of our category worlds that changes
frequently to create a sense of anticipation and freshness, which we believe provides excitement for our
customers. We have a broad range of vendors, most of which are domestically-based, which enables us to
shorten response lead times, maximizes our speed to market and equips us to make more informed buying
decisions. Our unique approach encourages frequent customer visits and limits the cyclical fluctuations
experienced by many other specialty retailers. The breadth, depth and quality of our product mix and the
diversity of our category worlds attract shoppers across a broad range of age and socio-economic
demographics.
• Exceptional Value Proposition for Customers. We believe we offer a clear value proposition to our
customers. Our price points of $5 and below resonate both with our target demographic and also with other
value-oriented customers. We are able to deliver on this value proposition through sourcing products in a
manner that is designed to achieve low cost, fast response and high item velocity and sell-through. We
maintain a dynamic and collaborative relationship with our vendor partners that provide us with favorable
access to quality merchandise at attractive prices. We also employ an opportunistic buying strategy,
capitalizing on select excess inventory opportunities with our vendors. This unique and flexible sourcing
strategy allows us to offer high-quality products at exceptional value across all of our category worlds.
• Differentiated Shopping Experience. We believe we have created a unique and engaging in-store
atmosphere that customers find fun and exciting. While we refresh our products frequently, we maintain a
consistent floor layout, designed with an easy-to-navigate racetrack flow and featuring sight-lines across the
entire store enabling customers to easily identify our category worlds. All of our stores feature a sound
system playing trend-right music throughout the shopping day. We employ novel and dynamic techniques to
display our products, including distinctive merchandise fixtures and colorful and stimulating signage, which
attract customers, encourage hands-on interaction with our products, and convey our value pricing. We have
developed a unique culture that emanates from our employees, many of whom frequently shop at Five Below,
to our customers, thereby driving a higher level of connectivity and engagement. Additionally, we believe our
price points of $5 and below, coupled with our dynamic merchandising approach, create an element of
discovery, driving repeat visits and customer engagement while insulating us against e-commerce
cannibalization trends.
• Powerful and Consistent Store Economics. We have a proven store model that generates strong cash flow,
consistent store-level financial results and high level return on investment. Our stores have been successful in
varying geographic regions, population densities and real estate settings and our new stores have achieved
average payback periods of less than one year. We believe our robust store model, reinforced by our rigorous
site selection process and in-store execution, drives the strength and consistency of our comparable store
sales financial results across all geographic regions and store-year classes.
5
• Highly Experienced and Passionate Senior Management Team with Proven Track Record. Since our
inception, our co-founders, David Schlessinger and Thomas Vellios, who have approximately 68 combined
years of retail experience, have set the vision and strategic direction for Five Below. Messrs. Schlessinger and
Vellios have assembled a talented senior management team averaging 25 years of retail experience across a
broad range of disciplines, including merchandising, real estate, finance, store operations, supply chain
management and information technology. Our management team drives our operating philosophy, which is
based on a relentless focus on providing high-quality merchandise at exceptional value and a superior
shopping experience utilizing a disciplined, low-cost operating and sourcing structure. We believe our
management team is integral to our success and has positioned us well for long-term growth.
Growth Strategy
We believe we can grow our net sales and earnings by executing on the following strategies:
• Grow Our Store Base. We believe there is significant opportunity to expand our store base in the U.S. from
304 locations as of February 1, 2014 to more than 2,000 locations within the U.S. over time. Based upon our
strategy of store densification in existing markets and expanding into adjacent states and markets, we expect
most of our near-term growth will occur within our existing markets, as well as contiguous new markets. This
strategy allows us to benefit from enhanced brand awareness and achieve operational efficiencies. We opened
52 new stores in fiscal 2012, 60 net new stores in fiscal 2013, and plan to open approximately 62 new stores
in fiscal 2014. Our new store model assumes approximately 7,500 square feet and are primarily in-line
locations within power, community and lifestyle shopping centers across a variety of urban, suburban and
semi-rural markets. We have a talented and disciplined real estate management team and a rigorous real estate
site selection process. We analyze the demographics of the surrounding trade areas and the performance of
adjacent retailers, as well as traffic and specific site characteristics and other variables. As of February 1,
2014, we have executed lease agreements for the opening of 48 new stores in fiscal 2014.
• Drive Comparable Store Sales. We expect to continue generating positive comparable store sales growth
by continuing to hone and refine our dynamic merchandising offering and differentiated in-store shopping
experience. We intend to increase our brand awareness through cost-effective marketing efforts and
enthusiastic customer engagement. We believe that executing on these strategies will increase the size and
frequency of purchases by our existing customers and attract new customers to our stores.
•
Increase Brand Awareness. We have a cost-effective marketing strategy designed to drive store traffic and
promote brand awareness. Our strategy includes the use of newspaper circulars and grassroots marketing to
support existing and new market entries. We believe we have an opportunity to leverage our growing social
media presence to drive brand excitement and increased store visits within existing and new markets. We
believe our online platform is an extension of our brand and retail stores, serving as a marketing and
informational tool for us. This platform allows us to continue to build brand awareness and expand our
customer base.
• Enhance Operating Margins. We believe we have further opportunities to drive margin improvement over
time. A primary driver of our expected margin expansion will come from leveraging our cost structure as we
continue to increase our store base and drive our average net sales per store. We intend to capitalize on
opportunities across our supply chain as we grow our business and achieve further economies of scale.
Our History
Five Below, Inc. was founded in 2002 by our Executive Chairman, David Schlessinger, and our President and Chief
Executive Officer, Thomas Vellios, who recognized a market need for a fun and affordable shopping destination aimed at our
target customer. The Company was incorporated in Pennsylvania in January 2002 under the name of Cheap Holdings, Inc. We
changed our name to Five Below, Inc. in August 2002. In October 2010, Advent International Corporation ("Advent") acquired
a majority interest in Five Below, which we refer to as the 2010 Transaction, with the goal of supporting the management team
in accelerating our growth.
On July 24, 2012, we completed our initial public offering, or IPO, of 11,057,692 shares of common stock at a price of
$17.00 per share. Our common stock is listed on The NASDAQ Global Select Market under the symbol “FIVE.” Of the shares
sold in the IPO, 4,807,692 shares were sold by the Company and 6,250,000 shares were sold by selling shareholders. In
February, July and September 2013, certain of our shareholders sold 13,012,250, 6,900,000 and 7,100,000 shares of common
6
stock, respectively, in separate secondary public offerings. As of February 1, 2014, Advent owned approximately 8.6% of our
outstanding common stock.
On June 12, 2013, we completed an internal business restructuring pursuant to which we formed Five Below
Merchandising, Inc., a wholly-owned subsidiary (the “Subsidiary”), and transferred to the Subsidiary assets, operations and
employees related to our merchandising operations (the “Restructuring”). Following the Restructuring, the Subsidiary
purchases and sells to us certain goods for sale at our retail locations, and we provide to the Subsidiary back office support,
office space and other services, in each case, pursuant to agreements between us and the Subsidiary. In connection with the
Restructuring, on June 12, 2013, we amended and restated the Loan and Security Agreement (defined in "Liquidity and Capital
Resources - Line of Credit") and certain other ancillary documents to our Revolving Credit Facility (defined in "Liquidity and
Capital Resources - Line of Credit") in order to, among other things, allow us to form and capitalize the Subsidiary and make
the Subsidiary a party to the Loan and Security Agreement as a guarantor of our obligations thereunder. The Subsidiary also
acceded to the credit agreement and certain ancillary documents to our Term Loan Facility (defined in "Liquidity and Capital
Resources - Term Loan Facility") as a guarantor of our obligations thereunder. Our consolidated financial statements include
the accounts of Five Below, Inc. and the Subsidiary. All intercompany transactions and accounts are eliminated in the
consolidation of our financial statements.
Our Market Opportunity
As a result of our unique merchandise offering and value proposition, we believe we have effectively tapped the teen
and pre-teen markets. According to the U.S. Census Bureau, there were over 63 million people in the U.S. between the ages of
5 and 19, which represented over 20% of the U.S. population as of April 1, 2010. Based on management’s experience and
industry knowledge, we believe that this segment of the population has a significant amount of disposable income as the vast
majority of this age group’s basic needs are already met.
Strategy
Our Merchandise
We offer a dynamic, edited assortment of trend-right, high-quality products, all priced at $5 or below, including select
brands and licensed merchandise, targeted at the teen and pre-teen customer. We believe we are transforming the shopping
experience of our target demographic with a unique merchandising strategy and high-energy retail concept that our customers
consider fun and exciting. Based on management’s experience and industry knowledge, we believe our compelling value
proposition and the dynamic nature of our merchandise offering has fostered universal appeal to customers across a variety of
age groups beyond our target demographic.
Our typical store features in excess of 4,000 stock-keeping units, or SKUs, across a number of our category worlds
including Style, Room, Sports, Tech, Crafts, Party, Candy and Now. We focus our merchandising strategy on maintaining core
categories within our stores, but aim to generate high item velocity and sell-through to keep our assortment fresh and drive
repeat visits. We monitor trends in our target demographic market, historical sales trends of current and prior products and the
success of new product launches to ensure that our merchandise is relevant for our customers. We have a highly planned
merchandise strategy focused on trend-right and everyday products supplemented by selected opportunistic purchases from our
vendors to drive traffic and therefore offer our customers a consistently exciting shopping experience.
We believe we offer a compelling value proposition to our customers across all of our core product categories. The
common element of our dynamic merchandise selection is the consistent delivery of exceptional value to the consumer, with all
products offered at or below the $5 price point. Pricing all items at $5 or below enables us to provide an extensive range of
exciting products, while maintaining the attraction of a value retailer. Many of the products we sell can also be found in mall
specialty stores, department stores, mass merchandisers and drug stores; however, we offer all of these products in an exciting
and easy to shop retail environment at price points of $5 and below.
Product Mix
We organize the merchandise in our stores into the following category worlds:
•
Style: Consists primarily of accessories such as novelty socks, sunglasses, jewelry, scarves, gloves, hair
accessories and “attitude” t-shirts. Our beauty offering includes products such as nail polish, lip gloss,
fragrance and branded cosmetics.
• Room: Consists of items used to complete and personalize our customer’s living space, including glitter
lamps, posters, frames, fleece blankets, pillows, candles, incense and related items. We also offer storage
options for the customer’s room and locker.
7
•
Sports: Consists of an assortment of sport balls, team sports merchandise and fitness accessories, including
hand weights, jump ropes and gym balls. We also offer a variety of games, including name brand board
games, puzzles, toys and plush items. In the summer season, our sports offering also includes pool, beach and
outdoor toys, games and accessories.
• Tech: Consists of a selection of accessories for PCs, cell phones, MP3 players and tablet computers. The
offering includes cases, chargers, headphones and other related items. We also carry a range of media
products including books, video games and DVDs.
• Crafts: We offer an assortment of craft activity kits, as well as arts and crafts supplies such as crayons,
markers and stickers. We also offer trend-right items for school such as backpacks, fashion notebooks and
journals, novelty pens and pencils, as well as everyday name brand items.
•
Party: Consists of party goods, decorations and greeting cards, as well as every day and special occasion
merchandise.
• Candy: Consists of branded items that appeal to teens and pre-teens. This category includes an assortment of
classic and novelty candy bars and movie-size box candy as well as gum and snack food. We also sell chilled
drinks via coolers.
• Now: Consists of seasonally-specific items used to celebrate and decorate for events such as Christmas,
Easter, Halloween and St. Patrick’s Day. These products are most often placed at the front of the store.
Set forth below is data for the following groups of products – leisure, fashion and home, and party and snack. The
percentage of net sales represented by each product group for each of the last three fiscal years was as follows:
Sales by Product Group
Leisure
Fashion and home
Party and snack
Total
Percentage of Net Sales
2013
2012
2011
51.7%
29.3%
19.0%
100.0%
52.6%
30.3%
17.1%
100.0%
50.6%
31.7%
17.7%
100.0%
Leisure includes items such as sporting goods, games, toys, tech, books, electronic accessories, and arts and crafts.
Fashion and home includes items such as personal accessories, “attitude” t-shirts, beauty offerings, home goods and storage
options. Party and snack includes items such as party and seasonal goods, greeting cards, candy and other snacks, and
beverages.
8
Our Stores
As of February 1, 2014, we operated 304 stores throughout the Northeast, South and Midwest regions of the United
States. Our new store model assumes a store size of 7,500 square feet. Our stores are primarily located in power, community
and lifestyle shopping centers; less than 3% of our stores are located in malls. The following map shows the number of stores in
each of the states in which we operated and the locations of our distributions centers as of February 1, 2014.
Store Design and Layout
We present our products in a unique and engaging in-store atmosphere. We maintain a consistent floor layout designed
with an easy-to-navigate racetrack flow and featuring sight-lines across the entire store enabling customers to easily identify
our category worlds. All of our stores feature a sound system playing popular music throughout the shopping day. We employ
novel and dynamic techniques to display our products, including distinctive merchandise fixtures and colorful and stimulating
signage, which attract customers, encourage hands-on interaction with our products and convey our value pricing. In addition
to traditional perimeter and gondola shelving, racks and tables, we utilize innovative approaches such as wheelbarrows, barrels
and bins strategically placed throughout our stores. These techniques foster customer interaction with products, supporting the
strong relationship we strive to develop with our customers and enhance our upbeat and vibrant shopping environment.
Each of our category worlds is strategically located within our stores in an effort to enhance the customer’s shopping
experience. For example, our Now offerings are located in the front of the store with the goal of catching customers’ attention
and being “top of mind,” and specially featured value items and other key items are positioned along the center aisle. Impulse
items and “dollar value” tables surround the checkout areas to capture add-on purchases.
Expansion Opportunities and Site Selection
Our unique focus on the teen and pre-teen customer is supported by our real estate strategy to locate stores in high-
visibility locations. We seek to operate stores in high-visibility, high-traffic retail venues, which reinforce our brand message,
heighten brand awareness and drive customer traffic.
9
Our strategy is to saturate markets with clusters of stores because of the considerable benefit that stores derive from
market concentration. Our store model is profitable across a variety of urban, suburban and semi-rural markets and in multiple
real estate venues including power, community and lifestyle shopping centers. Our retail concept works well with a large and
varied group of national co-tenants that drive customer traffic.
We select store sites for new store openings based upon certain criteria including minimum population density
requirements, availability of attractive lease terms, sufficient space and strong positioning within a center. Members of our real
estate team spend considerable time evaluating prospective sites before bringing a proposal to our real estate committee. Our
real estate committee, which is composed of senior management including our executive officers, approves all of our locations
before a lease is signed.
We believe there is a significant opportunity to expand our store base in the U.S. We opened 60 net new stores in fiscal
2013, and we intend to open approximately 62 new stores in fiscal 2014 through expansion in existing markets and by entering
new markets. We maintain a pipeline of real estate sites that have been approved by our real estate committee and have
executed 48 leases through February 1, 2014 for new stores in fiscal 2014. Our recent store growth is summarized in the
following table:
Period
Fiscal 2011
Fiscal 2012
Fiscal 2013
Stores at
Start of
Period
Stores
Opened
Stores
Closed
Net
Store
Increase
Stores at
End of
Period
142
192
244
51
52
62
1
—
2
50
52
60
192
244
304
During the twelve months ended February 1, 2014, 62 additional stores were opened and 2 stores were closed, bringing
the total number of stores open as of February 1, 2014 to 304.
Opening stores within existing markets enables Five Below to benefit from enhanced brand awareness and to achieve
advertising, operating and distribution efficiencies. Our targeted new store openings include additional locations in existing
markets as well as expansion into adjacent states and markets. In existing markets, we use a store densification strategy that
promotes brand awareness and leverages marketing, operating and distribution costs. When entering new markets, we employ a
store clustering strategy, opening multiple stores in a single market on the same day, enabling us to leverage marketing and pre-
opening expenses and generate initial new market brand awareness.
Our store growth is supported by our new store economics, which we believe to be compelling. Our new store model
assumes a store size of approximately 7,500 square feet that achieves sales of approximately $1.5 million to $1.6 million in the
first full year of operation and an average new store cash investment of approximately $0.3 million, including our store build-
out (net of tenant allowances), inventory (net of payables) and cash pre-opening expenses. Our new store model targets an
average payback period of less than one year on our initial investment.
Store Management, Culture and Training
Each of our stores is managed by a general manager and one or two assistant managers who oversee full-time and part-
time team members within each store. Each general manager is responsible for the day-to-day operations of his or her store,
including the unit’s operating results, maintaining a clean and appealing store environment and the hiring, training and
development of personnel. We also employ regional managers who are responsible for overseeing the operations of our district
managers. Our district managers are responsible for overseeing the operations of 10 to 15 stores, on average.
We are guided by a philosophy that recognizes strong sales performance and customer service, allowing us to identify
and reward team members who meet our high performance standards. Store managers and assistant managers participate in a
rewarding bonus incentive program based on exceeding planned levels of sales and are paid on a monthly basis. We also
recognize individual performance through internal promotions and provide extensive opportunities for advancement.
Our employees are critical to achieving our goals, and we strive to hire talented employees with high energy levels and
motivation. We have well-established store operating policies and procedures and an in-store training program for new store
managers, assistant managers and staff. In addition, we have a dedicated group of training and new store opening managers
who are focused on ensuring a consistent new store opening process and who leverage their extensive experience and
knowledge of the Five Below culture to train new store managers. Our customer service and store procedure training programs
are designed to enable associates to assist customers in a friendly manner and to help to create a positive sales-driven
environment and culture as well as teach successful operating practices and procedures.
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We have developed a disciplined approach to buying and a dynamic inventory planning and allocation process to support
Merchandising, Sourcing and Distribution
our merchandising strategy.
Merchandising
Our merchandising team consists of an Executive Vice President, Merchandising, who reports directly to our Chief
Executive Officer, supported by general merchandising managers and an extensive team of merchandising personnel. Our
merchandising team works directly with our product development team and our central planning and allocation group to ensure
a consistent delivery of products across our store base. Our Executive Vice President, Merchandising has over 20 years of
experience within the retail sector.
Our product development team consists of a Senior Vice President of Business and Product Development, who reports
directly to our Chief Executive Officer and is supported by a product development team. Our product development team works
directly with our merchandising group to identify new and improved products through international sourcing. Our Senior Vice
President of Business and Product Development has over 30 years of experience within the retail sector.
Sourcing
We believe we have strong sourcing capabilities developed through a dynamic and collaborative relationship with our
vendor partners that provide us with favorable access to quality merchandise at attractive prices. We regularly purchase core
merchandise in accordance with our key categories. We also employ an opportunistic buying strategy, capitalizing on selected
excess inventory opportunities, to purchase complementary merchandise based on consumer trends, product availability and
favorable economic terms.
We work with approximately 780 active vendors, with no single vendor representing more than 8% of our purchases in
fiscal 2013. We sourced approximately 79% of our purchases from domestic vendors in fiscal 2013. We typically have no long-
term supply agreements or exclusive arrangements with our vendors, and our top 20 vendors represent approximately 40% of
total goods purchased in fiscal 2013.
Distribution
We distribute over 85% of our merchandise from our 421,000 square foot distribution center in New Castle, Delaware
and our 605,000 square foot distribution center in Olive Branch, Mississippi, with the remaining merchandise shipped directly
from the vendor to our stores. We realize cost savings by working with our vendors to streamline and reduce packaging to
diminish shipping costs.
We generally ship merchandise from our distribution centers to our stores between two and four times a week, depending
on the season and the volume of a specific store. We use contract carriers to ship merchandise to our stores. From time to time,
we augment our distribution facilities with third-party warehousing. We continuously assess ways to maximize the productivity
and efficiency of our existing distribution facilities and evaluate opportunities for additional distribution centers.
Marketing and Advertising
Our cost-effective marketing strategy is designed to drive store traffic and increase brand awareness with our target
demographic, as well as other value-oriented customers. Our strategy includes the use of newspaper circulars focused during
peak selling seasons that highlight our brand and exceptional value proposition as well as grassroots marketing to support
existing and new market entries. Additionally, we rely on the strong visibility and the presence of our store locations, email
messaging and community fundraising to promote and further our brand image and drive traffic. Our social media presence is
growing rapidly as we utilize Facebook, Instagram and Twitter to engage our customers with compelling digital content on a
daily basis.
Our marketing team works with our merchandising team to develop novel and dynamic techniques to display our
products, including distinctive merchandise fixtures and colorful and stimulating signage, which attract customers, encourage
hands-on interaction with our products and convey our value pricing.
For new store openings, we seek to create community awareness and consumer excitement through a mix of print
advertising, public relations and community outreach promoting the grand opening and by creating an engaging grand opening
event that includes contests, giveaways and signature “Five Cent” hot dogs. We also aim to execute multiple store openings in a
given new market on the same day in order to leverage marketing efforts to produce maximum impact.
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In addition to our marketing and public relations efforts described above, we also maintain a website
(www.fivebelow.com) and, over the last year, our online following has grown substantially. We use both our website and social
networking sites to highlight our featured products, value proposition, store locations, employment opportunities, and grand
openings.
Competition
We compete with a broad range of retailers including discount, mass merchandise, grocery, drug, convenience, variety
and other specialty stores with both physical locations and online stores. Many of these retail companies operate stores in many
of the areas where we operate, and many of them engage in extensive advertising and marketing efforts.
The principal basis upon which we compete is by offering a dynamic, edited assortment of exciting products, all priced at
$5 or below and including select brands and licensed merchandise, targeted at the teen and pre-teen customer. We believe we
are transforming the shopping experience of our target demographic with a unique merchandising strategy and high-energy
retail concept that our customers consider fun and exciting. Our success also depends in substantial part on our ability to
respond quickly to trends so that we can meet the changing demands of our customers. We believe that we compare favorably
relative to many of our competitors based on our merchandising strategy, edited product assortment targeted at teens and pre-
teens, store environment, flexible real estate strategy and company culture. Nonetheless, certain of our competitors have greater
financial, distribution, marketing and other resources than we do.
Trademarks and Other Intellectual Property
We own several trademarks that have been registered with the U.S. Patent and Trademark Office, including Five Below®
and Five Below Hot Stuff. Cool Prices®. We also own domain names, including www.fivebelow.com, and unregistered
copyrights in our website content. We attempt to obtain registration of our trademarks whenever practicable and pursue any
infringement of those marks. Solely for convenience, trademarks and trade names referred to in this document may appear
without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest
extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We also
refer to product names, trademarks, trade names and service marks that are the property of other companies.
Management Information Systems
Our management information systems provide a full range of business process assistance and timely information to
support our merchandising strategy, warehouse management, stores and operating and financial teams. We believe our current
systems provide us with operational efficiencies, scalability, management control and timely reporting that allow us to identify
and respond to merchandising and operating trends in our business. We use a combination of internal and external resources to
support store point-of-sale, merchandise planning and buying, inventory management, financial reporting, real estate and
administrative functions. We continuously assess ways to maximize productivity and efficiency, as well as, evaluate
opportunities to further enhance our existing systems.
Government Regulation
We are subject to labor and employment laws, laws governing advertising, privacy laws, safety regulations and other
laws, including consumer protection regulations that regulate retailers and/or govern the promotion and sale of merchandise
and the operation of stores and warehouse facilities. We monitor changes in these laws and believe that we are in material
compliance with applicable laws.
We maintain third-party insurance for a number of risk management activities including workers’ compensation, general
liability, property and employee-related health care benefits. We evaluate our insurance requirements on an ongoing basis to
ensure we maintain adequate levels of coverage.
Insurance
Employees
As of February 1, 2014, we employed approximately 1,000 full-time and 4,500 part-time personnel. Of our total
employees, approximately 200 were based at our corporate headquarters in Philadelphia, Pennsylvania, approximately 200
were based at our distribution centers in New Castle, Delaware and Olive Branch, Mississippi and approximately 5,100 were
store employees. The number of part-time associates fluctuates depending on seasonal needs. We consider our relationship with
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our employees to be very good. None of our employees belong to a union or are party to any collective bargaining or similar
agreement.
Seasonality
Our business is seasonal in nature and demand is generally the highest in the fourth fiscal quarter due to the year-end
holiday season. To prepare for the holiday season, we must order and keep in stock more merchandise than we carry during
other parts of the year. We expect inventory levels, along with an increase in accounts payable and accrued expenses, generally
to reach their highest levels in the third and fourth fiscal quarters in anticipation of the increased net sales during the year-end
holiday season. As a result of this seasonality, and generally because of variation in consumer spending habits, we experience
fluctuations in net sales and working capital requirements during the year.
Available Information
For more information about us, visit our website at www.fivebelow.com. The contents of our website are not part of
this Annual Report on Form 10-K. Our electronic filings with the Securities and Exchange Commission (including all annual
reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and any amendments to these
reports), including the exhibits, are available, free of charge, through our website as soon as reasonably practicable after we
electronically file them with, or furnish them to, the Securities and Exchange Commission.
ITEM 1A. RISK FACTORS
You should consider carefully the following risks and uncertainties when reading this Annual Report. If any of the
following risks actually occurs, our business, financial condition and results of operations could be materially and adversely
affected. In that event, the trading price of our common stock could decline. Although we believe that we have identified and
discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not
presently known or that are not currently believed to be significant that may adversely affect our performance or financial
condition.
Risks Relating to Our Business and Industry
We may not be able to successfully implement our growth strategy on a timely basis or at all, which could harm our growth
and results of operations.
Our growth is dependent on our ability to open profitable new stores. We believe we have an opportunity to continue to
grow our store base from 304 stores in 19 states as of February 1, 2014, to more than 2,000 locations over time.
Our ability to open profitable new stores depends on many factors, including our ability to:
•
•
•
•
identify suitable markets and sites for new stores;
negotiate leases with acceptable terms;
achieve brand awareness in the new markets;
efficiently source and distribute additional merchandise;
• maintain adequate distribution capacity, information systems and other operational system capabilities;
•
•
hire, train and retain store management and other qualified personnel; and
achieve sufficient levels of cash flow and financing to support our expansion.
Unavailability of attractive store locations, delays in the acquisition or opening of new stores, delays or costs resulting
from a decrease in commercial development due to capital constraints, difficulties in staffing and operating new store locations
or lack of customer acceptance of stores in new market areas may negatively impact our new store growth and the costs or the
profitability associated with new stores.
Additionally, some of our new stores may be located in areas where we have little experience or a lack of brand
recognition. Those markets may have different competitive conditions, market conditions, consumer tastes and discretionary
spending patterns than our existing markets, which may cause these new stores to be less successful than stores in our existing
markets. Other new stores may be located in areas where we have existing stores. Although we have experience in these
markets, increasing the number of locations in these markets may result in inadvertent over-saturation of markets and
temporarily or permanently divert customers and sales from our existing stores, thereby adversely affecting our overall
financial performance.
13
Accordingly, we cannot assure you that we will achieve our planned growth or, even if we are able to grow our store base
as planned, that any new stores will perform as planned. If we fail to successfully implement our growth strategy, we will not
be able to sustain the rapid growth in sales and profits that we expect, which would likely have an adverse impact on the price
of our common stock.
Any disruption in our ability to select, obtain, distribute and market merchandise attractive to customers at prices that allow
us to profitably sell such merchandise could impact our business negatively.
We generally have been able to select and obtain sufficient quantities of attractive merchandise at prices that allow us to
be profitable. If we are unable to continue to select products that are attractive to our customers, to obtain such products at costs
that allow us to sell such products at a profit, or to market such products effectively to consumers, our sales or profitability
could be affected adversely. In addition, the success of our business depends in part on our ability to anticipate, identify and
respond promptly to evolving trends in demographics and consumer preferences, expectations and needs. If we are unable to
quickly respond to developing trends or if the spending patterns or demographics of these markets change, and we do not
timely and appropriately respond to such changes, then the demand for our products, which are discretionary, and our market
share could be adversely affected. Failure to maintain attractive stores and to timely identify or effectively respond to changing
consumer needs, preferences and spending patterns could adversely affect our relationship with customers, the demand for our
products and our market share.
Any disruption in the supply or increase in pricing of our merchandise could negatively impact our ability to achieve
anticipated operating results. The products we sell are sourced from a wide variety of domestic and international vendors. We
have not experienced any difficulty in obtaining sufficient quantities of core merchandise and believe that, if one or more of our
current sources of supply become unavailable, we would generally be able to obtain alternative sources without experiencing a
substantial disruption of our business. However, such alternative sources could increase our merchandise costs and reduce the
quality of our merchandise, and an inability to obtain alternative sources could affect our sales.
A significant majority of our merchandise is manufactured outside the United States, and changes in the prices and flow
of these goods for any reason could have an adverse impact on our operations. The United States and other countries have
occasionally proposed and enacted protectionist trade legislation, which may result in changes in tariff structures and trade
policies and restrictions that could increase the cost or reduce the availability of certain merchandise. Any of these or other
measures or events relating to vendors and the countries in which they are located or where our merchandise is manufactured,
some or all of which are beyond our control, can negatively impact our operations, increase costs and lower our margins. Such
events or circumstances include, but are not limited to:
•
•
•
political and economic instability;
the financial instability and labor problems of vendors;
the availability and cost of raw materials;
• merchandise quality or safety issues;
•
•
•
changes in currency exchange rates;
inflation; and
transportation availability and cost.
These and other factors affecting our vendors and our access to products could affect our financial performance
adversely.
Extreme weather conditions in the areas in which our stores are located could negatively affect our business and results of
operations.
Extreme weather conditions in the areas in which our stores are located could negatively affect our business and
results of operations. Inclement weather conditions, as well as severe storms, in areas in which we operate could have a
significant impact on consumer behavior, travel and store traffic patterns, as well as our ability to operate our stores. For
example, frequent or unusually heavy snowfall, ice storms, rainstorms or other extreme weather conditions over a prolonged
period could make it difficult for our customers to travel to our stores and thereby reduce our sales and profitability. Any
reduction in sales from extreme weather could be further impacted by the fact that we do not sell our products on the Internet as
consumers cannot purchase our products without traveling to our stores during inclement weather. In addition, we typically
generate higher revenues and gross margins during our last fiscal quarter, which includes the year-end holiday season. If
weather conditions are not favorable during these periods, our operating results and cash flow from operations could be
adversely affected.
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Our new store growth is dependent upon our ability to successfully expand our distribution network capacity, and failure to
achieve or sustain these plans could affect our performance adversely.
We maintain distribution centers in New Castle, Delaware and Olive Branch, Mississippi to support our growth
objectives. The Olive Branch, Mississippi distribution center became fully operational during fiscal 2013. We continuously
assess ways to maximize the productivity and efficiency of our existing distribution facilities and evaluate opportunities for
additional distribution centers. Should we open additional distribution centers, delays in opening could adversely affect our
future operations by slowing store growth, which could, in turn, reduce sales growth. In addition, any distribution-related
construction or expansion projects entail risks which could cause delays and cost overruns, such as: shortages of materials;
shortages of skilled labor or work stoppages; unforeseen construction, scheduling, engineering, environmental or geological
problems; weather interference; fires or other casualty losses; and unanticipated cost increases. The completion date and
ultimate cost of future projects could differ significantly from initial expectations due to construction-related or other reasons.
We cannot guarantee that any project will be completed on time or within established budgets.
A significant disruption to our distribution network or to the timely receipt of inventory could adversely impact sales or
increase our transportation costs, which would decrease our profits.
We currently rely on our two distribution centers in New Castle, Delaware and Olive Branch, Mississippi to distribute our
products. Because most of our products are distributed from these centers, the loss of our distribution centers, due to natural
disaster or otherwise, would materially affect our operations. We also rely upon independent third-party transportation to
provide goods to our stores in a timely and cost-effective manner, through deliveries to our distribution centers from vendors
and then from the distribution centers or direct ship vendors to our stores. Our use of outside delivery services for shipments is
subject to risks outside of our control and any disruption, unanticipated expense or operational failure related to this process
could affect store operations negatively. For example, unexpected delivery delays or increases in transportation costs (including
through increased fuel costs or a decrease in transportation capacity for overseas shipments) could significantly decrease our
ability to generate sales and earn profits. In addition, labor shortages or work stoppages in the transportation industry or long-
term disruptions to the national and international transportation infrastructure that lead to delays or interruptions of deliveries
could negatively affect our business. If we change shipping companies, we could face logistical difficulties that could adversely
impact deliveries and we would incur costs and expend resources in connection with such change. Moreover, we may not be
able to obtain terms as favorable as those received from the independent third-party transportation providers we currently use,
which would increase our costs.
Inability to attract and retain qualified employees, particularly senior management and district, store and distribution center
managers, and to control labor costs, as well as other labor issues, could adversely affect our business.
Our growth could be adversely impacted by our inability to attract, retain and motivate qualified employees at the store
operations level, in distribution facilities, and at the corporate level, at costs which allow us to profitably conduct our
operations. Our ability to meet our labor needs, while controlling our labor costs, is subject to many external factors, including
competition for and availability of qualified personnel in a given market, unemployment levels within those markets, prevailing
wage rates, minimum wage laws, health and other insurance costs, and changes in employment and labor laws (including
changes in the process for our employees to join a union) or other workplace regulation. To the extent a significant portion of
our employee base unionizes, or attempts to unionize, our labor costs could increase. In addition, we believe the current pricing
of our healthcare costs includes the potential future impact of recently enacted comprehensive healthcare reform legislation, but
such legislation may further cause our healthcare costs to increase. Significant costs of the healthcare reform legislation may
occur after 2013 due to provisions of the legislation being phased in over time and changes to our healthcare costs structure
could have a significant negative effect on our business. In addition, our ability to pass along any increase in labor costs to our
customers is constrained by our low price model.
Our growth from existing stores is dependent upon our ability to increase sales and improve the efficiencies, costs and
effectiveness of our operations, and failure to achieve or sustain these plans could affect our performance adversely.
Increases in sales in existing stores are dependent on factors such as competition, merchandise selection, store operations
and customer satisfaction. If we fail to realize our goals of successfully managing our store operations and increasing our
customer retention and recruitment levels, our sales may not increase and our growth may be impacted adversely.
Our success depends on our executive officers and other key personnel. If we lose our executive officers or any other key
personnel, or are unable to hire additional qualified personnel, our business could be harmed.
Our future success depends to a significant degree on the skills, experience and efforts of our executive officers and other
key personnel, including Messrs. Schlessinger and Vellios, our founders. The loss of the services of any of our executive
officers or other key personnel could have an adverse effect on our operations. Our future success will also depend on our
15
ability to attract, retain and motivate qualified personnel, as a failure to attract these key personnel could have an adverse effect
on our operations. We do not currently maintain key person life insurance policies with respect to our executive officers or key
personnel.
Our cash flows from operations may be negatively affected if we are not successful in managing our inventory balances and
inventory shrinkage.
Our inventory balance represented approximately 39% of our total assets as of February 1, 2014. Efficient inventory
management is a key component of our business success and profitability. To be successful, we must maintain sufficient
inventory levels to meet our customers’ demands without allowing those levels to increase to such an extent that the costs to
store and hold the goods unduly impacts our financial results. If our buying decisions do not accurately predict customer trends
or purchasing actions, we may have to take unanticipated markdowns to dispose of excess inventory, which also can adversely
impact our financial results. We also experience inventory shrinkage, and we cannot assure you that incidences of inventory
loss and theft will stay at acceptable levels or decrease in the future, or that the measures we are taking will effectively address
the problem of inventory shrinkage. We continue to focus on ways to reduce these risks, but we cannot assure you that we will
be successful in our inventory management. If we are not successful in managing our inventory balances, our cash flows from
operations may be negatively affected.
Our business requires that we lease substantial amounts of space and there can be no assurance that we will be able to
continue to lease space on terms as favorable as the leases negotiated in the past.
We do not own any real estate. Instead, we lease all of our store locations, as well as our corporate headquarters and
distribution facilities in New Castle, Delaware and Olive Branch, Mississippi. Our stores are leased from third parties, with
typical initial lease terms of ten years. Many of our lease agreements also have additional five-year renewal options. We believe
that we have been able to negotiate favorable rental rates and tenant allowances over the last few years due in large part to the
state of the economy and higher than usual vacancy rates in shopping centers and regional malls. These trends may not
continue, and there is no guarantee that we will be able to continue to negotiate such favorable terms. Many of our lease
agreements have defined escalating rent provisions over the initial term and any extensions. Increases in our occupancy costs
and difficulty in identifying economically suitable new store locations could have significant negative consequences, which
include:
•
•
•
requiring that a greater portion of our available cash be applied to pay our rental obligations, thus reducing
cash available for other purposes and reducing our profitability;
increasing our vulnerability to general adverse economic and industry conditions; and
limiting our flexibility in planning for, or reacting to changes in, our business or in the industry in which we
compete.
We depend on cash flow from operations to pay our lease expenses and to fulfill our other cash needs. If our business
does not generate sufficient cash flow from operating activities to fund these expenses and needs and sufficient funds are not
otherwise available to us, we may not be able to service our lease expenses, grow our business, respond to competitive
challenges or fund our other liquidity and capital needs, which could harm our business. Additional sites that we lease may be
subject to long-term non-cancelable leases if we are unable to negotiate our current standard lease terms. If an existing or future
store is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the
applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease
has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. In
addition, if we are not able to enter into new leases or renew existing leases on terms acceptable to us, this could have an
adverse effect on our results of operations.
We operate in a competitive environment and, as a result, we may not be able to compete effectively or maintain or increase
our sales, market shares or margins.
We operate in a highly competitive retail environment with numerous competitors, some of which have greater resources
or better brand recognition than we do. We compete with respect to customers, price, store location, merchandise quality,
assortment and presentation, in-stock consistency, customer service and employees. This competitive environment subjects us
to various risks, including the ability to provide quality, trend-right merchandise to our customers at competitive prices that
allow us to maintain our profitability. Because of our low price model, we may have limited ability to increase prices in
response to increased costs without losing competitive position which may adversely affect our margins and financial
performance. In addition, price reductions by our competitors may result in the reduction of our prices and a corresponding
reduction in our profitability. Many of our competitors also make sales through the Internet, and although we do maintain an
16
Internet site, we do not sell merchandise online. Accordingly, we may face periods of intense competition in the future, which
could have a material adverse effect on our profitability and results of operations.
Consolidation among retailers, changes in pricing of merchandise or offerings of other services by competitors could
have a negative impact on the relative attractiveness of our stores to consumers. We do not possess exclusive rights to many of
the elements that comprise our in-store experience and product offerings. Our competitors may seek to copy our business
strategy and in-store experience, which could result in a reduction of any competitive advantage or special appeal that we might
possess. In addition, most of our products are sold to us on a non-exclusive basis. As a result, our current and future
competitors may be able to duplicate or improve on some or all of our in-store experience or product offerings that we believe
are important in differentiating our stores and our customers’ shopping experience. If our competitors were to duplicate or
improve on some or all of our in-store experience or product offerings, our competitive position and our business could suffer.
Our ability to provide quality, trend-right products while offering attractive, competitively-priced products could be impacted
by various actions of our competitors that are beyond our control.
Our profitability is vulnerable to inflation, cost increases and energy prices.
Future increases in costs such as the cost of merchandise, shipping rates, freight costs, fuel costs and store occupancy
costs may reduce our profitability, particularly given our $5 and below pricing model. These cost increases may be the result of
inflationary pressures that could further reduce our sales or profitability. Increases in other operating costs, including changes in
energy prices, wage rates and lease and utility costs, may increase our cost of goods sold or operating expenses. Our low price
model and competitive pressures in our industry may have the effect of inhibiting our ability to reflect these increased costs in
the prices of our products and therefore reduce our profitability.
Our business is seasonal, and adverse events during the holiday season could impact our operating results negatively.
Our business is seasonal, with the highest percentage of sales (approximately 40% of total annual sales over the last two
fiscal years) occurring during the last fiscal quarter (November, December and January), which includes the year-end holiday
season. We purchase substantial amounts of inventory in the end of the third fiscal quarter (October) and beginning of the
fourth fiscal quarter (November and December) and incur higher shipping costs and higher payroll costs in anticipation of the
increased sales activity during these time periods. Adverse events, such as deteriorating economic conditions, higher
unemployment, higher gas prices, public transportation disruptions or unusual weather could result in lower-than-planned sales
during the holiday season which may lead to unanticipated markdowns. Since we rely on third parties for transportation and use
third party warehouses when we build up inventory, a number of these factors are outside of our control. An unsuccessful fourth
quarter, or holiday season, will have a substantial negative impact on our financial condition and results of operations for the
entire fiscal year.
Material damage to, or interruptions to, our technology systems as a result of external factors, staffing shortages and
difficulties in updating our existing technology or developing or implementing new technology could have a material
adverse effect on our business or results of operations.
We depend on a variety of information technology systems for the efficient functioning of our business. Such systems are
subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security
breaches and natural disasters. Damage or interruption to these systems may require a significant investment to fix or replace
them, and we may suffer interruptions in our operations in the interim. Any material interruptions may have a material adverse
effect on our business or results of operations.
We also rely heavily on our information technology staff. Failure to meet these staffing needs may negatively affect our
ability to fulfill our technology initiatives while continuing to provide maintenance on existing systems. We rely on certain
vendors to maintain and periodically upgrade many of these systems so that they can continue to support our business. The
software programs supporting many of our systems were licensed to us by independent software developers. The inability of
these developers or us to continue to maintain and upgrade these information systems and software programs would disrupt or
reduce the efficiency of our operations if we are unable to convert to alternate systems in an efficient and timely manner. In
addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and
technology, or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our
operations.
Failure to maintain adequate financial and management processes and controls could lead to errors in our financial
reporting, which could harm our business and cause a decline in our stock price.
Reporting obligations as a public company and our anticipated growth are likely to place a considerable strain on our
financial and management systems, processes and controls, as well as on our personnel. In addition, as a public company, we
17
are required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley
Act of 2002 so that our management can certify the effectiveness of our internal controls and our independent registered public
accounting firm can render an opinion on the effectiveness of our internal control over financial reporting. As a result, we may
incur substantial expenses to test our systems, to make any necessary improvements, and to hire additional personnel. If our
management is unable to certify the effectiveness of our internal controls or if our independent registered public accounting
firm cannot render an opinion on the effectiveness of our internal control over financial reporting, or if material weaknesses in
our internal controls are identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could
harm our business and cause a decline in our stock price. In addition, if we do not maintain adequate financial and management
personnel, processes and controls, we may not be able to accurately report our financial performance on a timely basis, which
could cause a decline in our stock price and harm our ability to raise capital. Failure to accurately report our financial
performance on a timely basis could also jeopardize our continued listing on The NASDAQ Global Select Market or any other
stock exchange on which our common stock may be listed. Delisting of our common stock on any exchange could reduce the
liquidity of the market for our common stock, which could reduce the price of our stock and increase the volatility of our stock
price.
Our ability to obtain additional financing on favorable terms, if needed, could be adversely affected by volatility in the
capital markets.
We obtain and manage liquidity from the positive cash flow we generate from our operating activities, our access to
capital markets and our revolving credit facility. There is no assurance that our ability to obtain additional financing from
financial institutions or through the capital markets, if needed, will not be adversely impacted by economic conditions.
Tightening in the credit markets, low liquidity and volatility in the capital markets could result in diminished availability of
credit, higher cost of borrowing and lack of confidence in the equity market, making it more difficult to obtain additional
financing on terms that are favorable to us.
If we are unable to secure our customers’ confidential or credit card information, or other private data relating to our
employees or our Company, we could be subject to negative publicity, costly government enforcement actions or private
litigation, which could damage our business reputation and adversely affect our financial results.
The protection of our customer, employee and company data is critical to us. We have procedures and technology in place
to safeguard our customers’ debit and credit card, and other personal information, our employees’ private data and company
records and intellectual property. While we have taken significant steps to protect customer and confidential information, the
intentional or negligent actions of employees, business associates or third parties may undermine our security measures. As a
result, unauthorized parties may obtain access to our data systems and misappropriate confidential data. There can be no
assurance that advances in computer capabilities, new discoveries in the field of cryptography or other developments will
prevent the compromise of our customer transaction processing capabilities and personal data. Furthermore, because the
techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems, change frequently and often are
not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate
preventative measures. If any such compromise of our security or the security of information residing with our business
associates or third parties were to occur, we could be exposed to negative publicity, government enforcement actions, private
litigation or costly response measures. In addition, our reputation within the business community and with our customers may
be affected, which could result in our customers discontinuing the use of debit or credit cards in our stores, or not shopping in
our stores altogether. This could cause us to lose market share to our competitors and could have an adverse effect on our
financial results.
We are exposed to the risk of natural disasters, unusual weather conditions, pandemic outbreaks, global political events, war
and terrorism that could disrupt business and result in lower sales, increased operating costs and capital expenditures.
Our headquarters, store locations and distribution centers, as well as certain of our vendors and customers, are located in
areas which have been and could be subject to natural disasters such as floods, hurricanes, tornadoes, fires or earthquakes.
Adverse weather conditions or other extreme changes in the weather, including resulting electrical and technological failures,
may disrupt our business and may adversely affect our ability to sell and distribute products. For example, as a result of
Superstorm Sandy in October 2012, we experienced closures in 122 of our stores. In addition, we operate in markets that may
be susceptible to pandemic outbreaks, war, terrorist acts or disruptive global political events, such as civil unrest in countries
from which our vendors are located or products are manufactured. Our business may be harmed if our ability to sell and
distribute products is impacted by any such events, any of which could influence customer trends and purchases and may
negatively impact our net sales, properties or operations. Such events could result in physical damage to one or more of our
properties, the temporary closure of some or all of our stores or distribution centers, the temporary lack of an adequate work
force in a market, temporary or long-term disruption in the transport of goods, delay in the delivery of goods to our distribution
centers or stores, disruption of our technology support or information systems, or fuel shortages or dramatic increases in fuel
18
prices, which increase the cost of doing business. These events also can have indirect consequences such as increases in the
costs of insurance if they result in significant loss of property or other insurable damage. Any of these factors, or combination
thereof, could adversely affect our operations.
Current economic conditions and other economic factors could adversely impact our financial performance and other
aspects of our business in various respects.
Weakness in the U.S. economy or other economic factors affecting disposable consumer income, such as employment
levels, inflation, business conditions, fuel and energy costs, consumer debt levels, lack of available credit, interest rates, tax
rates and erosion in consumer confidence may affect our business adversely. Such factors could reduce overall consumer
spending or cause customers to shift their spending to products other than those sold by us or to products sold by us that are
less profitable than other product choices, all of which could result in lower net sales, decreases in inventory turnover or a
reduction in profitability due to lower margins. We have limited or no ability to control many of these factors. Global economic
uncertainty, the impact of recessions and the potential for failures or realignments of financial institutions and the related
impact on available credit may impact us, our vendors and other business partners, our landlords, our customers, our service
providers and our operations in an adverse manner.
Changes in state or federal legislation or regulations, including the effects of legislation and regulations on product and
food safety and quality, wage levels, employee rights, health care, social welfare and entitlement programs could increase
our cost of doing business.
Our business is subject to numerous federal, state and local laws and regulations. We routinely incur costs in complying
with these laws and regulations. We are exposed to the risk that federal, state or local legislation may negatively impact our
operations. Changes in product and food safety and quality (including changes in labeling or disclosure requirements), federal
or state wage requirements, employee rights (including changes in the process for our employees to join a union), health care,
social welfare or entitlement programs such as health insurance, paid leave programs, or other changes in workplace regulation
or tax laws could adversely impact our ability to achieve our financial targets. Changes in other regulatory areas, such as
consumer credit, privacy and information security, or environmental regulation may result in significant added expenses or may
require extensive system and operating changes that may be difficult to implement and/or could materially increase our costs of
doing business. Untimely compliance or noncompliance with applicable laws and regulations may subject us to legal risk,
including government enforcement action, significant fines and penalties and class action litigation, as well as reputational
damage, which could adversely affect our results of operations.
Litigation may adversely affect our business, financial condition, results of operations or liquidity.
Our business is subject to the risk of litigation by employees, consumers, vendors, competitors, intellectual property
rights holders, shareholders, government agencies and others through private actions, class actions, administrative proceedings,
regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits, regulatory actions and
intellectual property claims, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very
large or indeterminate amounts, and the magnitude of the potential loss relating to these lawsuits may remain unknown for
substantial periods of time. In addition, certain of these lawsuits, if decided adversely to us or settled by us, may result in
liability material to our consolidated financial statements as a whole or may negatively affect our operating results if changes to
our business operation are required. The cost to defend future litigation may be significant. There also may be adverse publicity
associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations
are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition,
results of operations or liquidity.
If we fail to protect our brand name, competitors may adopt trade names that dilute the value of our brand name.
We may be unable or unwilling to strictly enforce our trademarks in each jurisdiction in which we do business. Also, we
may not always be able to successfully enforce our trademarks against competitors or against challenges by others. Our failure
to successfully protect our trademarks could diminish the value and efficacy of our brand recognition and could cause customer
confusion, which could, in turn, adversely affect our sales and profitability.
Our management has limited experience managing a public company and our current resources may not be sufficient to
fulfill our public company obligations.
We are subject to various regulatory requirements, including those of the Securities and Exchange Commission (SEC)
and The NASDAQ Stock Market LLC. These requirements include record keeping, financial reporting and corporate
governance rules and regulations. Our management team has limited experience in managing a public company and,
historically, has not had the resources typically found in a public company. Our internal infrastructure may not be adequate to
19
support our increased reporting obligations and we may be unable to hire, train or retain necessary staff and may be reliant on
engaging outside consultants or professionals to overcome our lack of experience or employees. Our business could be
adversely affected if our internal infrastructure is inadequate and we are unable to engage outside consultants or are otherwise
unable to fulfill our public company obligations.
Product and food safety claims and the effects of legislation and regulations on product and food safety and quality could
affect our sales and results of operations adversely.
We may be subject to product liability claims from customers or actions required or penalties assessed by government
agencies relating to products, including food products that are recalled, defective or otherwise alleged to be harmful. Such
claims may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of
foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling and
transportation phases. All of our vendors and their products are contractually required to comply with applicable product and
food safety laws. We generally seek contractual indemnification and insurance coverage from our vendors. However, if we do
not have adequate contractual indemnification and/or insurance available, such claims could have a material adverse effect on
our business, financial condition and results of operations. Our ability to obtain indemnification from foreign vendors may be
hindered by the manufacturers’ lack of understanding of U.S. product liability or other laws, which may make it more likely
that we be required to respond to claims or complaints from customers as if we were the manufacturer of the products. Even
with adequate insurance and indemnification, such claims could significantly damage our reputation and consumer confidence
in our products. Our litigation expenses could increase as well, which also could have a materially negative impact on our
results of operations even if a product liability claim is unsuccessful or is not fully pursued.
We purchase a portion of our products on a closeout basis. Some of these products are obtained through brokers or
intermediaries rather than through manufacturers. The closeout nature of a portion of our products sometimes makes it more
difficult for us to investigate all aspects of these products. We attempt to assure compliance and to test products when
appropriate, and we seek to obtain indemnification through our vendors or to be listed as an additional insured, but there is no
assurance that these efforts will be successful.
We incur significant expenses as a result of being a public company, which negatively impact our financial performance
and could cause our results of operations and financial condition to suffer.
In July 2012, we completed our IPO. As a result, we are now required to incur significant legal, accounting, insurance,
compliance and other expenses as a result of being a public company. We are obligated to file annual and quarterly information
and other reports with the Securities and Exchange Commission ("SEC"). In addition, we also became subject to other
reporting and corporate governance requirements which impose significant compliance obligations upon us. The Sarbanes-
Oxley Act of 2002, together with related rules implemented by the SEC and by The NASDAQ Stock Market LLC, have
imposed increased regulation and disclosure and have required enhanced corporate governance practices of public companies.
Our efforts to comply with these laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act
as discussed in “—Failure to maintain adequate financial and management processes and controls could lead to errors in our
financial reporting, which could harm our business and cause a decline in our stock price” above, substantially increase our
expenses, including our legal and accounting costs, and make some activities more time-consuming and costly. These laws,
rules and regulations may make it more expensive for us to obtain director and officer liability insurance in the future, and we
may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or
as officers. As a result of the foregoing, we have incurred substantial increases in legal, accounting and insurance compliance
and we may incur certain other expenses in the future, which will negatively impact our financial performance and could cause
our results of operations and financial condition to suffer.
The terms of our revolving credit facility may restrict our current and future operations, which could adversely affect our
ability to respond to changes in our business and to manage our operations.
Our revolving credit facility contains, and any additional debt financing we may incur would likely contain, covenants
requiring us to maintain or adhere to certain financial ratios or limits and covenants that restrict our operations, which may
include limitations on our ability to, among other things:
•
•
•
•
incur additional indebtedness;
pay dividends and make certain distributions, investments and other restricted payments;
create certain liens or encumbrances;
enter into transactions with our affiliates;
20
•
•
redeem our common stock; and
engage in certain merger, consolidation or asset sale transactions.
Complying with these covenants could adversely affect our ability to respond to changes in our business and manage our
operations. In addition, these covenants could affect our ability to invest capital in our new stores and fund capital expenditures
for existing stores, including the costs associated with the conversion of certain stores existing before the fiscal year ended
January 30, 2010 to our current prototype new store size of approximately 7,500 square feet. Our ability to comply with these
covenants and other provisions in the revolving credit facility and any future debt instruments may be affected by changes in
our operating and financial performance, changes in general business and economic conditions, adverse regulatory
developments, or other events beyond our control. A failure by us to comply with the financial ratios and restrictive covenants
contained in our revolving credit facility and any future debt instruments could result in an event of default. Upon the
occurrence of an event of default, the lenders could elect to declare all amounts outstanding to be due and payable and exercise
other remedies as set forth in our revolving credit facility and any future debt instruments. In addition, if we are in default, we
may be unable to borrow additional amounts under any such facilities to the extent that they would otherwise be available and
our ability to obtain future financing may also be impacted negatively. If the indebtedness under our revolving credit facility
and any future debt instruments were to be accelerated, our future financial condition could be materially adversely affected.
New regulations related to conflict minerals could adversely impact our business.
The SEC has promulgated final rules mandated by the Dodd-Frank Act regarding disclosure of the use of tin, tantalum,
tungsten and gold, known as conflict minerals, included in components of products either manufactured by public companies or
for which public companies have contracted to manufacture. These new rules require due diligence to determine whether such
minerals originated from the Democratic Republic of Congo (the “DRC”) or an adjoining country and whether such minerals
helped finance the armed conflict in the DRC. The first conflict minerals report required by the new rules is due by May 31,
2014 and annually thereafter. While we do not manufacture products, we may in the future contract to manufacture products.
Accordingly, there will be costs associated with complying with these disclosure requirements, including costs to determine the
origin of conflict minerals used in any products we are deemed to contract to manufacture. In addition, the implementation of
these rules could adversely affect the sourcing, supply and pricing of materials used in our products. Also, we may face
reputational challenges if the due diligence procedures we implement do not enable us to verify the origins for all conflict
minerals or to determine that such minerals are DRC conflict-free.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile or may decline regardless of our operating performance.
Shares of our common stock were sold in our IPO in July 2012 at a price of $17.00 per share, and our common stock has
subsequently traded as high as $55.28 and as low as $25.00 during the period from our IPO to February 1, 2014.
An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price of
our common stock. In addition, broad market and industry factors, most of which we cannot control, may harm the price of our
common stock, regardless of our actual operating performance. Factors that could cause fluctuation in the price of our common
stock may include, among other things:
•
•
•
•
•
•
•
•
•
•
actual or anticipated fluctuations in quarterly operating results or other operating metrics, such as comparable
store sales, that may be used by the investment community;
changes in financial estimates by us or by any securities analysts who might cover our stock;
speculation about our business in the press or the investment community;
conditions or trends affecting our industry or the economy generally;
stock market price and volume fluctuations of other publicly traded companies and, in particular, those that
are in the retail industry;
announcements by us or our competitors of new product offerings, significant acquisitions, strategic
partnerships or divestitures;
our entry into new markets;
timing of new store openings;
percentage of sales from new stores versus established stores;
additions or departures of key personnel;
21
•
•
•
•
actual or anticipated sales of our common stock, including sales by our directors, officers or significant
shareholders;
significant developments relating to our relationships with business partners, vendors and distributors;
customer purchases of new products from us and our competitors;
investor perceptions of the retail industry in general and our Company in particular;
• major catastrophic events;
•
•
volatility in our stock price, which may lead to higher stock-based compensation expense under applicable
accounting standards; and
changes in accounting standards, policies, guidance, interpretation or principles.
In the past, securities class action litigation has often been instituted against companies following periods of volatility in
their stock price. This type of litigation, even if it does not result in liability for us, could result in substantial costs to us and
divert management's attention and resources.
Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock
price.
The market price of our common stock could decline significantly as a result of sales of a large number of shares of our
common stock in the market. The sales, or the perception that these sales might occur, could depress the market price of our
common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem appropriate.
As of February 1, 2014, we had 54,190,724 shares of common stock outstanding, which are freely tradable without
restriction under the Securities Act of 1933, as amended (the "Securities Act"), except for any shares of common stock held or
acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which are
restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is
registered under the Securities Act or an exemption from registration is available. In addition, pursuant to our amended and
restated investor rights agreement, certain of our investors have rights to require us to file registration statements registering
additional sales of shares of common stock or to include sales of such shares of common stock in registration statements that
we may file for ourselves or other shareholders. In order to exercise these registration rights, these shareholders must satisfy
certain conditions. Subject to compliance with applicable lock-up restrictions, shares of common stock sold under these
registration statements can be freely sold in the public market. In the event such registration rights are exercised and a large
number of shares of common stock are sold in the public market, such sales could reduce the trading price of our common
stock. These sales also could impede our ability to raise future capital. Additionally, we will bear all expenses in connection
with any such registrations (other than stock transfer taxes and underwriting discounts or commissions).
In the future, we may also issue our securities in connection with investments or acquisitions. The number of shares of our
common stock issued in connection with an investment or acquisition could constitute a material portion of our then-
outstanding shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions
may result in additional dilution to you.
Certain of our existing investors have interests and positions that could present potential conflicts with our and our
shareholders' interests.
Advent makes investments in companies and may, from time to time, acquire and hold interests in businesses that compete
directly or indirectly with us. Advent may also pursue, for its own accounts, acquisition opportunities that may be
complementary to our business, and as a result, those acquisition opportunities may not be available to us. Our Second
Amended and Restated Shareholders Agreement, as amended, contains provisions renouncing any interest or expectancy held
by our directors affiliated with Advent in certain corporate opportunities. Accordingly, the interests of Advent may supersede
ours, causing them or their affiliates to compete against us or to pursue opportunities instead of us, for which we have no
recourse. Such actions on the part of Advent and inaction on our part could have a material adverse effect on our business,
financial condition and results of operations.
Your percentage ownership in us may be diluted by future equity issuances, which could reduce your influence over matters
on which shareholders vote.
Our board of directors has the authority, without action or vote of our shareholders, to issue all or any part of our
authorized but unissued shares of common stock, including shares issuable upon the exercise of options, shares that may be
22
issued to satisfy our obligations under our equity incentive plan or shares of our authorized but unissued preferred stock. We
initially reserved 7,600,000 shares of common stock under our equity incentive plan for future issuances and, as of February 1,
2014, 1,304,620 shares of our common stock are issuable upon the exercise of options outstanding. We also initially reserved
500,000 shares of common stock under our employee stock purchase plan for future issuances, and as of February 1, 2014,
3,565 shares of our common stock have been issued. Exercises of these options or issuances of common stock or preferred
stock could reduce your influence over matters on which our shareholders vote and, in the case of issuances of preferred stock,
likely could result in your interest in us being subject to the prior rights of holders of that preferred stock.
We do not expect to pay any cash dividends for the foreseeable future.
For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and
we do not anticipate paying any cash dividends on our common stock. Any determination to pay dividends in the future will be
at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual
restrictions, including under agreements for indebtedness we may incur, restrictions imposed by applicable law and other
factors our board of directors deems relevant. Accordingly, if you purchase shares, realization of a gain on your investment will
depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the
foreseeable future should not purchase our common stock.
If securities or industry analysts do not publish research or continue to publish or publish inaccurate or unfavorable
research about our business, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts
publish about us or our business. If one or more of these analysts ceases coverage of our Company or fails to publish reports on
us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to
decline. Moreover, if our operating results do not meet the expectations of the investor community, or one or more of the
analysts who cover our Company downgrade our stock, our stock price could decline.
Anti-takeover provisions could delay and discourage takeover attempts that shareholders may consider to be favorable.
Certain provisions of our amended and restated articles of incorporation and amended bylaws and applicable provisions of
Pennsylvania law may make it more difficult or impossible for a third party to acquire control of us or effect a change in our
board of directors and management.
In particular, these provisions, among other things:
•
•
•
•
•
provide that only the chairman of the board of directors, the chief executive officer or a majority of the board
of directors may call special meetings of the shareholders;
classify our board of directors into three separate classes with staggered terms;
provide for supermajority approval requirements for amending or repealing provisions in our amended and
restated articles of incorporation and amended bylaws;
establish certain advance notice procedures for nominations of candidates for election as directors and for
shareholder proposals to be considered at shareholders’ meetings; and
permit the board of directors, without further action of the shareholders, to issue and fix the terms of
preferred stock, which may have rights senior to those of the common stock.
In addition, anti-takeover provisions in Pennsylvania law could make it more difficult for a third party to acquire control of
us. These provisions could adversely affect the market price of our common stock and could reduce the amount that
shareholders might receive if we are sold. For example, Pennsylvania law may restrict a third party's ability to obtain control of
us and may prevent shareholders from receiving a premium for their shares of our common stock. Pennsylvania law also
provides that our shareholders are not entitled by statute to propose amendments to our articles of incorporation.
These and other provisions of Pennsylvania law and our amended and restated articles of incorporation and amended
bylaws could delay, defer or prevent us from experiencing a change of control or changes in our board of directors and
management and may adversely affect our shareholders' voting and other rights. Any delay or prevention of a change of control
transaction or changes in our board of directors and management could deter potential acquirers or prevent the completion of a
transaction in which our shareholders could receive a substantial premium over the then current market price for their shares of
our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
23
ITEM 2. PROPERTIES
We do not own any real property. Our corporate headquarters are located in Philadelphia, Pennsylvania and are leased
under a lease agreement expiring in 2022, with options to renew for two successive five-year periods. Our approximately
421,000 square foot distribution center located in New Castle, Delaware is leased under a lease agreement expiring in 2016
with options to renew for two successive five-year periods. Our approximately 605,000 square foot distribution center in Olive
Branch, Mississippi is leased under a lease agreement expiring in 2022 with options to renew for three successive five-year
periods.
At the end of fiscal 2013, there were 304 Five Below store locations in 19 states. All of our stores are leased from third
parties, and the leases typically have ten-year terms with additional five-year renewal options, and many provide us with the
option to terminate early under specified conditions. In addition to future minimum lease payments, some of our store leases
provide for additional rental payments based on a percentage of net sales if sales at the respective stores exceed specified
levels, as well as the payment of common area maintenance charges, real property insurance and real estate taxes. Many of our
lease agreements have defined escalating rent provisions over the initial term and any extensions.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various proceedings, lawsuits, disputes, and claims arising in the ordinary course of our business. Many
of these actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us from time to
time include commercial, intellectual property, customer, and employment actions, including class action lawsuits. The
plaintiffs in some actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages, and
some are covered in part by insurance. We cannot predict with assurance the outcome of actions brought against us.
Accordingly, adverse developments, settlements, or resolutions may occur and negatively impact income in the quarter of such
development, settlement or resolution. If a potential loss arising from these lawsuits, claims and pending actions is probable
and reasonably estimable, we record the estimated liability based on circumstances and assumptions existing at the time.
Although the outcome of these and other claims cannot be predicted with certainty, management does not believe that the
ultimate resolution of these matters will have a material adverse effect on our financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock has been listed on the NASDAQ Global Select Market under the symbol “FIVE” since our IPO,
which had a price of $17.00 per share. Before then, there was no public market for our common stock. The following table sets
forth, for the periods indicated, the high and low sales prices of our common stock as reported by the NASDAQ Global Select
Market:
Fiscal 2013
$
First Quarter (February 3, 2013 - May 4, 2013)
$
Second Quarter (May 5, 2013 - August 3, 2013)
Third Quarter (August 4, 2013 - November 2, 2013) $
$
Fourth Quarter (November 3, 2013 - February 1,
2014)
High
Low
43.04 $
42.37 $
51.00 $
55.28 $
Fiscal 2012
$
Second Quarter (July 19, 2012 - July 28, 2012)
$
Third Quarter (July 29, 2012 - October 27, 2012)
Fourth Quarter (October 28, 2012 - February 2, 2013) $
High
Low
29.96 $
40.00 $
37.85 $
34.62
35.20
36.40
35.58
25.00
28.70
27.73
On January 31, 2014 (the last trading day of fiscal 2013), the last reported sale price on the NASDAQ Global Select
Market of our common stock was $36.65 per share. As of March 21, 2014, we had approximately 17,078 holders of record of
our common stock.
Performance Graph
This performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the
Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by
reference into any future filing under the Securities Act, or the Exchange Act, except to the extent that we specifically
incorporate it by reference into such filing.
The following graph compares the cumulative total shareholder return on our common stock from July 19, 2012 (the date
our common stock commenced trading on the NASDAQ Global Select Market) through February 1, 2014, with the return on (i)
the NASDAQ Global Market Composite Index and (ii) the NASDAQ US Benchmark Retail Index over the same period. This
graph assumes an initial investment of $100 and assumes the reinvestment of dividends, if any. Such returns are based on
historical results and are not intended to suggest future performance.
25
FIVE BELOW, INC.
NASDAQ GLOBAL MARKET
COMPOSITE INDEX
NASDAQ US BENCHMARK
RETAIL INDEX
7/19/2012
$100.00
7/27/2012 10/26/2012
$126.00
$111.90
2/1/2013
$140.00
5/3/2013
$136.80
8/2/2013
$148.20
11/1/2013
$189.40
1/31/2014
$138.30
$100.00
$99.70
$100.70
$107.20
$113.90
$124.40
$132.20
$138.40
$100.00
$101.30
$103.90
$111.00
$120.60
$130.70
$136.00
$132.70
Securities Authorized for Issuance under Equity Compensation Plans
See Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for
information regarding securities authorized for issuance under our equity compensation plans.
Dividends
On May 15, 2012, we declared and subsequently paid on May 16, 2012 a special dividend of $2.02 per share on shares of
our common stock and on an as-converted basis on shares of our then outstanding Series A 8% Convertible Preferred Stock
totaling $99.5 million, which we refer to as the 2012 Dividend.
Other than the 2012 Dividend, during the past two fiscal years, we have not declared, and currently do not plan to declare
in the foreseeable future, dividends on shares of our common stock. We currently intend to retain any future earnings for use in
the operation and expansion of our business. Any further determination to pay dividends on our capital stock will be at the
discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations,
capital requirements, general business conditions and other factors that our board of directors considers relevant. In addition,
the terms of our revolving credit facility contain restrictions on our ability to pay dividends.
Recent Sales of Unregistered Securities
The table below sets forth information regarding repurchases of our common stock during the fourth fiscal quarter of 2013.
The shares represent shares of our common stock that we have elected to repurchase due to a termination of employment prior
to vesting. We do not consider this a share buyback program.
26
Issuer Purchase of Equity Securities
(a)
Total
Number of
Shares (or
Units)
Purchased (1)
(b)
Average
Price
Paid per
Share
(or Unit)
(c)
Total
Number of
Shares (or
Units)
Purchased
as Part of
Publicly
Announced
Plans or
Programs
(d)
Maximum
Number (or
Approximate
Dollar Value)
of Shares
(or Units)
that May Yet
Be
Purchased
Under the
Plans or
Programs
Period
November 3, 2013
through November 30,
2013
December 1, 2013
through January 4,
2014
January 5, 2014
through February 1,
2014
Total
260
—
—
260
$
$
11.42
—
—
11.42
—
$
—
—
— $
—
—
—
—
(1) We exercised our right to repurchase 260 shares of unvested restricted stock during the month of November 2013 from
a former employee who ceased employment with us.
ITEM 6. SELECTED FINANCIAL AND OTHER DATA
The following table presents selected financial and other data as of and for the periods indicated. The selected financial
data for fiscal 2013, 2012 and 2011 and selected consolidated balance sheet data as of February 1, 2014 and February 2, 2013
have been derived from our consolidated financial statements audited by KPMG LLP, our independent registered public
accounting firm, included elsewhere in this Annual Report. The selected financial data for the fiscal years ended January 29,
2011, which we refer to as fiscal 2010, and January 30, 2010, which we refer to as fiscal 2009, and the selected balance sheet
data as of January 28, 2012, January 29, 2011, and January 30, 2010, have been derived from our audited consolidated financial
statements that have not been included in this Annual Report. The historical results presented below are not necessarily
indicative of the results to be expected for any future period. You should read this selected financial data in conjunction with
the consolidated financial statements and accompanying notes and the information under Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report.
We operate on a fiscal calendar that results in a given fiscal year consisting of a 52- or 53-week period ending on the
Saturday closest to January 31st of the following year. The reporting periods contained in the following table consist of 52
weeks of operations in fiscal 2013, 2011, 2010, and 2009, respectively, and 53 weeks of operations in fiscal 2012.
27
Consolidated Statements of Operations Data (1):
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses (2)
Operating income
Interest expense, net
Loss on debt extinguishment
Other income
Income before income taxes
Income tax expense (benefit) (3)
Net income
Dividend paid to preferred and unvested restricted shareholders
Series A 8% Convertible Preferred Stock cumulative dividends
Accretion of Redeemable Convertible Preferred Stock
Net income attributable to participating securities
Net income (loss) attributable to common shareholders
Per Share Data:
Basic income (loss) per common share (4)
Diluted income (loss) per common share (4)
Dividends declared and paid per common share
Weighted average shares outstanding:
Basic shares
Diluted shares
Consolidated Statements of Cash Flows Data (1):
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Other Operating and Financial Data (1):
Total stores at end of period
Comparable store sales growth
Average net sales per store (5)
Capital expenditures
Consolidated Balance Sheet Data (1):
Cash and cash equivalents
Total current assets
Total assets
Total current liabilities
Total long-term debt, excluding current portion (6)
Total liabilities
Series A 8% Convertible Preferred Stock
Series A Redeemable Convertible Preferred Stock
Series A-1 Redeemable Convertible Preferred Stock
Total shareholders’ equity (deficit)
$
$
$
$
$
$
$
$
$
$
Fiscal Year
2013
2012
2011
2010
2009
(in millions, except share and per share data)
$
535.4 $
418.8 $
347.4
188.0
134.3
53.7
1.5
0.3
—
52.0
19.8
32.1
—
—
—
(0.5)
31.7 $
0.59 $
0.59 $
— $
269.0
149.8
112.2
37.7
2.4
1.6
(0.4)
34.1
14.1
20.0
(65.4)
—
—
—
(45.4) $
(1.28) $
(1.28) $
2.02 $
297.1 $
192.3
104.9
78.6
26.2
—
—
—
26.2
10.2
16.1
—
(15.9)
—
(0.1)
0.1 $
— $
— $
— $
197.2 $
131.0
66.1
54.3
11.8
—
—
—
11.8
4.8
7.0
—
(4.5)
(3.3)
—
(0.8) $
(0.08) $
(0.08) $
13.24 $
125.1
85.0
40.1
33.2
6.9
0.1
—
—
6.8
(4.9)
11.7
—
—
(4.3)
(3.4)
4.0
0.54
0.54
—
53,294,805
35,444,200
53,741,860
35,444,200
15,903,599
15,904,108
Fiscal Year
9,672,195
9,672,195
7,452,811
7,452,811
2013
2012
2011
2010
2009
(in millions, except total stores data)
31.2
$
(25.9) $
(11.2) $
$
$
$
304
4.0%
1.9
25.9
50.2
160.9
232.1
79.7
—
115.2
—
—
—
30.4
$
(22.9) $
7.3
$
$
$
$
244
7.1%
1.8
22.9
56.1
129.7
189.7
68.8
19.5
118.9
—
—
—
46.7 $
(18.6) $
1.0 $
192
7.9%
1.7 $
18.6 $
41.3 $
92.2
134.5
49.9
0.3
72.4
191.9
—
—
(129.8) $
15.0
$
(14.9) $
(0.4) $
142
15.6%
1.5
14.9
$
$
$
12.2
45.9
76.6
18.2
0.3
33.5
191.9
—
—
(148.8) $
9.2
(7.3)
(0.1)
102
12.1%
1.3
7.3
12.4
35.3
56.3
11.0
—
20.0
—
18.8
18.5
(1.0)
(1) Components may not add to total due to rounding.
(2) Fiscal 2013 and 2012 includes $6.1 million and $10.5 million of stock-based compensation expense that relates to the cancellation of certain stock
options, in exchange for the grant of restricted shares and on-going expense recognition of the awards over the remaining vesting period. In addition,
fiscal 2013 and 2012 each include $1.0 million of expenses related to legal, accounting, and other fees in connection with secondary public offerings.
28
$
116.9
$
70.7
$
Fiscal 2011 includes $6.1 million of non-contractual executive bonus expense and fiscal 2010 includes $5.3 million of expense related to the 2010
Transaction.
(3) We recognized an income tax benefit of $7.4 million related to the reduction of our income tax valuation allowance in fiscal 2009. Prior to that time, a
full valuation allowance was established and no income tax expense or benefit was recorded on the consolidated statements of operations.
(4) Please see Note 2 in our consolidated financial statements included elsewhere in this Annual Report for an explanation of per share calculations.
(5) Only includes stores open during full fiscal year.
(6) We repaid $19.5 million of principal on the term loan facility in February 2014, subsequent to the end of fiscal 2013, which is classified as a current
liability and not included in the long-term balance as of the end of fiscal 2013.
29
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion together with “Selected Financial and Other Data,” and the consolidated
financial statements and related notes included elsewhere in this Annual Report. 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 in Part I, Item 1A “Risk Factors” and “Special Note Regarding Forward-Looking
Statements.” 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 2014” or “fiscal
2014” refer to the period from February 2, 2014 to January 31, 2015, which consists of a 52-week fiscal year. References to
“fiscal year 2013” or “fiscal 2013” refer to the period from February 3, 2013 to February 1, 2014, which consists of a 52-
week fiscal year. References to “fiscal year 2012” or “fiscal 2012” refer to the period from January 29, 2012 to February 2,
2013, which consists of a 53-week fiscal year. References to “fiscal year 2011” or “fiscal 2011” refer to the period from
January 30, 2011 to January 28, 2012, which consists of a 52-week fiscal year. 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.
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.
Five Below was founded in 2002 by our Executive Chairman, David Schlessinger, and our President and Chief Executive
Officer, Thomas Vellios, who recognized a market need for a fun and affordable shopping destination aimed at teens and pre-
teens aspiring to be young adults.
We believe that our business model has resulted in strong financial performance irrespective of the economic
environment. Our comparable store sales increased by 4.0% in fiscal 2013, 7.1% in fiscal 2012 and 7.9% in fiscal 2011.
Between fiscal 2011 and fiscal 2013, our net sales increased from $297.1 million to $535.4 million, representing a compound
annual growth rate of 34.2%. Over the same period, our operating income increased from $26.2 million to $53.7 million,
representing a compound annual growth rate of 43.2%. In addition, we expanded our store base from 192 stores at the end of
fiscal 2011 to 304 stores at the end of fiscal 2013. We plan to open approximately 62 new stores in fiscal 2014.
We expect to continue our strong growth in the future. By offering trend-right merchandise at a differentiated price point
of $5 and below, our stores have been successful in varying geographic regions, population densities and real estate settings.
We operate stores in 19 states in the Northeast, South and Midwest regions of the United States. We are primarily present in
power, community and lifestyle shopping centers across a variety of urban, suburban and semi-rural markets with trade areas
including at least 100,000 people in the specified market. We believe we have the opportunity to expand our store base in the
U.S. from 304 locations at February 1, 2014, to more than 2,000 locations over time. Our ability to open profitable new stores
depends on many factors, including our ability to identify suitable markets and sites; negotiate leases with acceptable terms;
achieve brand awareness in the new markets; efficiently source and distribute additional merchandise; and achieve sufficient
levels of cash flow and financing to support our expansion.
We have a proven and highly profitable store model that has produced consistent financial results and returns and our
new stores have achieved average payback periods of less than one year. Our new store model assumes a store size of 7,500
square feet that achieves annual sales of $1.5 million to $1.6 million in the first full year of operation. Our new store model also
assumes an average new store investment of approximately $0.3 million. Our new store investment includes our store build-out
(net of tenant allowances), inventory (net of payables) and cash pre-opening expenses.
Our planned store expansion will place increased demands on our operational, managerial, administrative and other
resources. Managing our growth effectively will require us to continue to maintain adequate distribution capacity, enhance our
store management systems, financial and management controls, information systems and other operational system capabilities.
In addition, we will be required to hire, train and retain store management and other qualified personnel. For further
information see Part I, Item 1A “Risk Factors-Risk Relating to our Business and Industry.”
Over the past seven years we have invested a significant amount of capital in infrastructure and systems necessary to
support our future growth and we expect to incur additional capital expenditures related to expansion of our infrastructure and
30
systems in future periods. In fiscal 2010, we expanded our New Castle, Delaware distribution center, in fiscal 2011, we
relocated our corporate headquarters and upgraded our warehouse management and information systems, and in fiscal 2013, we
opened our second distribution center in Olive Branch, Mississippi and expanded our corporate headquarters to support our
growth. We continuously assess ways to maximize the productivity and efficiency of our existing facilities, infrastructure and
systems. The timing and amount of investments in our facilities, infrastructure and systems could affect the comparability of
our results of operations in future periods. The completion date and ultimate cost of future projects could differ significantly
from initial expectations due to construction-related or other reasons.
We believe our business strategy will continue to offer significant opportunity, but it also presents risks and challenges.
These risks and challenges include, but are not limited to, that we may not be able to effectively identify and respond to
changing trends and customer preferences, that we may not be able to find desirable locations for new stores and that we may
not be able to effectively manage our future growth. In addition, our financial results can be expected to be directly impacted
by substantial increases in product costs due to commodity cost increases or general inflation which could lead to a reduction in
our sales as well as greater margin pressure as costs may not be able to be passed on to consumers. To date, changes in
commodity prices and general inflation have not materially impacted our business. In response to increasing commodity prices
or general inflation, we seek to minimize the impact of such events by sourcing our merchandise from different vendors and
changing our product mix. See Part I, Item 1A “Risk Factors” for a description of these and other important factors that could
adversely impact us and our results of operations.
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:
(cid:2)
(cid:2)
the last day of the fiscal year in which the store was relocated or expanded (for stores that
increased significantly in size); or
the last day of the fiscal month in which the store re-opens (for all other stores); and
• The period beginning on the first anniversary of the date the store received its last merchandise delivery
from one of our distribution centers through the first anniversary of the date the store re-opened.
We had historically excluded stores that are relocated or expanded during the period of construction and pre-opening
starting when the store closed. During the second quarter of 2013, we changed our comparable store sales calculation to
exclude relocated or expanded stores starting when a store receives its last merchandise delivery from one of our distribution
centers. This change would not significantly impact our historical comparable store sales calculations as previously reported.
Comparable store 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.
31
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 Annual Report regarding our comparable store sales may not be comparable to similar data
made available by other retailers. Non-comparable store sales are comprised of new store sales, sales for stores not open for a
full 15 months, and sales from existing store relocation and expansion projects that were temporarily closed (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 Annual Report regarding our gross profit and gross margin may not be comparable to
similar data made available by our competitors and other retailers.
The variable component of our cost of goods sold is higher in higher volume quarters because the variable component of
our cost of goods sold generally increases as net sales increase. We regularly analyze the components of gross profit as well as
gross margin. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns, and a
significant increase in inventory shrinkage or inability to generate sufficient sales leverage on the store occupancy, distribution
and buying components of costs of goods sold could have an adverse impact on our gross profit and results of operations.
Changes in the mix of our products may also impact our overall cost of goods sold.
Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses are composed of payroll and other compensation, marketing and
advertising expense, depreciation and amortization expense and other selling and administrative expenses. SG&A expenses as a
percentage of net sales are usually higher in lower sales volume quarters and lower in higher sales volume quarters.
The components of our SG&A expenses may not be comparable to those of other retailers. We expect that our SG&A
expenses will increase in future periods due to our continuing store growth and in part due to additional legal, accounting,
insurance and other expenses we are incurring as a result of being a public company. Among other things, the on-going
compliance with the Sarbanes-Oxley Act of 2002 and related rules and regulations have resulted in significant incremental
32
legal, accounting and other overhead costs. In addition, any increase in future stock option or other stock-based grants or
modifications will increase our stock-based compensation expense included in SG&A.
Operating Income
Operating income equals gross profit less SG&A expenses. Operating income excludes interest expense or income and
income tax expense or benefit. We use operating income as an indicator of the productivity of our business and our ability to
manage SG&A expenses. Operating income percentage measures operating income as a percentage of our net sales.
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.
Consolidated Statements of Operations Data (1):
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses (2)
Operating income
Interest expense (income), net
Loss on debt extinguishment
Other income
Income before income taxes
Income tax expense
Net income
Percentage of Net Sales (1):
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses (2)
Operating income
Interest expense (income), net
Loss on debt extinguishment
Other income
Income before income taxes
Income tax expense
Net income
Operational Data:
Total stores at end of period
Comparable stores sales growth
Average net sales per store (3)
Fiscal Year
2013
2012
2011
(in millions, except total stores)
$
$
$
$
$
535.4
347.4
188.0
134.3
53.7
1.5
0.3
—
52.0
19.8
32.1
100.0%
64.9%
35.1%
25.1%
10.0%
0.3%
—%
—%
9.7%
3.7%
6.0%
418.8
269.0
149.8
112.2
37.7
2.4
1.6
(0.4)
34.1
14.1
20.0
$
$
100.0 %
64.2 %
35.8 %
26.8 %
9.0 %
0.6 %
0.4 %
(0.1)%
8.1 %
3.4 %
4.8 %
304
4.0%
1.9
$
244
7.1 %
1.8
$
297.1
192.3
104.9
78.6
26.2
—
—
—
26.2
10.2
16.1
100.0%
64.7%
35.3%
26.5%
8.8%
—%
—%
—%
8.8%
3.4%
5.4%
192
7.9%
1.7
(1) Components may not add to total due to rounding.
(2) Fiscal 2013 and 2012 includes $6.1 million and $10.5 million of stock-based compensation expense that relates to the cancellation of certain stock
options, in exchange for the grant of restricted shares and on-going expense recognition of the awards over the remaining vesting period. In addition,
fiscal 2013 and 2012 each include $1.0 million of expenses related to legal, accounting, and other fees in connection with secondary public offerings.
Fiscal 2011 includes $6.1 million of non-contractual executive bonus expense.
(3) Only includes stores open during the full fiscal year.
33
Fiscal Year 2013 Compared to Fiscal Year 2012
Net Sales
Net sales increased to $535.4 million in fiscal year 2013, which consisted of a 52-week fiscal year, from $418.8 million
in fiscal year 2012, which consisted of a 53-week fiscal year, an increase of $116.6 million, or 27.8%. The increase was the
result of a non-comparable store sales increase of $102.0 million and a comparable store sales increase of $14.6 million. In
fiscal year 2013, we opened 60 net new stores compared to 52 new stores in fiscal year 2012. The increase in non-comparable
store sales was primarily driven by new stores and the number of stores that opened in fiscal 2012 but have not been open for
15 full months.
Comparable store sales increased 4.0% for fiscal year 2013 compared to fiscal year 2012. This increase resulted from an
increase of approximately 4.8% in the number of transactions in our stores offset by a decrease in the average dollar value of
transactions of approximately 0.8%.
Cost of Goods Sold and Gross Profit
Cost of goods sold increased to $347.4 million in fiscal year 2013 from $269.0 million in fiscal year 2012, an increase of
$78.4 million, or 29.1%. The increase in cost of goods sold was primarily the result of a $57.0 million increase in the
merchandise costs of goods resulting from an increase in sales, and a $12.2 million increase in store occupancy costs resulting
from new store openings and a $7.0 million increase in distribution costs, primarily due to the increase in sales as well as the
opening of a second distribution center.
Gross profit increased to $188.0 million in fiscal year 2013 from $149.8 million in fiscal year 2012, an increase of $38.2
million, or 25.5%. Gross margin decreased to 35.1% for fiscal year 2013 from 35.8% in fiscal year 2012, a decrease of
approximately 70 basis points. The decrease in gross margin was primarily the result of an increase of approximately 60 basis
points in distribution costs due to the opening of a second distribution center.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $134.3 million in fiscal year 2013 from $112.2 million in fiscal
year 2012, an increase of $22.1 million, or 19.7%. As a percentage of net sales, selling, general and administrative expenses
decreased 170 basis points to 25.1% in fiscal year 2013 compared to 26.8% in fiscal year 2012. The increase in selling, general
and administrative expense was primarily the result of increases of $21.0 million in store-related expenses to support new store
growth and $4.5 million of corporate-related expenses, partially offset by a decrease of $3.4 million in stock-based
compensation expense primarily related to the cancellation of certain stock options in exchange for the grant of restricted
shares in March 2012. The remaining expense related to the cancellation of certain stock options in exchange for the grant of
restricted shares from March 2012 will be recognized through March 2014, when these shares will fully vest.
Interest Expense (Income), Net
Interest expense, net decreased to $1.5 million in fiscal year 2013 from $2.4 million of interest expense, net in fiscal year
2012, a decrease of $0.9 million. The decrease in interest expense resulted mainly from the decrease in the outstanding balance
of our Term Loan Facility (see -“Liquidity and Capital Resources-Term Loan Facility” section below).
Loss on Debt Extinguishment
Loss on debt extinguishment decreased to $0.3 million in fiscal year 2013 from $1.6 million in fiscal year 2012, a
decrease of $1.3 million. The decrease in the loss on debt extinguishment is due to the $15.0 million repayment on the $100.0
million Term Loan Facility during fiscal year 2013 compared to the $65.5 million of repayments that were made during fiscal
year 2012.
Income Tax Expense
Income tax expense increased to $19.8 million in fiscal year 2013 from $14.1 million in fiscal year 2012, an increase of
$5.7 million, or approximately 40.8%. This increase in income tax expense was primarily the result of a $17.9 million increase
in pre-tax net income. Our effective tax rate for fiscal year 2013 was 38.1% compared to 41.3% in fiscal year 2012. Our
effective tax rate for fiscal year 2013 was lower than the comparable period as a result of changes in the mix of pretax income
across state jurisdictions and the Company's operating entities as a result of the Restructuring.
34
Net Income
As a result of the foregoing, net income increased to $32.1 million in fiscal year 2013 from $20.0 million in fiscal year
2012 an increase of approximately $12.1 million, or 60.5%.
Fiscal Year 2012 Compared to Fiscal Year 2011
Net Sales
Net sales increased to $418.8 million in fiscal year 2012 from $297.1 million in fiscal year 2011, an increase of $121.7
million, or 41.0%. The increase was the result of a non-comparable store sales increase of $103.2 million and a comparable
store sales increase of $18.5 million. In fiscal year 2012, we opened 52 new stores compared to a net of 50 new stores in fiscal
year 2011. The increase in non-comparable store sales was driven by the number of stores that opened in fiscal 2011 but have
not been open for 15 full months and includes $5.0 million of sales contributed by the 53rd week in fiscal 2012.
Comparable store sales increased 7.1% for fiscal year 2012 compared to fiscal year 2011. This increase resulted from an
increase of approximately 6.9% in the number of transactions in our stores and an increase in the average dollar value of
transactions of approximately 0.2%.
Cost of Goods Sold and Gross Profit
Cost of goods sold increased to $269.0 million in fiscal year 2012 from $192.3 million in fiscal year 2011,
an increase of $76.7 million, or 39.9%. The increase in cost of goods sold was primarily the result of a $59.9 million increase in
the merchandise costs of goods resulting from an increase in sales and an $11.1 million increase in store occupancy as a result
of new store openings.
Gross profit increased to $149.8 million in fiscal year 2012 from $104.9 million in fiscal year 2011, an increase of $44.9
million, or 42.8%. Gross margin increased to 35.8% for fiscal year 2012 from 35.3% in fiscal year 2011, an increase of 54 basis
points. The increase in gross margin was primarily the result of a decrease of 53 basis points in store occupancy, which
increased at a lower rate than the increase in net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $112.2 million in fiscal year 2012 from $78.6 million in fiscal
year 2011, an increase of $33.6 million, or 42.7%. As a percentage of net sales, selling, general and administrative expenses
increased 30 basis points to 26.8% in fiscal year 2012 compared to 26.5% in fiscal year 2011. The increase in selling, general
and administrative expense was primarily the result of increases of $19.5 million in store-related expenses to support new store
growth, $10.5 million of stock-based compensation expense recorded in fiscal year 2012 associated with the cancellation of
certain stock options in exchange for the grant of restricted shares in March 2012 and on-going expense recognition of the
awards over the remaining vesting period and $9.1 million of corporate related expenses, partially offset by $6.1 million of a
non-contractual bonus to certain executive officers for performance in fiscal 2011. Fiscal 2012 also included $1.0 million of
fees in connection with the filing of the secondary public offering.
Interest Expense (Income), Net
Interest expense, net increased to $2.4 million in fiscal year 2012. The increase in interest expense resulted from interest
on the outstanding balance of our term loan facility of $1.9 million, as well as amortization of deferred financing fees of $0.5
million.
Loss on Debt Extinguishment
In connection with a $65.3 million repayment of our $100.0 million term loan facility, we expensed $1.6 million of
deferred financing costs in fiscal 2012.
Income Tax Expense
Income tax expense increased to $14.1 million in fiscal year 2012 from $10.2 million in fiscal year 2011,
an increase of $3.9 million, or 38.2%. This increase in income tax expense was primarily the result of a $7.9 million increase in
pre-tax net income. Our effective tax rate increased to 41.3% in fiscal year 2012 from 38.7% in fiscal year 2011. Our fiscal year
2012 effective tax rate is negatively impacted by permanent book to tax differences relating to fees paid for our secondary
offering in fiscal 2012.
35
Net Income
As a result of the foregoing, net income increased to $20.0 million in fiscal year 2012 from $16.1 million in fiscal year
2011 an increase of $3.9 million, or 24.2%. The 53rd week in fiscal 2012 had an immaterial impact to net income.
Seasonality
Our business is seasonal in nature and demand is generally the highest in the fourth fiscal quarter due to the year-end
holiday season. To prepare for the holiday season, we must order and keep in stock more merchandise than we carry during
other parts of the year. We expect inventory levels, along with an increase in accounts payable and accrued expenses, generally
to reach their highest levels in the third and fourth fiscal quarters in anticipation of the increased net sales during the year-end
holiday season. As a result of this seasonality, and generally because of variation in consumer spending habits, we experience
fluctuations in net sales and working capital requirements during the year.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash flows from operations, historical equity financings and borrowings under our
Revolving Credit Facility (defined in “-Line of Credit”). Our primary cash needs are for capital expenditures and working
capital. During fiscal 2012, we also entered into a Term Loan Facility (defined in “-Term Loan Facility”) and used the proceeds
to pay the 2012 Dividend in May 2012.
Capital expenditures typically vary depending on the timing of new store openings and infrastructure-related investments.
We plan to make capital expenditures of approximately $35.0 million in fiscal 2014, which we expect to fund from cash
generated from operations. We expect to devote approximately $17.0 million of our capital expenditure budget in fiscal 2014 to
construct and open 62 new stores, with the remainder projected to be spent on corporate infrastructure, store relocations and
remodels and our distribution centers.
Our primary working capital requirements are for the purchase of store inventory and payment of payroll, rent, other
store operating costs and distribution costs. Our working capital requirements fluctuate during the year, rising in the third and
fourth fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak, year-end holiday shopping
season in the fourth fiscal quarter. Fluctuations in working capital are also driven by the timing of new store openings.
Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with cash
on hand and borrowings under our Revolving Credit Facility. We did not have any direct borrowings under our Revolving
Credit Facility during fiscal year 2013. When we have used our Revolving Credit Facility, the amount of indebtedness
outstanding under it has tended to be the highest in the beginning of the fourth quarter of each fiscal year. Over the past three
fiscal years, to the extent that we have drawn on the facility, we have paid down the borrowings before the end of the fiscal year
with cash generated during our peak selling season in the fourth quarter.
On June 12, 2013, we completed an internal business restructuring pursuant to which we formed Five Below
Merchandising, Inc., a wholly-owned subsidiary (the “Subsidiary”), and transferred to the Subsidiary assets, operations and
employees related to our merchandising operations (the “Restructuring”). Following the Restructuring, the Subsidiary
purchases and sells to us certain goods for sale at our retail locations, and we provide to the Subsidiary back office support,
office space and other services, in each case, pursuant to agreements between us and the Subsidiary. In connection with the
Restructuring, on June 12, 2013, we amended and restated the Loan and Security Agreement (defined in “-Line of Credit”) and
certain other ancillary documents to our Revolving Credit Facility in order to, among other things, allow us to form and
capitalize the Subsidiary and make the Subsidiary a party to the Loan and Security Agreement as a guarantor of our obligations
thereunder. The Subsidiary also acceded to the credit agreement and certain ancillary documents to our Term Loan Facility as a
guarantor of our obligations thereunder. Our consolidated financial statements include the accounts of Five Below, Inc. and the
Subsidiary. All intercompany transactions and accounts are eliminated in the consolidation of our financial statements.
As of February 1, 2014, the balance outstanding under the Term Loan Facility was $19.5 million. Pursuant to the terms of
the Term Loan Facility, due to the repayment of $65.3 million of principal under the Term Loan Facility in July 2012, we were
no longer required to make minimum quarterly payments. In May 2013, we repaid $15.0 million of principal on the Term Loan
Facility. In February 2014, subsequent to the fiscal year ended 2013, we repaid the remaining $19.5 million of principal on the
Term Loan Facility. This amount was classified as a current liability as of February 1, 2014 based on our planned repayment.
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
36
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):
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Net (decrease) increase during period in cash and cash equivalents (1)
(1) Components may not add to total due to rounding.
Cash Provided by Operating Activities
2013
Fiscal
2012
$
$
31.2 $
(25.9)
(11.2)
(5.9) $
30.4 $
(22.9)
7.3
14.8 $
2011
46.7
(18.6)
1.0
29.1
Net cash provided by operating activities for fiscal 2013 was $31.2 million, an increase of $0.8 million compared to fiscal
2012. The increase was primarily due to an increase in operating cash flows from store performance offset by an increase in
taxes paid of $14.2 million. During fiscal 2013, we added 60 net new stores and expect to add approximately 62 new stores in
fiscal 2014.
Net cash provided by operating activities for fiscal 2012 was $30.4 million, a decrease of $16.3 million compared to
fiscal 2011. The decrease in net cash provided by operating activities was primarily the result of the net change in income taxes
paid of $9.6 million, the settlement of $6.8 million of book overdrafts that were outstanding at January 28, 2012, and the
payment of $6.0 million of non-contractual bonuses to certain executive officers for performance, which were accrued at
January 28, 2012, and an increase in working capital needs to support our growth. Partially offsetting the decreases were
increased operating cash flows from store performance. During fiscal 2012, we added 52 new stores.
Net cash provided by operating activities for fiscal 2011 was $46.7 million, an increase of $31.7 million compared
to fiscal 2010. The increase in net cash provided by operating activities was primarily driven by an increase in operating
income and the reclassification of $6.8 million in book overdrafts as accounts payable, due to the timing of bank settlement.
The primary driver of the increase in our operating income is the addition of our new stores. During fiscal 2011, we
added 50 net new stores.
Cash Used in Investing Activities
Net cash used in investing activities for fiscal 2013 was $25.9 million, an increase of $3.0 million compared to fiscal
2012 related solely to capital expenditures. The increase in capital expenditures was primarily for our new store construction,
corporate infrastructure and our distribution facilities.
Net cash used in investing activities for fiscal 2012 was $22.9 million, an increase of $4.3 million compared to fiscal
2011 related solely to capital expenditures. The increase in capital expenditures was primarily for our new store construction,
our new distribution center and corporate infrastructure.
Net cash used in investing activities for fiscal 2011 was $18.6 million, an increase of $3.7 million compared to fiscal
2010 and related solely to capital expenditures. The increase in capital expenditures was primarily for corporate infrastructure
and our distribution facility.
Cash (Used in) Provided by Financing Activities
Net cash used in financing activities for fiscal year 2013 was $11.2 million, an increase of $18.5 million compared to net
cash provided by financing activities of $7.3 million in fiscal year 2012. The increase in net cash used in financing activities
was primarily the result of the $15.0 million principal repayment on the Term Loan Facility in fiscal year 2013 compared to
$100.0 million of proceeds from our Term Loan Facility and $73.2 million of net proceeds from our initial public offering,
partially offset by $99.5 million of dividend payments, and the $65.5 million of principal repayments on the Term Loan Facility
during fiscal year 2012.
37
Net cash provided by financing activities for fiscal year 2012 was $7.3 million, an increase of $6.3 million compared
to fiscal year 2011. The increase in net cash provided by financing activities was primarily the result of $100.0 million of
proceeds from our term loan facility and $73.2 million of proceeds from the IPO, partially offset by $99.5 million of dividend
payments, $65.5 million of repayments of the term loan facility, $2.8 million in debt financing costs and $1.6 million related to
the excess tax benefit related to restricted shares and the exercise of stock options and warrants. Please see “—Term Loan
Facility” for a description of the term loan facility entered into on May 16, 2012.
Fiscal 2011 cash flows provided by financing activities were primarily the result of proceeds of $1.1 million from the
issuance of common stock.
Term Loan Facility
On May 16, 2012, we entered into a $100.0 million Term Loan Facility with Goldman Sachs Bank USA as
administrative agent for a syndicate of lenders (the “Term Loan Facility”). We used the net proceeds from the Term Loan
Facility and cash on hand to pay a dividend on our common and preferred stock, totaling $99.5 million. On June 12, 2013 in
connection with the Restructuring, the Subsidiary acceded to the credit agreement and certain ancillary documents to the
Company's Term Loan Facility as a guarantor of the Company's obligations thereunder.
The Term Loan Facility provides for a term loan of $100.0 million and matures on the earlier of (i) May 16, 2015 and (ii)
the date on which such facility is accelerated following the occurrence of an event of default. The Term Loan Facility provides
for interest on borrowings, at our option, at an alternate base rate which is the greater of (i) the administrative agent’s prime rate
in effect on such day and (ii) the federal funds effective rate in effect on such day plus 0.50% with a 2.00% floor, plus a margin
of 3.25%, or a London Interbank Offer Rate (“LIBOR”) based rate with a 1.00% floor plus a margin of 4.25%. The credit
agreement for the Term Loan Facility includes a maximum consolidated net leverage ratio financial covenant, the calculation of
which allows us to net up to $10.0 million of our cash and cash equivalents against our indebtedness. Our leverage ratio must
not exceed 2.75x to 2.50x for the testing periods in calendar year 2013, 2.00x for the testing periods in calendar year 2014 and
1.75x thereafter.
The credit agreement for the Term Loan Facility also includes customary negative and affirmative covenants including,
among others, limitations on our ability to: (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and
advances; (iv) sell assets; (v) pay dividends or make distributions or other restricted payments; (vi) engage in mergers or
consolidations; or (vii) change our business.
Amounts under the credit agreement for the Term Loan Facility may become due upon certain events of default including,
among others, failure to comply with the credit agreement’s covenants, bankruptcy, default on certain other indebtedness or a
change in control. The default rate under the Term Loan Facility is 2.00% per annum.
All obligations under the Term Loan Facility are secured by substantially all of our assets and are guaranteed by the
Subsidiary, and we were in compliance with the financial covenant and other covenants applicable to us under the Term Loan
Facility.
The Term Loan Facility was subject to repayment upon the receipt of certain proceeds, including those from the sale of
certain assets, insurance proceeds and indebtedness not otherwise permitted. The Term Loan Facility was also subject to
repayment of $50.0 million upon the receipt of proceeds from the IPO. We closed the IPO on July 24, 2012. In July 2012, we
repaid $65.3 million of principal on the Term Loan Facility and $0.7 million of interest. In October 2012 and May 2013, we
repaid $0.3 million and $15.0 million, respectively, of principal on the Term Loan Facility. As of February 1, 2014, the balance
outstanding under the Term Loan Facility was $19.5 million bearing interest at a rate of 5.25%. Pursuant to the terms of the
Term Loan Facility, due to the repayment of $65.3 million principal under the Term Loan Facility in July 2012, we were no
longer required to make minimum quarterly payments. In February 2014, subsequent to the fiscal year ended 2013, we repaid
the remaining principal balance outstanding under the Term Loan Facility of $19.5 million. We classified the amount as a
current liability in our consolidated balance sheet as of February 1, 2014 based upon our planned repayment.
In connection with the Term Loan Facility, we incurred deferred financing costs of $2.7 million which are being
amortized over the term of the Term Loan Facility. The amortization is included in interest expense, net, in the consolidated
statements of operations. In connection with the $65.5 million of principal repayments on the Term Loan Facility in fiscal 2012
and the $15.0 million principal repayment on the Term Loan Facility in fiscal 2013, approximately $1.6 million and $0.3
million of the deferred financing costs were written off and included in loss on debt extinguishment in the consolidated
statements of operations, respectively. In connection with the $19.5 million principal repayment on the Term Loan Facility in
February 2014, subsequent to the fiscal year ended 2013, the remaining deferred financing costs of approximately $0.2 million
will be written off and included in loss on debt extinguishment in the consolidated statement of operations for the thirteen
weeks ending May 3, 2014.
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Line of Credit
On August 18, 2006, we entered into a loan and security agreement (the “Loan and Security Agreement”) with a bank that
included a revolving line of credit with advances tied to a borrowing base. The Loan and Security Agreement has been
amended and/or restated several times, the latest on June 12, 2013 (as amended and restated, the “Revolving Credit Facility”),
generally to extend the maturity date, increase maximum borrowings, adjust the applicable interest rates, permit the formation
and capitalization of subsidiaries, make the Subsidiary a party to the agreement as a guarantor of our obligations and modify
certain definitions.
The Revolving Credit Facility allows maximum borrowings of $20.0 million with advances tied to a borrowing base and
expires on the earliest to occur of (i) May 16, 2017, (ii) the date which was 45 days prior to the maturity date of the Term Loan
Facility if the Term Loan Facility remained outstanding or (iii) upon the occurrence of an event of default. The Revolving
Credit Facility may be increased to $30.0 million upon certain conditions. The Revolving Credit Facility includes a $5.0
million sub limit for the issuance of letters of credit. The borrowing base is 90% of eligible credit card receivables plus 90% of
the net recovery percentage of eligible inventory less established reserves.
The Revolving Credit Facility provides for interest on borrowings, at our option, at (a) a prime rate plus a margin of (i)
0.75% if excess availability is greater than or equal to 75%, (ii) 1.0% if excess availability is less than 75% but greater than or
equal to 33% or (iii) 1.25% if excess availability is less than 33% or (b) a LIBOR-based rate plus a margin of (i) 1.75% if
excess availability is greater than or equal to 75%, (ii) 2.00% if excess availability is less than 75% but greater than or equal to
33% or (iii) 2.25% if excess availability is less than 33%. The Revolving Credit Facility further provides for a letter of credit
fee equal to the LIBOR-based rate plus (i) 1.75% if excess availability is greater than or equal to 75%, (ii) 2.00% if excess
availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. The
Revolving Credit Facility also contains an unused credit facility fee of 0.375% per annum and is subject to a servicing fee of
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.
During fiscal 2013 and fiscal 2012, the Company had no borrowings or interest expense under the Revolving Credit
Facility. As of February 1, 2014, the Company had approximately $20.0 million available on the line of credit. As
of February 2, 2013, the Company had approximately $20.0 million available on the line of credit of which $19.7 million was
available and $0.3 million was issued but undrawn on an outstanding letter of credit obligation.
All obligations under the Revolving Credit Facility are secured by substantially all of our assets and are guaranteed by the
Subsidiary. As of February 1, 2014, we were in compliance with the covenants applicable to us under the Revolving Credit
Facility.
Stock Split
On July 17, 2012, we amended our articles of incorporation to reflect a 0.3460-for-1 reverse stock split of our common
stock. The amendment also changed the authorized shares of our common stock to 120,000,000 shares. Concurrent with the
reverse stock split, we adjusted (i) the conversion price of our Series A 8% Convertible Preferred Stock, (ii) the number of
shares subject to and the exercise price of our outstanding stock option awards under our equity incentive plan and (iii) the
number of shares subject to and the exercise price of our outstanding warrants to equitably reflect the split. All common stock
share and per-share data presented in this Annual Report gives effect to the reverse stock split and the change in authorized
shares and have been adjusted retroactively for all periods presented.
39
Initial Public Offering
On July 24, 2012, we completed our IPO of 11,057,692 shares of common stock at a price of $17.00 per share. The
common stock was listed on The NASDAQ Global Select Market under the symbol “FIVE.” The shares sold in the IPO were
registered under the Securities Act, pursuant to our Registration Statement on Form S-1 (File No. 333-180780), which was
declared effective by the Securities and Exchange Commission on July 18, 2012. Of the 11,057,692 shares sold in the IPO, we
issued 4,807,692 shares, and 6,250,000 shares were sold by selling shareholders, including 1,442,308 shares sold pursuant to
the exercise in full of the underwriters’ over-allotment option. We did not receive any proceeds from shares sold by the selling
shareholders. We received proceeds of approximately $73.2 million, net of approximately $8.5 million in underwriting
discounts and legal, accounting and other fees incurred in connection with the IPO. Of the $73.2 million net proceeds received
from the IPO, approximately $65.3 million and $0.7 million, respectively, were used to repay principal and interest under our
Term Loan Facility that existed as of the date of the IPO. The remaining net proceeds of the IPO were used for general
corporate purposes, including working capital.
Secondary Public Offerings
On February 4, 2013, we completed a secondary public offering of 13,012,250 shares of common stock at a price of $35.65
per share. The shares sold in the secondary public offering were registered under the Securities Act, pursuant to our
Registration Statements on Form S-1 (File No. 333-186043 and File No. 333-186275), which were declared effective by the
Securities and Exchange Commission on January 29, 2013. All of the shares sold in the secondary public offering were sold by
selling shareholders and we did not receive any proceeds. We did incur fees of approximately $1.0 million related to legal,
accounting, and other fees in connection with the secondary public offering in fiscal 2012, which are included in selling,
general and administrative expenses in the fiscal 2012 consolidated statement of operations.
On July 1, 2013, we completed a secondary public offering of 6,900,000 shares of common stock at a price of $36.00 per
share. The shares sold in the secondary public offering were registered under the Securities Act, pursuant to our registration
statement on Form S-1 (File No. 333-188578), which was declared effective by the Securities and Exchange Commission on
June 26, 2013. All of the shares sold in the secondary public offering were sold by selling shareholders and we did not receive
any proceeds. We incurred fees of approximately $1.0 million related to legal, accounting and other fees in connection with the
secondary public offering in fiscal 2013, which are included in selling, general and administrative expenses in the fiscal 2013
consolidated statement of operations.
On September 23, 2013, we completed a secondary public stock offering of 7,100,000 shares of common stock at a price
of $46.65 per share. The shares sold in the secondary public offering were registered under the Securities Act pursuant to our
registration statement on Form S-3 (File 333-191210), which was declared effective by the Securities and Exchange
Commission on September 17, 2013. All of the shares sold in the secondary public offering were sold by selling shareholders,
and we did not receive any proceeds. The selling shareholders agreed to bear all of the offering expenses related to legal,
accounting and other fees in connection with the secondary public offering.
Critical Accounting Policies and Estimates
We have identified the policies below as critical to our business operations and understanding of our consolidated results
of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect our
reported and expected financial results. Our consolidated financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles, require us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures. We base our estimates on historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. For a
detailed discussion on the application of these and other accounting policies, see Note 1 in our annual consolidated financial
statements included elsewhere in this Annual Report.
Inventories
Inventories consist of finished goods purchased for resale, including freight, and are stated at the lower of cost or market
value, at the individual product level. Cost is determined on a weighted average cost method which approximates a FIFO (first-
in, first-out) basis. The market value used in the lower of cost or market analysis is subject to the effects of consumer demands,
customer preferences and the broader economy. The effects of the previously listed criteria are not controllable by management.
Our management reviews inventory levels in order to identify obsolete and slow-moving merchandise as these factors can
indicate a decline in the market value of inventory on hand. Inventory cost is reduced when the selling price less costs of
disposal is below cost. We accrue an estimate for inventory shrink for the period between the last physical count and the
balance sheet date. The shrink estimate can be affected by changes in merchandise mix and changes in actual shrink trends.
40
These estimates are derived using available data and our historical experience. Our estimates may be impacted by changes in
certain underlying assumptions and may not be indicative of future activity.
Impairment of Long-Lived Assets
In accordance with Accounting Standards Codification ("ASC") Topic 360, Property, Plant and Equipment, long-lived
assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable. Assets are grouped and evaluated for impairment at the lowest level of
which there are identifiable cash flows, which is generally at a store level. Assets are reviewed for impairment using factors
including, but not limited to, our future operating plans and projected cash flows. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, then an
impairment charge is recognized as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Fair value is based on discounted future cash flows of the asset using a discount rate commensurate with the risk. In the event
of a store closure, we will record an impairment charge, if appropriate, or accelerate depreciation over the revised useful life of
the asset. Based on the analysis performed, our management believes that there was no impairment of long-lived assets for each
of the 2013, 2012 and 2011 fiscal years. The impairment loss analysis requires management to apply judgment and make
estimates.
Income Taxes
Income taxes are accounted for under the asset-and-liability method in accordance with ASC Topic 740, Income Taxes.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We
recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized
income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in
recognition or measurement are reflected in the period in which the change in judgment occurs.
We record a valuation allowance to reduce our deferred tax assets when uncertainty regarding their realizability exists. In
assessing the realizability of deferred tax assets, our management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during periods in which those temporary differences become deductible. Our management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment.
Stock-Based Compensation
We account for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation, which
establishes accounting for equity instruments exchanged for employee services. Under the provisions of this guidance, our
stock-based compensation expense is measured at the grant date, based on the calculated fair value of the award, and is
recognized as an expense on a straight-line basis over the employee's requisite service period (generally the vesting period of
the equity grant). We recognize compensation expense based on the estimated grant date fair value of restricted stock awards
and use the Black-Scholes option-pricing model for grants of stock options. The determination of the grant date fair value of
options using an option-pricing model is affected by a number of assumptions, such as our common stock fair value, our
expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free
interest rates and expected dividends. As a result, if any of the inputs or assumptions used in the Black-Scholes model change
significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously.
We account for stock-based compensation for non-employee stock options by using the Black-Scholes option-pricing
model and record expense as the options vest. Non-employee options subject to vesting are required to be periodically revalued
over their service period, which is generally the same as the vesting period.
There are significant judgments and estimates inherent in the determination of fair value of stock-based awards. These
judgments and estimates include determinations of an appropriate valuation method and the selection of appropriate inputs to
be used in the valuation model. The use of alternative assumptions, including expected term, volatility, risk-free interest rate
and dividend yield, could cause stock-based compensation to differ significantly from what has been recorded in the past.
Future stock-based compensation cost will increase when we grant additional equity awards. Modifications, cancellations or
repurchases of awards may require us to accelerate any remaining unearned stock-based compensation cost or incur additional
cost.
41
Determination of the Fair Value of Common Stock on Grant Date. Prior to our IPO, we were a private company with no
active public market for our common stock. Therefore, prior to the IPO, in connection with each grant of restricted stock and
stock options, the fair value of the common stock underlying the awards was determined by our board of directors, which
intended all stock options granted to be exercisable at a price per share not less than the per share fair value of our common
stock underlying those stock options on the date of grant. We determined the estimated per share fair value of our common
stock using contemporaneous valuations consistent with the American Institute of Certified Public Accountants Practice Aid,
Valuation of Privately-Held Company Equity Securities Issued as Compensation, or the Practice Aid. In conducting these
valuations, we considered all objective and subjective factors that we believed to be relevant, including our best estimate of our
business condition, prospects and operating performance at the valuation date. Management, with the assistance of a third-party
valuation firm engaged by us, used a range of factors, assumptions and methodologies to perform the valuations. The
significant factors included:
•
•
•
•
•
•
•
the fact that we were a private retail company with illiquid securities;
our historical operating results;
our discounted future cash flows, based on our projected operating results;
the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options,
such as an initial public offering or sale of our company, given prevailing market conditions;
valuation of comparable public companies at the time of grant;
the U.S. and global capital market conditions; and
outlook for our industry at the time of grant.
After review of the fair value analysis, our board of directors authorized the use of at least that fair value as the value for
restricted shares granted and the exercise price for options granted on the date of that valuation report.
Valuation Methodologies Used in Determining Fair Value. To determine the estimated fair value of our common stock in
relation to stock grants prior to our IPO, we conducted valuation analyses with the assistance of a third-party valuation firm that
had experience in the retail industry. We considered three enterprise value allocation methods outlined in the Practice Aid. The
Practice Aid discussed three “top-down” methods that establish the fair value of the enterprise and then allocate this value
among the various classes of equity. These methods are referred to as: (i) the current-value method, (ii) the option-pricing
method and (iii) the probability-weighted expected return method, or PWERM. For our valuations, we used the PWERM for
three discrete scenarios: continuation as a private company (i.e., no liquidity event), initial public offering, and strategic sale or
merger. Management determined the likelihood of these various outcomes to further support the selection of this method.
Under the PWERM, the value of our common stock was estimated based upon an analysis of future enterprise values
under the aforementioned scenarios. The future enterprise values were allocated among the various equity classes expected to
be outstanding at the various liquidity events based on the rights and preferences of each class. The future value of the common
stock under each liquidation event was then discounted back to the valuation date at an appropriate risk-adjusted discount rate
and probability weighted to arrive at an indication of value for the common stock. For the continue as a private company
scenario, discounts for lack of marketability and lack of control, to account for the illiquidity of the common stock and a
minority holding, were applied to the indicated common stock value to determine the fair value of the common stock. As of
each valuation date described below, the probability of an exit via an initial public offering or strategic sale or merger was
considered significantly more likely than remaining a private company. As such, a lower probability was assigned to the
continue as a private company scenario at each valuation date based on management's best estimate. Moreover, the exit via an
initial public offering scenario was considered to be significantly more likely than an exit via a strategic sale or merger. Each of
the liquidity event dates determined by management was weighted based on the likelihood of the initial public offering timing
at these dates.
After consideration of conventional valuation approaches, we concluded that the income and market approach were most
appropriate to determine the fair value of our common stock under the continuation as a private company scenario. The income
approach is a valuation technique that provides an estimation of the fair value of a business based upon the cash flows that it
can be expected to generate over time. The market approach is a valuation technique that provides an estimation of fair value
based on market prices of publicly traded companies. With regard to weighting the conclusions that were reached by applying
the income and market approaches, we considered the quality and the reliability of the data underlying each indication of value
at each valuation date. Based on management's analysis of the underlying data, the weighting of value between the income and
market approaches was adjusted to provide the most reliable indication of value. It was our opinion that while both approaches
provide reliable value indications, the income approach was considered to provide a slightly more reliable indication of value
because it assumed that a hypothetical investor in our securities would place more importance on the projected operations and
forecasted future financial performance given the above average growth trajectory. Therefore, primary emphasis and weighting
was placed on the income approach under the continue as a private company scenario.
42
Under the initial public offering scenario, the fair value of our common shares was based upon transactions of publicly
traded companies (“guideline companies”) engaged in a line (or lines) of business similar to us (the “public company method”).
In conjunction with guidance from our Board of Directors and independent valuation firm, a search for guideline companies
was made which revealed numerous publicly-traded companies in the “discount stores” and “teen brands” retail industry.
Beginning with our November 2011 valuation, guideline companies in the “high growth” retail industry were included in our
analysis to better compare the nature of our business with other comparable companies. Though the selected guideline
companies differed in some respects from our business, they were generally influenced by similar business and economic
conditions and were considered to offer alternative investment opportunities. The application of the public company method
utilized market multiples based on current market prices together with historical and forecasted financial data of the publicly
traded guideline companies. Selected market multiples derived in the analysis was then applied to our historical or projected
financial results to arrive at indications of value.
Stock Option and Restricted Stock Grants. On February 22, 2011, we granted stock options to purchase a total of 25,950
shares of common stock at an exercise price of $6.31 per share to nine employees pursuant to our equity incentive plan. We
determined that the fair value of the common stock on the date of grant was $5.75 per share. To assess the reasonableness of the
fair value of our common stock on this date, we considered:
•
•
an independent valuation utilizing the above valuation methods that indicated a valuation price of $5.75 per
common share as of December 1, 2010.
there were no material changes in factors impacting common stock per share value from December 1, 2010 to
February 22, 2011, including:
• macroeconomic conditions;
•
•
•
•
retail sector performance;
stock market conditions;
interest rates; and
our operating performance and future projections.
On May 25, 2011, we granted stock options to purchase a total of 150,250 shares of common stock at an exercise price of
$6.31 per share to 81 employees pursuant to our equity incentive plan. We determined that the fair value of the common stock
on the date of grant was $6.04 per share. To assess the reasonableness of the fair value of our common stock on this date, we
considered:
•
•
•
an independent valuation utilizing the above valuation methods that indicated a valuation price of $6.04 per
common share as of April 2, 2011.
changes in valuation which were primarily due to the following:
•
based on the passage of time from our previous determination of fair value, we assumed to be closer
to a liquidity event and therefore reduced the present value discounting, which increased our
estimated value per share.
that there were no material changes in factors impacting common stock per share value from April 2, 2011 to
May 25, 2011, including:
• macroeconomic conditions;
•
•
•
•
retail sector performance;
stock market conditions;
interest rates; and
our operating performance and future projections.
On September 1, 2011, we granted stock options to purchase a total of 35,543 shares of common stock at an exercise price
of $6.97 per share to 28 employees pursuant to our equity incentive plan. We determined that the fair value of the common
stock on the date of grant was $6.97 per share. To assess the reasonableness of the fair value of our common stock on this date,
we considered:
•
•
an independent valuation utilizing the above valuation methods that indicated a valuation price of $6.97 per
common share as of September 1, 2011.
changes in valuation which were primarily due to the following:
43
•
based on the passage of time from our previous determination of fair value, we assumed to be closer
to a liquidity event and therefore reduced the present value discounting, which increased our
estimated value per share; and
• management determined that the likelihood of an initial public offering or other liquidity event had
increased from our previous estimate of fair value based on discussions with investors and advisors.
Therefore management revised our probability assigned to either an initial public offering or other
liquidity event from 70% to 80%, which increased our estimated value per share.
On October 18, 2011, we granted stock options to purchase a total of 270,500 shares of common stock at an exercise
price of $6.97 per share to 120 employees pursuant to our equity incentive plan. We determined that the fair value of the
common stock on the date of grant was $6.97 per share. To assess the reasonableness of the fair value of our common stock on
this date, we considered:
•
•
an independent valuation utilizing the above valuation methods that indicated a valuation price of $6.97 per
common share as of September 1, 2011.
that there were no material changes in factors impacting common stock per share value from September 1,
2011 to October 18, 2011, including:
• macroeconomic conditions;
•
•
•
•
retail sector performance;
stock market conditions;
interest rates; and
our operating performance and future projections.
On November 22, 2011, we granted stock options to purchase a total of 129,058 shares of common stock at an exercise
price of $8.16 per share to seven employees pursuant to our equity incentive plan. We determined that the fair value of the
common stock on the date of grant was $8.15 per share. To assess the reasonableness of the fair value of our common stock on
this date, we considered:
•
•
an independent valuation utilizing the above valuation methods that indicated a valuation price of $8.15 per
common share as of November 22, 2011.
changes in valuation which were primarily due to the following:
• multiples of our guideline public company peer group were generally higher than at the time of our
previous valuation, which increased our estimated value per share;
•
•
based on the passage of time from our previous determination of fair value, we assumed to be closer
to a liquidity event and therefore reduced the present value discounting, which increased our
estimated value per share; and
following the completion of our third fiscal quarter, management revised the full year forecast
upward, which resulted in an increased value per share.
On March 1, 2012, we granted stock options to purchase a total of 318,666 shares of common stock at an exercise price
of $11.22 per share to 146 employees pursuant to our equity incentive plan. We determined that the fair value of the common
stock on the date of grant was $11.21 per share. To assess the reasonableness of the fair value of our common stock on this
date, we considered:
•
•
an independent valuation utilizing the above valuation methods that indicated a valuation price of $11.21 per
common share as of February 21, 2012.
changes in valuation which were primarily due to the following:
• multiples of our guideline public company peer group were generally higher than at the time of our
previous valuation, which increased our value per share;
•
an upward revision in Management's estimate of terminal value, due to the revised projections of
growth potential driven by new store openings in new markets, which increased our value per share;
and
44
•
following the completion of our full fiscal year, which exceeded both budgeted revenues and
earnings, management revised forecasted financial results upward, which resulted in an increased
value per share.
•
there were no material changes in factors impacting common stock per share value from February 21, 2012 to
March 1, 2012, including:
• macroeconomic conditions;
•
•
•
•
retail sector performance;
stock market conditions;
interest rates; and
our operating performance and future projections.
On March 30, 2012, we granted stock options to purchase a total of 79,926 shares of common stock at an exercise price
of $11.22 per share to 12 employees pursuant to our equity incentive plan. In addition, just previous to this grant, on March 22,
2012, we granted 2,020,620 shares of restricted stock in connection with the cancellation of previously granted options. We
determined that the fair value of the common stock on the date of both grants was $11.01 per share. To assess the
reasonableness of the fair value of our common stock on these dates, we considered:
•
•
an independent valuation utilizing the above valuation methods that indicated a valuation price of $11.01 per
common share as of March 22, 2012
changes in valuation which were primarily due to the following:
• multiples of our guideline public company peer group were generally lower than at the time of our
previous valuation, which decreased our value per share; this decrease was offset by the planned
leveraged dividend of approximately $100 million that provided shareholders with earlier liquidity,
which increased our value per share.
•
there were no material changes in factors impacting common stock per share value from March 22, 2012 to
March 30, 2012, including:
• macroeconomic conditions;
•
•
•
•
retail sector performance;
stock market conditions;
interest rates; and
our operating performance and future projections.
For grant dates from March 31, 2012, through the date of our IPO, the fair value of restricted stock awards were based on
the pricing of our IPO and the fair value of stock options were based on the Black-Scholes option-pricing model as discussed
above utilizing the IPO price of our common stock as the fair value of common stock in the model. Subsequent to the date of
our IPO, the fair value of restricted stock awards are based on the closing price of our common stock on the grant date and the
fair value of stock options are based on the Black-Scholes option-pricing model as discussed above utilizing the closing price
of our common stock on the grant date as the fair value of common stock in the model. The Company uses the simplified
method to estimate the expected term of the option. The expected volatility incorporates historical and implied volatility of
similar entities whose share prices are publicly available. The risk-free rate for the expected term of the option is based on the
U.S. Treasury yield curve in effect at the time of grant.
45
The following table summarizes, as of February 1, 2014, our minimum rental commitments under operating lease
agreements including assumed extensions, minimum payments for long-term debt and other obligations in future periods:
Contractual Obligations
(In millions)
Operating lease obligations (2)
Purchase obligations (3)
Notes payable (4)
Total
Payments Due By Period
Total (1)
Less than
1 year
1-3 years
3-5 years
More than
5 years
$
$
422.6 $
2.0
19.5
444.1 $
52.7 $
2.0
19.5
74.2 $
104.3 $
—
—
104.3 $
96.2 $
—
—
96.2 $
169.4
—
—
169.4
(1) The amounts in this table exclude obligations under employment agreements. For a discussion of the compensation of our executive officers, see Part
III, Item 11 “Executive Compensation”
(2) Our store leases generally have initial lease terms of 10 years and include renewal options on substantially the same terms and conditions as the
original lease. Also included in operating leases are our leases for the corporate office and distribution centers.
(3) Purchase obligations are primarily for materials that will be used in the construction of new stores and purchase commitments for infrastructure and
(4)
systems that will be used by the corporate office and distribution centers.
In February 2014, subsequent to the fiscal year ended 2013, we repaid the remaining principal of $19.5 million under the Term Loan Facility, which is
reflected in the Less than 1 year column although it was not due under its contractual terms.
From February 2, 2014 to March 26, 2014, the Company committed to 17 new store leases with terms of 10 years that
have future minimum lease payments of approximately $28.6 million.
Off Balance Sheet Arrangements
For the fiscal year ended February 1, 2014, 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our principal market risk relates to interest rate sensitivity, which is the risk that future changes in interest rates will
reduce our net income or net assets. We have a Revolving Credit Facility which includes a revolving line of credit with
advances tied to a borrowing base, and a Term Loan Facility, both of which bear interest at a variable rate. Because our
Revolving Credit Facility and Term Loan Facility bear interest at a variable rate, we will be exposed to market risks relating to
changes in interest rates.
As of February 1, 2014, 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.
As of February 1, 2014, the principal amount of the term loan was $19.5 million. In February 2014, subsequent to the
fiscal year ended 2013, we repaid the remaining principal balance outstanding under our Term Loan Facility of $19.5 million.
The Term Loan Facility provided for interest on borrowings, at our option, at an alternate base rate which was the greater of (i)
the administrative agent's prime rate in effect on such day and (ii) the federal funds effective rate in effect on such day plus
0.50% with a 2.00% floor plus a margin of 3.25% or a LIBOR-based rate with a 1.00% floor plus a margin of 4.25%.
46
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.
47
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIVE BELOW, INC.
Index to Consolidated Financial Statements
Report of KPMG LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of February 1, 2014 and February 2, 2013
Consolidated Statements of Operations for Fiscal Years 2013, 2012 and 2011
Consolidated Statements of Changes in Convertible Preferred Stock and Shareholders’ Equity (Deficit) for
Fiscal Years 2013, 2012 and 2011
Consolidated Statements of Cash Flows for Fiscal Years 2013, 2012 and 2011
Notes to Consolidated Financial Statements
Page
49
50
51
52
53
54
48
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Five Below, Inc.:
We have audited the accompanying consolidated balance sheets of Five Below, Inc. and subsidiary as of February 1, 2014 and
February 2, 2013, and the related consolidated statements of operations, changes in convertible preferred stock and
shareholders’ equity (deficit), and cash flows for each of the fiscal years in the three(cid:3236)year period ended February 1, 2014. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Five Below, Inc. and subsidiary as of February 1, 2014 and February 2, 2013, and the results of their operations and
their cash flows for each of the fiscal years in the three(cid:3236)year period ended February 1, 2014, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Five Below, Inc.’s internal control over financial reporting as of February 1, 2014, based on criteria established in Internal
Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 26, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 26, 2014
49
FIVE BELOW, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
February 1,
2014
February 2,
2013
$
$
$
Current assets:
Assets
Cash and cash equivalents
Inventories
Prepaid income taxes
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Deferred income taxes
Other assets
Current liabilities:
Liabilities and Shareholders’ Equity
Line of credit
Current portion of note payable
Accounts payable
Income taxes payable
Accrued salaries and wages
Other accrued expenses
Total current liabilities
Notes payable
Deferred rent and other
Deferred income taxes
Total liabilities
Commitments and contingencies (note 4)
Shareholders’ equity:
56,081
50,184 $
89,377
1,497
4,586
15,255
160,899
70,381
232
542
60,831
36
1,295
11,433
129,676
59,040
—
944
232,054 $ 189,660
— $
19,500
34,013
6,007
2,672
17,550
79,742
—
35,439
—
115,181
—
15,000
27,952
7,083
4,204
14,545
68,784
19,500
29,082
1,550
118,916
Common stock, $0.01 par value. Authorized 120,000,000 shares; issued and
outstanding 54,190,724 and 53,980,797 shares, respectively.
Additional paid-in capital
Accumulated deficit
Total shareholders’ equity
542
284,622
540
270,637
(200,433)
(168,291 )
116,873
70,744
232,054 $ 189,660
$
See accompanying notes to consolidated financial statements.
50
FIVE BELOW, INC.
Consolidated Statements of Operations
(in thousands, except share and per share data)
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Operating income
Interest expense (income), net
Loss on debt extinguishment
Other income
Income before income taxes
Income tax expense
Net income
Dividend paid to preferred and unvested restricted
shareholders
Series A 8% Convertible Preferred Stock cumulative
dividends
Net income attributable to participating securities
Net income (loss) attributable to common
shareholders
Basic income (loss) per common share
Diluted income (loss) per common share
Dividends declared and paid per common share
Weighted average shares outstanding:
Basic shares
Diluted shares
Fiscal Year
2013
535,402 $
347,386
188,016
134,279
53,737
1,513
266
—
51,958
19,816
32,142
2012
418,825 $
268,989
149,836
112,182
37,654
2,374
1,594
(408)
34,094
14,069
20,025
2011
297,113
192,252
104,861
78,640
26,221
(16)
—
—
26,237
10,159
16,078
—
(65,403)
—
—
(465)
31,677 $
0.59 $
0.59 $
— $
—
—
(15,913)
(109)
(45,378) $
(1.28) $
(1.28) $
2.02 $
56
—
—
—
$
$
$
$
$
53,294,805
53,741,860
35,444,200
35,444,200
15,903,599
15,904,108
See accompanying notes to consolidated financial statements.
51
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FIVE BELOW, INC.
Consolidated Statements of Cash Flows
(in thousands)
Fiscal Year
2013
2012
2011
$
32,142 $
20,025 $
16,078
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Gain on conversion of note payable
Loss on debt extinguishment
Loss on disposal of property and equipment
Amortization of deferred financing costs
Warrant expense related to professional service providers for services rendered
Stock-based compensation expense
Deferred income tax (benefit) expense
Changes in operating assets and liabilities:
Prepaid income taxes
Income taxes receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Income taxes payable
Accrued salaries and wages
Deferred rent
Other accrued expenses
Net cash provided by operating activities
Investing activities:
Capital expenditures
Net cash used in investing activities
Financing activities:
Borrowing on note payable under Term Loan Facility
Repayment of note payable under Term Loan Facility
Cash paid for debt financing costs
Repayment of other note payable
Net proceeds from issuance of common stock
Proceeds from exercise of warrants and options to purchase common stock
Repurchase of unvested restricted shares related to stock option exercises
Dividends paid to shareholders
Excess tax benefit related to restricted shares and exercise of stock options and warrants
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information:
Interest paid
Income taxes paid
$
$
$
56,081
50,184 $
1,259 $
25,039 $
See accompanying notes to consolidated financial statements.
53
13,469
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(5,074)
(1,461)
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(3,597)
4,083
(1,076)
(1,532)
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31,187
(25,931)
(25,931)
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9,599
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1,594
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3,369
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4,877
30,363
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(22,890 )
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14,788
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12,153
41,293
24
1,157
Five Below, Inc.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
(a) Description of Business
Five Below, Inc. (individually and/or collectively with its wholly owned subsidiary as the "Company") is a specialty
value retailer offering merchandise targeted at the teen and pre-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 February 1, 2014, operated in
Pennsylvania, New Jersey, Delaware, Maryland, Virginia, Massachusetts, New Hampshire, West Virginia, North Carolina, New
York, Connecticut, Rhode Island, Ohio, Illinois, Indiana, Michigan, Missouri, Georgia and Texas. As of February 1, 2014 and
February 2, 2013, the Company operated 304 stores and 244 stores, respectively, each operating under the name “Five Below.”
On June 12, 2013, the Company completed an internal business restructuring pursuant to which the Company formed
Five Below Merchandising, Inc., a wholly-owned subsidiary (the “Subsidiary”), and transferred to the Subsidiary assets,
operations and employees related to the Company's merchandising operations (the “Restructuring”). Following the
Restructuring, the Subsidiary purchases and sells to the Company certain goods for sale at the Company's retail locations, and
the Company provides to the Subsidiary back office support, office space and other services, in each case, pursuant to
agreements between the Company and the Subsidiary. In connection with the Restructuring, on June 12, 2013, the Company
amended and restated the Loan and Security Agreement (note 3) and certain other ancillary documents to the Company's
Revolving Credit Facility (note 3) in order to, among other things, allow the Company to form and capitalize the Subsidiary
and make the Subsidiary a party to the Loan and Security Agreement as a guarantor of the Company's obligations thereunder.
The Subsidiary also acceded to the credit agreement and certain ancillary documents to the Company's Term Loan Facility as a
guarantor of the Company's obligations thereunder. The Company's consolidated financial statements include the accounts of
Five Below, Inc. and the Subsidiary. All intercompany transactions and accounts are eliminated in the consolidation of the
Company's and Subsidiary's financial statements.
(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 2013” or “fiscal 2013” refer to the period from February 3, 2013 to February 1, 2014 and consists of a 52-week fiscal year.
References to “fiscal year 2012” or “fiscal 2012” refer to the period from January 29, 2012 to February 2, 2013 and consists of
a 53-week fiscal year. References to “fiscal year 2011” or “fiscal 2011” refer to the period from January 30, 2011 to January 28,
2012 and consists of a 52-week fiscal year.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity date of three months or less when
purchased to be cash equivalents. The majority of payments due from banks for third-party credit card and debit card
transactions resulting from customer purchases at the Company’s retail stores process within 24 to 48 hours, except for
transactions occurring on a Friday, which are generally processed the following Monday. All credit card and debit card
transactions are classified as cash and cash equivalents in the accompanying consolidated balance sheets. Amounts due from
banks for these transactions classified as cash equivalents totaled $2.3 million and $1.6 million at February 1, 2014 and
February 2, 2013, respectively. Book overdrafts, which are outstanding checks in excess of funds on deposit, are recorded
within accounts payable in the accompanying consolidated balance sheets and within operating activities in the accompanying
consolidated statements of cash flows. At February 1, 2014 and February 2, 2013, the Company has cash and cash equivalents
of $50.2 million and $56.1 million. The Company’s cash accounts are primarily maintained with one financial institution.
54
(d) 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.
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, accounts payable, and borrowings under a
line of credit and Term Loan Facility (as defined in note 3). 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 under the line of credit and Term Loan Facility approximates their
fair value because the line of credit’s and Term Loan Facility's interest rates vary with market interest rates. The Company
considers the inputs utilized to determine the fair value of the borrowings under the Term Loan Facility to be Level 2 inputs. At
February 1, 2014 and February 2, 2013, the Company had cash equivalents of $2.3 million and $1.6 million, respectively. The
Company’s cash equivalents consist of credit card receivables and fair value was determined based on Level 1 inputs.
(e) Inventories
Inventories consist of finished goods purchased for resale, including freight, and are stated at the lower of cost or market
value, at the individual product level. Cost is determined on a weighted average cost method which approximates a FIFO (first-
in, first-out) basis due to the nature of the Company's inventory. Management of the Company reviews inventory levels in order
to identify slow-moving merchandise and uses markdowns to clear merchandise. Inventory cost is reduced when the selling
price less costs of disposal is below cost. The Company accrues an estimate for inventory shrink for the period between the last
physical count and the balance sheet date. The shrink estimate can be affected by changes in merchandise mix and changes in
actual shrink trends.
(f) Property and Equipment
Property and equipment are stated at cost. Additions and improvements are capitalized, while repairs and maintenance are
charged to expense as incurred.
Depreciation and amortization is recorded using the straight-line method over the shorter of the estimated useful lives of
the assets or the terms of the respective leases, if applicable. The estimated useful lives are three to ten years for furniture and
fixtures and computers and equipment. Store leasehold improvements are amortized over the shorter of the useful life or the
lease term plus assumed extensions, which is generally 10 years. Depreciation and amortization expense for property and
equipment, which is included in selling, general and administrative expenses in the accompanying consolidated statements of
operations, was $13.5 million, $9.6 million and $7.1 million in fiscal 2013, fiscal 2012 and fiscal 2011, respectively.
Property and equipment, net, consists of the following (in thousands):
Furniture and fixtures
Leasehold improvements
Computers and equipment
Construction in process
Property and equipment, gross
Less: Accumulated depreciation and amortization
Property and equipment, net
55
February 1,
2014
February 2,
2013
$
$
44,112 $
51,736
15,903
2,627
114,378
(43,997)
70,381 $
31,680
41,671
10,541
6,678
90,570
(31,530)
59,040
(g) Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to
be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, then an impairment
charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Based on its
Company's most recent analysis, management believes that no impairment of long-lived assets exists as of February 1, 2014.
(h) Deferred Financing Costs
Deferred financing costs (note 3) are amortized to interest expense over the term of the related credit agreement.
Amortization expense in fiscal 2013, fiscal 2012 and fiscal 2011 was $0.3 million, $0.5 million and $28.0 thousand,
respectively. In connection with the repayments of the $100.0 million term loan facility in the amounts of $15.0 million and
$65.5 million in fiscal 2013 and fiscal 2012, respectively, we wrote-off approximately $0.3 million and $1.6 million of deferred
financing costs in fiscal 2013 and fiscal 2012, respectively, which is included in loss on debt extinguishment in the
accompanying consolidated statements of operations.
(i) Other Accrued Expenses
Other accrued expenses consist of the following (in thousands):
Deposit liability related to restricted shares (note 6)
Gift card liability
Other
February 1,
2014
February 2,
2013
$
$
62 $
3,273
14,215
17,550 $
308
2,418
11,819
14,545
(j) Leases
The Company leases store locations, distribution centers, and equipment used in its operations. The Company
accounts for its leases under the provisions of Accounting Standards Codification ("ASC") Topic 840, Leases (“ASC 840”),
which require that leases be evaluated and classified as operating or capital leases for financial reporting purposes. Any assets
held under a capital lease are included in property and equipment, net. As of February 1, 2014 and February 2, 2013, the
Company had no material capital leases.
Operating lease expense is recorded on a straight-line basis over the lease term. At the inception of a lease, the
Company determines the lease term, which includes periods under the exercise of renewal options that are reasonably assured.
Renewal options are exercised at the Company's sole discretion. The corporate headquarters are leased under a lease agreement
expiring in 2022, with options to renew for two successive five-year periods. The distribution center located in New Castle,
Delaware is leased under a lease agreement expiring in 2016 with options to renew for two successive five-year periods and the
distribution center in Olive Branch, Mississippi is leased under a lease agreement expiring in 2022 with options to renew for
three successive five-year periods. Generally, the Company’s store leases have expected lease terms of ten years, which are
comprised of an initial term of ten years or an initial term of five years and one assumed five-year extension, resulting in a ten-
year life. The expected lease term is used to determine whether a lease is capital or operating and to calculate straight-line rent
expense.
Substantially all of the Company's leases include options that allow the Company to renew or extend the lease term
beyond the initial lease period, subject to terms and conditions agreed upon at the inception of the lease. Such terms and
conditions include rental rates agreed upon at the inception of the lease that could represent below or above market rental rates
later in the life of the lease, depending upon market conditions at the time of such renewal or extension. In addition, the
Company's leases may include early termination options.
(k) Deferred Rent and Other
Certain of the Company’s operating leases contain either rent holidays and/or predetermined fixed escalations of
minimum rentals during the original and/or extended lease terms. For these leases, the Company recognizes the related rent
expense on a straight-line basis over the life of the lease and records the difference between the amounts charged to operations
and amounts paid as deferred rent. The life of the lease is the initial term plus assumed extensions. The Company also receives
56
certain lease incentives in conjunction with entering into operating leases. These lease incentives are recorded as deferred rent
at the beginning of the lease term and recognized as a reduction of rent expense over the lease term. In addition, certain of the
Company’s leases contain future contingent increases in rents. Such increases in rent expense are recorded in the period in
which such contingent increases to the rents take place.
The following table summarizes the Company's deferred rent and other long-term liabilities balances (in thousands):
Current:
Deferred rent (1)
Total current liabilities
Long-term:
Deferred rent
Other
$
$
$
Total long-term liabilities $
February 1, 2014
February 2, 2013
2,965 $
2,965 $
35,198 $
241
35,439 $
878
878
28,901
181
29,082
(1)
The current portion of deferred rent is included in the other accrued expenses line item in the accompanying
consolidated balance sheets.
(l) Stock-based Compensation
The Company measures the cost of employee services received in exchange for stock-based compensation based on the
grant date fair value of the employee stock award. Incremental compensation costs arising from subsequent modifications of
awards after the grant date must also be recognized. The Company recognizes compensation expense based on the estimated
grant date fair value of restricted stock awards, and using the Black-Scholes option-pricing model for grants of stock options
which are both recorded over the vesting period. Stock-based compensation cost recognized and included in expenses,
excluding modifications, for fiscal 2013, fiscal 2012 and fiscal 2011, was $9.9 million, $6.9 million and $1.2 million,
respectively. In addition, during fiscal 2013 and fiscal 2012, the Company recognized $0.2 million, and $5.4 million of
additional compensation expense related to certain modifications of outstanding options (note 6).
(m) Revenue Recognition
Revenue is recognized at the point of sale. Returns are accepted under certain conditions within 14 days of purchase.
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. Sales tax collected from
customers and remitted to governmental authorities are accounted for on a net basis and, therefore, excluded from sales in the
accompanying consolidated statements of operations.
(n) Cost of Goods Sold
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 the Company's distribution centers and between store locations. Buying costs include compensation expense for the
Company's internal buying organization.
(o) Selling, General and Administrative Expenses
Selling, general and administrative expenses include payroll and other compensation, marketing and advertising expense,
depreciation and amortization expense, and other selling and administrative expenses.
57
(p) Vendor Allowances
The Company receives various incentives in the form of allowances, free product and promotional funds from its vendors
based on product purchases and advertising activities. The amounts received are subject to changes in market conditions,
vendor marketing strategies and changes in the profitability or sell-through of the related merchandise for the Company.
Merchandise allowances are recorded in cost of goods and recognized in the period the related merchandise is sold. Marketing
allowances are recorded in selling, general and administrative expenses and are recognized in the period the related advertising
occurs to the extent the allowance is a reimbursement that is specific and incremental, and identifiable costs have been incurred
by the Company to sell the vendor’s products. To the extent these conditions are not met, these allowances are recorded as
merchandise allowances.
(q) Store Pre-Opening Costs
Costs incurred between completion of a new store location’s construction and its opening (pre-opening costs) are charged
to expense as incurred. Pre-opening costs were $4.3 million, $3.5 million and $3.4 million in fiscal 2013, fiscal 2012, and fiscal
2011, respectively, and are recorded in the accompanying consolidated statements of operations based on the nature of the
expense.
(r) Advertising Costs
Advertising costs are charged to expense the first time the advertising takes place. Advertising expenses were $15.6
million, $12.0 million and $9.7 million in fiscal 2013, fiscal 2012 and fiscal 2011, respectively, and are included in selling,
general and administrative expenses in the accompanying consolidated statements of operations.
(s) Income Taxes
Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those
positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that
is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the
change in judgment occurs.
The Company records a valuation allowance to reduce its deferred tax assets when uncertainty regarding their
realizability exists. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment.
(t) Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are
recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Legal costs incurred in connection with loss contingencies are expensed as incurred.
(u) Use of Estimates
The preparation of 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 and stock-based compensation expense.
(2) Income (Loss) Per Common Share
Basic income (loss) per common share amounts are calculated using the weighted-average number of common shares
outstanding for the period. Diluted income (loss) per common share amounts are calculated using the weighted-average number
58
of common shares outstanding for the period and include the dilutive impact of preferred stock using the if-converted method
and exercise of stock options and warrants as well as assumed lapse of restrictions on restricted stock awards and shares
currently available for purchase under the Company's Employee Stock Purchase Plan, using the treasury stock method.
The two-class method is used to calculate basic and diluted income (loss) per common share since the Company's
preferred and restricted stock are participating securities under ASC 260 Earnings per share. The two-class method is an
earnings allocation formula that determines income per share for each class of common stock and participating security
according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under the two-class
method, basic income (loss) per common share is computed by dividing net income (loss) attributable to common shares after
allocation of income to participating securities by the weighted-average number of common shares outstanding during the year.
Diluted income (loss) per common share is computed using the more dilutive of the two-class method or the if-converted
method. In periods of net loss, no effect is given to participating securities since they do not contractually participate in the
losses of the Company. The two-class method is the more dilutive method for fiscal 2013, fiscal 2012 and fiscal 2011.
The following table reconciles net income (loss) and the weighted average common shares outstanding used in the
computations of basic and diluted income (loss) per common share (in thousands, except for share and per share data):
Numerator:
Net income
Dividend paid to preferred shareholders
Dividend paid to unvested restricted shareholders
Series A 8% Convertible Preferred Stock cumulative dividends
Net income attributable to participating securities
Net income (loss) attributable to common shareholders
Denominator:
Weighted average common shares outstanding - basic
Dilutive impact of options, warrants and employee stock purchase plan
Weighted average common shares outstanding - diluted
Per common share:
Basic income (loss) per common share
Diluted income (loss) per common share
Fiscal Year
2013
2012
2011
32,142 $
—
—
—
(465)
31,677 $
20,025 $
(62,504)
(2,899)
—
—
(45,378) $
16,078
—
—
(15,913)
(109)
56
53,294,805
447,055
53,741,860
35,444,200
—
35,444,200
15,903,599
509
15,904,108
0.59 $
0.59 $
(1.28) $
(1.28) $
—
—
$
$
$
$
For fiscal 2013 and fiscal 2011, $0.5 million and $0.1 million, respectively, of net income was attributable to
participating securities, as the two-class method was more dilutive, and the remainder was attributable to common
shareholders. For fiscal 2012, as the Company was in a net loss position after recognition of the payment of dividends, the net
losses were solely attributable to common shareholders.
For fiscal 2011 preferred stock that could be converted to 30,894,593 shares of common stock were not included in the
computation of diluted income per share, as the effect of doing so would have been anti-dilutive. The preferred stock was
converted to common stock on July 24, 2012 and was included in the computation of income (loss) per share during fiscal 2012
on a weighted average basis.
The effects of the assumed exercise of stock options for 388,197 shares of common stock for fiscal 2013 were excluded
from the calculation of diluted net income per share as their impact would have been anti-dilutive.
The effects of the assumed exercise of the combined stock options and warrants and vesting of restricted share awards of
2,573,490 for fiscal 2012, and the impact of shares to be issued under the Company's Employee Stock Purchase Plan, which is
minor, were excluded from the calculation of diluted net loss as the effect would be anti-dilutive due to a net loss to common
shareholders. The effects of the assumed exercise of stock options and warrants for 2,781,138 shares of common stock for
fiscal 2011 were excluded from the calculation of diluted net income per share as the average market price of the related
common stock for the periods exceeded the exercise price of the options or warrants or the assumed proceeds determined under
the treasury stock method resulted in no incremental shares for stock options.
59
The aforementioned excluded shares do not reflect the impact of any incremental repurchases under the treasury stock
method.
(3) Financing Transactions, Line of Credit and Note Payable
Financing Transactions
On May 16, 2012, the Company entered into a $100.0 million term loan facility with Goldman Sachs Bank USA as
administrative agent for a syndicate of lenders (the “Term Loan Facility”). The Company used the net proceeds from the Term
Loan Facility and cash on hand to pay a dividend on all outstanding shares of the Company's common stock and Preferred
Stock totaling $99.5 million. On the same day, the Company amended and restated its existing senior secured Revolving Credit
Facility with Wells Fargo Bank, National Association, which is defined below under “—Line of Credit.” The Company refers
to the Term Loan Facility, the amendment and restatement of the Revolving Credit Facility and related transactions as the
“Financing Transactions.”
The Term Loan Facility provided for a term loan of $100.0 million and matures on the earlier of (i) May 16, 2015 and (ii)
the date on which such facility is accelerated following the occurrence of an event of default. The Term Loan Facility provides
for interest on borrowings, at the option of the Company, at an alternate base rate which is the greater of (i) the administrative
agent’s prime rate in effect on such day and (ii) the federal funds effective rate in effect on such day plus 0.50% with a 2.00%
floor, plus a margin of 3.25%, or a London Interbank Offer Rate (“LIBOR”) based rate with a 1.00% floor plus a margin of
4.25%. The credit agreement for the Term Loan Facility includes a maximum consolidated net leverage ratio financial
covenant, the calculation of which allows the Company to net up to $10.0 million of its cash and cash equivalents against its
indebtedness. The Company’s leverage ratio must not exceed 2.00x for the testing periods in calendar year 2014 and 1.75x
thereafter.
The credit agreement for the Term Loan Facility also includes customary negative and affirmative covenants including,
among others, limitations on the Company’s 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 its business.
Amounts under the credit agreement for the Term Loan Facility may become due upon certain events of default including,
among others, failure to comply with the credit agreement’s covenants, bankruptcy, default on certain other indebtedness or a
change in control. The default rate under the Term Loan Facility is 2.00% per annum.
On June 12, 2013, in connection with the Restructuring, the Subsidiary acceded to the credit agreement and certain
ancillary documents to the Company's Term Loan Facility as a guarantor of the Company's obligations thereunder. All
obligations under the Term Loan Facility are secured by substantially all of the Company’s assets. As of February 1, 2014, the
Company was in compliance with the financial covenant and other covenants applicable to it under the Term Loan Facility.
During fiscal 2013 and fiscal 2012, the Company recorded $1.5 million and $2.4 million, respectively, in interest expense,
including amortization of deferred financing fees of $0.3 million and $0.5 million, respectively.
The Term Loan Facility was subject to repayment upon the receipt of certain proceeds, including those from the sale of
certain assets, insurance proceeds and indebtedness not otherwise permitted. The Term Loan Facility was also subject to
repayment of $50.0 million upon the receipt of proceeds from the Company’s Initial Public Offering ("IPO"). The Company
closed its IPO on July 24, 2012. On July 27, 2012, the Company repaid $65.3 million of principal on the Term Loan Facility
and $0.7 million of interest. In October 2012 and May 2013, the Company repaid $0.3 million and $15.0 million, respectively,
of principal on the Term Loan Facility. As of February 1, 2014, the balance outstanding under the Term Loan Facility was $19.5
million bearing interest at a rate of 5.25%. Pursuant to the terms of the Term Loan Facility, due to the repayment of $65.3
million of principal in July 2012, the Company was no longer required to make minimum quarterly payments. The Company
planned to repay the remaining principal balance outstanding under the Term Loan Facility of $19.5 million within the next 12
months and classified the amount as current portion of note payable in the accompanying consolidated balance sheet as of
February 1, 2014. In February 2014, subsequent to the fiscal year ended 2013, the Company repaid the remaining principal
balance outstanding under the Term Loan Facility of $19.5 million.
In connection with the Term Loan Facility, the Company incurred deferred financing costs of $2.7 million, which are
being amortized over the term of the Term Loan Facility. The amortization is included in interest expense, net, in the
consolidated statements of operations. In connection with the $65.5 million of principal repayments on the Term Loan Facility
in fiscal 2012 and the $15.0 million principal repayment on the Term Loan Facility in fiscal 2013, approximately $1.6 million
and approximately $0.3 million of the deferred financing costs were written off and included in loss on debt extinguishment in
the consolidated statements of operations, respectively. The Company had approximately $0.2 million and $0.8 million of
remaining deferred financing fees as of February 1, 2014 and February 2, 2013, respectively. In connection with the $19.5
million principal repayment on the Term Loan Facility in February 2014, subsequent to the fiscal year ended 2013, the
60
remaining deferred financing costs of approximately $0.2 million will be written off and included in loss on debt
extinguishment in the consolidated statement of operations for the thirteen weeks ending May 3, 2014.
Line of Credit
On August 18, 2006, the Company entered into a Loan and Security Agreement (the "Loan and Security Agreement")
with Wachovia Bank National Association (predecessor in interest to Wells Fargo Bank, National Association) that included a
revolving line of credit with advances tied to a borrowing base. The Loan and Security Agreement was amended and/or restated
several times, the latest on June 12, 2013 (as amended and restated, the "Revolving Credit Facility"), generally to extend the
maturity date, increase maximum borrowings, adjust the applicable interest rates, permit the formation and capitalization of the
Subsidiary, and make the Subsidiary a party to the Loan and Security Agreement as a guarantor of the Company's obligations,
and modify certain definitions.
The Revolving Credit Facility allows maximum borrowings of $20.0 million with advances tied to a borrowing base and
expires on the earliest to occur of (i) May 16, 2017, (ii) the date which was 45 days prior to the maturity date of the Term Loan
Facility if the Term Loan Facility remained outstanding or (iii) upon the occurrence of an event of default. The Revolving
Credit Facility may be increased to $30.0 million upon certain conditions. The Revolving Credit Facility includes a $5.0
million sub-limit for the issuance of letters of credit. The borrowing base is 90% of eligible credit card receivables plus 90% of
the net recovery percentage of eligible inventory less established reserves. The Company incurred deferred financing costs of
$50.0 thousand in May 2012 in connection with the Revolving Credit Facility and such costs are being amortized over the
remaining term of 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%. 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 the Company 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 the Company's 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 the Company's 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.
During fiscal 2013, fiscal 2012 and fiscal 2011the Company had no borrowings or interest expense under the Revolving
Credit Facility. At February 1, 2014, the Company had approximately $20.0 million available on the line of credit. At
February 2, 2013 the Company had approximately $20.0 million available on the line of credit of which $19.7 million was
available and $0.3 million was issued but undrawn on an outstanding letter of credit obligation.
All obligations under the Revolving Credit Facility are secured by substantially all of the Company's assets and are
guaranteed by the Subsidiary. As of February 1, 2014 and February 2, 2013, the Company was in compliance with the
covenants applicable to it under the Revolving Credit Facility.
Note Payable
On December 10, 2010, the Company entered into a loan and security agreement (the “Note”) for $0.3 million with a
governmental authority. On May 13, 2012, a portion of the Note ($0.2 million) was converted to a grant upon the Company
meeting certain non-financial conditions and the remainder of $50.0 thousand was paid back in full along with interest
outstanding.
61
(4) Commitments and Contingencies
The Company leases property and equipment under non-cancelable 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 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 extensions, which are generally those that take the lease to a ten-year term, expire through fiscal 2024.
The Company’s minimum rental commitments under operating lease agreements, including assumed extensions, as of
February 1, 2014, are as follows (in thousands):
2014
2015
2016
2017
2018
Thereafter
Retail stores
Corporate office and
distribution centers
Total
$
$
47,767 $
48,844
46,566
45,498
44,100
157,356
390,131 $
4,936 $
5,225
3,655
3,191
3,388
12,088
32,483 $
52,703
54,069
50,221
48,689
47,488
169,444
422,614
Rent expense, including base and contingent rent under operating leases, was $41.8 million, $32.8 million and $23.6
million in fiscal 2013, fiscal 2012 and fiscal 2011, respectively. Contingent rents were $0.5 million, $0.5 million and $0.5
million in fiscal 2013, fiscal 2012 and fiscal 2011, respectively.
From February 2, 2014 to March 26, 2014, the Company committed to 17 new store leases with terms of 10 years that
have future minimum lease payments of approximately $28.6 million.
The Company has employment agreements with certain key employees that provide for, among other things, salary,
bonus, severance, and change-in-control provisions. The severance and change of control provisions under these agreements
provide for additional payments upon employee separation of up to approximately $3.9 million.
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.
As of February 1, 2014, the Company has other purchase commitments of approximately $2.0 million consisting of
purchase agreements for materials that will be used in the construction of new stores.
(5) Shareholders’ Equity (Deficit)
As of February 1, 2014, the Company is authorized to issue 120,000,000 shares of $0.01 par value common stock and
5,000,000 shares of $0.01 par value preferred stock. The holders of the common stock are entitled to one vote per share of
common stock and are entitled to receive dividends if declared by the board of directors. The preferred stock may be issued
from time to time in series as designated by the board of directors. The designations, powers, preferences, voting rights,
privileges, options, conversion rights, and other special rights of the shares of each such series and the qualifications,
limitations and restrictions thereof shall be designated by the board of directors.
Preferred Stock
On October 14, 2010, the Company issued 89,291,773 shares of Series A 8% Convertible Preferred Stock for cash
proceeds of $191.9 million, net of offering costs of $2.1 million.
The shares of Series A 8% Convertible Preferred Stock were entitled to receive cumulative dividends of 8% of their
original issue price of $2.17 per share per year compounded annually and payable in cash when and if declared by the
Company’s board of directors; however, the Company could not pay, unless otherwise consented to by the holders of Series A
8% Convertible Preferred Stock, any dividends on common stock unless an equal amount of dividends per share (on an as
converted basis) was simultaneously paid to the holders of the Series A 8% Convertible Preferred Stock. Effective immediately
62
prior to the closing of the IPO on July 24, 2012, all outstanding shares of Series A 8% Convertible Preferred Stock were
converted into 30,894,953 shares of common stock and ceased to be entitled to the payment of any dividends that accrued on
such shares as of the effective time of the conversion. The Series A 8% Convertible Preferred Stock was presented outside of
shareholders’ equity since its redemption under certain circumstances was beyond the control of the Company’s management.
Common Stock
The Company and its shareholders have entered into an Amended and Restated Investors Rights Agreement and a Second
Amended and Restated Shareholders Agreement, which provide for, among others, certain registration, information, first
refusal, co-sale, observer, bring along and board of director voting rights. The Second Amended and Restated Shareholders
Agreement also provides for certain restrictions and obligations with respect to the stock of the Company held by the
Company’s shareholders, including limits on the transfer of stock held by shareholders.
In March 2012, options to purchase 2,020,620 shares of common stock granted during fiscal 2010, including options to
purchase 1,010,310 shares that were subject to time-based and performance-based vesting, were cancelled and an equal number
of restricted shares were granted. One-third of the shares vested in March 2012, one-third of the shares vested in March 2013,
and the remaining one-third will vest in March 2014, which is the second anniversary of the grant.
In connection with the cancellation and grant, the Company will record total compensation expense of $17.4 million
including $5.3 million which was recorded on the date of the modification and the remainder on a straight-line basis over the
two-year vesting period.
In February 2011, the Company granted warrants to purchase 13,840 shares of common stock at an exercise price of
$6.30 per share to professional service providers, of which 5,191 were exercised in November 2011. The fair value of the
warrants of $25.0 thousand was recorded as expense in fiscal 2010.
In May 2011, the Company granted warrants to purchase 3,114 shares of common stock at an exercise price of $6.30 per
share to a professional service provider. The fair value of the warrants of $6.0 thousand was recorded as expense in fiscal 2011.
In November 2011, the Company issued 159,248 shares of common stock for cash proceeds of $1.1 million to an
incoming member of the Company's board of directors.
In March 2012, the Company granted warrants to purchase 11,245 shares of common stock at an exercise price of $11.21
per share to professional service providers. The fair value of the warrants of $43.0 thousand was recorded as expense in Fiscal
2012.
During fiscal 2012, 23,012 warrants were exercised and, as of February 2, 2013, no warrants remained outstanding.
On July 17, 2012, the Company amended its articles of incorporation to reflect a 0.3460-for-1 reverse stock split of its
common stock. The amendment also changed the authorized shares of the Company’s common stock to 120,000,000 shares.
Concurrent with the reverse stock split, the Company adjusted (i) the conversion price of its Series A 8% Convertible Preferred
Stock, (ii) the number of shares subject to and the exercise price of its outstanding stock option awards under its equity
incentive plan and (iii) the number of shares subject to and the exercise price of its outstanding warrants to equitably reflect the
split. All common stock share and per-share data included in these consolidated financial statements give effect to the reverse
stock split and the change in authorized shares and have been adjusted retroactively for all periods presented.
On July 18, 2012, two members of the board of directors were each issued 3,529 restricted shares of common stock.
These shares vest and become free of forfeiture restrictions on the earlier of: (i) the one-year anniversary of the issuance date or
(ii) the date of the Company’s next annual shareholder meeting following the issuance date.
On July 24, 2012, the Company completed its IPO of 11,057,692 shares of common stock at a price of $17.00 per share.
The common stock was listed on The NASDAQ Global Select Market under the symbol “FIVE.” The shares sold in the IPO
were registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to the Company's Registration
Statement on Form S-1 (File No. 333-180780), which was declared effective by the Securities and Exchange Commission
("SEC") on July 18, 2012. Of the 11,057,692 shares sold in the IPO, the Company issued 4,807,692 shares, and 6,250,000
shares were sold by selling shareholders, including 1,442,308 shares sold pursuant to the exercise in full of the underwriters’
over-allotment option. The Company did not receive any proceeds from shares sold by the selling shareholders. The Company
received proceeds of approximately $73.2 million, net of approximately $8.5 million in underwriting discounts and legal,
accounting and other fees incurred in connection with the IPO. Of the $73.2 million net proceeds received from the IPO,
approximately $65.3 million and $0.7 million, respectively, were used to repay principal and interest under the Company's
Term Loan Facility that existed as of the date of the IPO. The remaining net proceeds of the IPO were used for general
corporate purposes, including working capital.
On September 27, 2012, the Company’s board of directors approved the Five Below, Inc. 2012 Employee Stock Purchase
Plan (the “ESPP”), which remained subject to shareholder approval. The Company's shareholders approved the ESPP on May
63
30, 2013 at the Company's annual meeting of shareholders. The ESPP's effective date is retroactive to January 1, 2013 and is
intended to be qualified as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code
of 1986. The number of shares of common stock reserved for issuance, which is subject to other limitations, is 500,000 shares.
The ESPP allows eligible employees the opportunity to purchase, subject to limitations, shares of the Company’s common
stock through payroll deductions at a discount of 10% of the fair market value of such shares on the purchase date. In fiscal
2013, the Company issued 3,565 shares of common stock under the ESPP resulting in proceeds of approximately $0.1 million
and recorded stock-based compensation expense of $13.5 thousand in connection with the ESPP related to the amount of the
discount.
On February 4, 2013, the Company completed a secondary public offering of 13,012,250 shares of common stock at a
price of $35.65 per share. The shares sold in the secondary public offering were registered under the Securities Act, pursuant to
the Company's registration statements on Form S-1 (File No. 333-186043 and File No. 333-186275), which were declared
effective by the Securities and Exchange Commission on January 29, 2013. All of the shares sold in the secondary public
offering were sold by selling shareholders and the Company did not receive any proceeds. The Company incurred fees of
approximately $1.0 million related to legal, accounting and other fees in connection with the secondary public offering, which
are included in selling, general and administrative expenses in the consolidated statements of operations for fiscal 2012.
On February 28, 2013, one member of the board of directors was issued 594 restricted shares of common stock. These
shares vest and become free of forfeiture restrictions on the earlier of: (i) the one-year anniversary of the issuance date or (ii)
the date of the Company’s next annual shareholder meeting following the issuance date.
On May 30, 2013, three members of the board of directors were each issued 1,990 restricted shares of common stock.
These shares vest and become free of forfeiture restrictions on the earlier of: (i) the one-year anniversary of the issuance date or
(ii) the date of the Company’s next annual shareholder meeting following the issuance date.
During fiscal 2013, two members of the board of directors were issued 1,878, and 1,627 fully vested shares of common
stock, respectively, in lieu of a cash retainer for their annual non-employee director compensation.
On July 1, 2013, the Company completed a secondary public offering of 6,900,000 shares of common stock at a price of
$36.00 per share. The shares sold in the secondary public offering were registered under the Securities Act pursuant to the
Company's registration statement on Form S-1 (File No. 333-188578), which was declared effective by the Securities and
Exchange Commission on June 26, 2013. All of the shares sold in the secondary public offering were sold by selling
shareholders and the Company did not receive any proceeds. The Company incurred fees of approximately $1.0 million related
to legal, accounting and other fees in connection with the secondary public offering, which are included in selling, general and
administrative expenses in the consolidated statement of operations for fiscal 2013.
On September 23, 2013, the Company completed a secondary public stock offering of 7,100,000 shares of common stock
at a price of $46.65 per share. The shares sold in the secondary public offering were registered under the Securities Act
pursuant to the Company's registration statement on Form S-3 (File 333-191210), which was declared effective by the
Securities and Exchange Commission on September 17, 2013. All of the shares sold in the secondary public offering were sold
by selling shareholders, and the Company did not receive any proceeds. The selling shareholders agreed to bear all of the
offering expenses related to legal, accounting and other fees in connection with the secondary public offering.
Dividends
On May 15, 2012, the Company declared and subsequently paid on May 16, 2012 a dividend of $2.02 per share on shares
of common stock (including restricted shares) and on an as-converted basis on shares of Series A 8% Convertible Preferred
Stock totaling approximately $99.5 million. Refer to note 6 for additional information regarding changes to outstanding stock
options resulting from the dividend payment.
(6) Common Stock Options
2002 Equity Incentive Plan
Effective July 26, 2002, the Company adopted the 2002 Equity Incentive Plan (the “Plan”) pursuant to which the
Company’s board of directors may grant stock options and restricted shares to officers, directors, key employees and
professional service providers. The Plan, as amended, allows for the issuance of up to a total of 7,600,000 shares under the
Plan. 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. As of February 1, 2014, 4,669,509 stock options or restricted shares were available for grant.
On May 23, 2012, the Company’s board of directors, in accordance with the Plan’s documents, approved an equitable
adjustment to all options outstanding on the date of the Company’s dividend declaration to reflect the dividend value received
64
by the Company’s common and preferred shareholders. The exercise price of each outstanding option was reduced by $2.02.
The adjustment did not result in additional compensation expense given the adjustment was required under the Plan’s
documents and there was no increase in the fair value of the awards before and after payment of the dividend and adjustment of
the awards.
On August 25, 2010, the Company’s board of directors agreed to allow option holders, as of that date, to exercise, during
a twenty day offer period, all options issued and outstanding under the Plan, regardless if those options were vested and
exercisable (“Vested Options”) or were not currently vested and exercisable (“Unvested Options”). The Company recorded
additional compensation cost in fiscal 2010 to reflect the incremental value associated with the modification of the options,
which was primarily related to the value of the dividends received by the exercisers before the original vesting date. On
October 13, 2010, the holders of the stock options exercised all of their outstanding Vested Options and Unvested Options to
purchase shares of the Company’s common stock. The Unvested Options were exercised for restricted shares of common stock
that have the same vesting schedule as the Unvested Options that were exercised for those shares. The restricted shares are
subject to repurchase by the Company should the option holder’s employment be terminated prior to the vesting at a purchase
price equal to the lesser of: (i) the exercise price paid for the restricted shares and (ii) the fair market value of the restricted
shares at the time of repurchase. For accounting purposes, as the shares remain subject to their original vesting provisions, the
early exercises are being recorded as if the original options remain outstanding until the respective shares vest. Exercise
proceeds received prior to the shares vesting are recorded as a deposit liability in other accrued expenses on the consolidated
balance sheets. As of February 1, 2014 and February 2, 2013, $0.1 million and $0.3 million, respectively, was recorded as a
deposit liability.
Restricted Stock Activity
The following table summarizes the activity related to the restricted shares of common stock (in thousands except share
data):
Unvested, January 29, 2011
Vested
Repurchases upon employee termination
Unvested, January 28, 2012
Vested
Repurchases upon employee termination
Unvested, February 2, 2013
Vested
Repurchases upon employee termination
Unvested, February 1, 2014
Number of
shares
Deposit
liability
304,400 $
(135,657)
(26,816)
141,927
(106,980)
(3,405)
31,542
(26,759)
(648)
4,135 $
1,860
(491)
(238)
1,131
(802)
(21)
308
(239)
(7)
62
65
Stock option activity under the Plan was as follows:
Options
outstanding
Weighted
average exercise
price
Balance as of January 29, 2011
Granted
Forfeited
Balance as of January 28, 2012
Granted
Forfeited
Cancelled (see note 5)
Exercised
Balance as of February 2, 2013 (1)
Granted
Forfeited
Cancelled
Exercised
Balance as of February 1, 2014 (1)
Weighted
average
remaining
contractual term
9.7
9.0
9.3
8.5
7.8
6.31
7.03
6.40
6.47
14.96
9.14
6.30
4.12
10.43
38.92
20.23
30.19
7.55
20.90
8.79
2,136,185 $
611,313
(119,543)
2,627,955
687,416
(98,048)
(2,020,620)
(8,886)
1,187,817
554,500
(205,456)
(35,300)
(196,941)
1,304,620 $
251,657 $
Exercisable as of February 1, 2014
(1) The weighted-average exercise price at February 1, 2014 and February 2, 2013, respectively, reflects the adjustment of $2.02 per share resulting from the
dividend declared on May 15, 2012 as described above.
Included in the options outstanding as of January 28, 2012 were options to purchase 1,010,310 shares of common stock,
which vested incrementally only upon the achievement of certain performance targets including achieving targeted internal
rates of return for the Company’s preferred shareholders or the Company achieving certain market capitalization levels
subsequent to an initial public offering. In March 2012, options to purchase 2,020,620 shares of common stock granted during
fiscal 2010, including the options that were to vest upon the achievement of performance targets, were cancelled and an equal
number of restricted shares were granted (see note 5). During fiscal 2011 no compensation expense was recognized for the
options that were to vest upon the achievement of performance targets prior to their cancellation since the Company's
management determined that the performance targets were not probable of achievement.
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 with the following weighted average assumptions:
Expected volatility
Risk-free interest rate
Expected life of options
Expected dividend yield
Fiscal Year
2013
2012
2011
50.0%
1.4%
6.3 years
—%
50.0%
1.3%
6.3 years
—%
50.0%
2.0%
7.0 years
—%
The Company uses the simplified method to estimate the expected term of the option. The expected volatility incorporates
historical and implied volatility of similar entities whose share prices are publicly available. The risk-free rate for the expected
term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
The per-share weighted average grant-date fair value of stock options granted to employees, including outside directors,
in fiscal 2013, fiscal 2012 and fiscal 2011 was $18.90, $7.42 and $3.58 respectively. The total intrinsic value of stock options
exercised during fiscal 2013, fiscal 2012 and fiscal 2011 was $7.2 million, $0.2 million and zero, respectively. In fiscal 2013
and fiscal 2012, the Company recorded cash received from the exercise of options of $1.5 million and $36.0 thousand,
respectively, and excess tax benefits from option exercises and restricted stock of $2.3 million and $1.6 million, respectively.
Upon option exercise, we issued new shares of stock.
66
As of February 1, 2014, there was $11.6 million of total unrecognized compensation costs related to nonvested share-
based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average
vesting period of 2.8 years.
(7) Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income
during the periods in which temporary differences representing net future deductible amounts become deductible.
As of February 1, 2014, no valuation allowance has been provided for net deferred tax assets as management believes
that it is more likely than not that the Company will realize all deferred tax assets at February 1, 2014.
The components of the income tax expense are as follows (in thousands):
Current:
Federal
State
Deferred:
Federal
State
Income tax expense
Fiscal Year
2013
2012
2011
$
$
21,718 $
3,172
24,890
(3,977)
(1,097)
(5,074)
19,816 $
8,127 $
2,130
10,257
3,043
769
3,812
14,069 $
6,979
3,124
10,103
1,434
(1,378)
56
10,159
The reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows:
Statutory federal tax rate
State taxes, net of federal benefit
Other
Fiscal Year
2013
2012
2011
35.0%
2.6
0.5
38.1%
35.0%
5.5
0.8
41.3%
35.0%
5.6
(1.9)
38.7%
The effective tax rate for fiscal year 2013 compared to fiscal 2012 was primarily impacted by changes in the mix of
pretax income across state jurisdictions and the Company's operating entities as a result of the Restructuring. The effective tax
rate for fiscal 2012 compared to fiscal 2011 was primarily impacted by permanent book to tax differences related to fees paid
for the secondary public offering in fiscal 2012.
67
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are (in thousands):
Deferred tax assets:
Inventories
Deferred revenue
Accrued bonus
Deferred rent
Other
Deferred tax assets
Deferred tax liabilities:
Property and equipment
Other
Deferred tax liabilities
February 1,
2014
February 2,
2013
$
5,430 $
142
194
15,192
1,665
22,623
(16,623)
(1,182)
(17,805)
$
4,818 $
2,990
95
1,067
12,076
750
16,978
(13,874)
(3,359)
(17,233)
(255)
Total income taxes paid during fiscal 2013, fiscal 2012, and fiscal 2011 were $25.0 million, $10.8 million and $1.2
million, respectively.
The Company had no material accrual for uncertain tax positions or interest or penalties related to income taxes on the
Company’s balance sheets at February 1, 2014 and February 2, 2013, 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 fiscal 2013, fiscal
2012, and fiscal 2011.
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, 2011 and thereafter remain subject to examination by the U.S. Internal Revenue
Service (“IRS”). 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 3 to 4 years depending on the state.
(8) Employee Benefit Plan
Effective February 1, 2007, the Company implemented the Five Below 401(k) Retirement Savings Plan for all employees
who have at least 1 year of service, worked at least 1,000 hours, and are 21 years of age. Employees can contribute up to the
maximum amount allowed under law. The Company may make discretionary matching and profit sharing contributions, which
vest over a period of 5 years from each employee’s commencement of employment with the Company. During fiscal 2013 and
fiscal 2012, the Company made discretionary contributions of $0.2 million and $52.0 thousand, respectively. The Company
made no discretionary contributions in fiscal 2011.
(9) Segment Reporting
The Company evaluates performance internally and manages the business on the basis of one operating segment;
therefore, it has only one reportable segment. All of the Company’s identifiable assets are located in the United States.
Set forth below is data for the following groups of products: leisure, fashion and home, and party and snack. The
percentage of net sales represented by each product group for each of the last three fiscal years was as follows:
Sales by Product Group
Leisure
Fashion and home
Party and snack
Total
Percentage of Net Sales
Fiscal Year
2013
2012
2011
51.7%
29.3%
19.0%
100.0%
52.6%
30.3%
17.1%
100.0%
50.6%
31.7%
17.7%
100.0%
68
Leisure includes items such as sporting goods, games, toys, tech, books, electronic accessories, and arts and crafts.
Fashion and home includes items such as personal accessories, “attitude” t-shirts, beauty offerings, home goods and storage
options. Party and snack includes items such as party and seasonal goods, greeting cards, candy and other snacks, and
beverages.
(10) Quarterly Results of Operations and Seasonality (Unaudited)
Quarterly financial results for fiscal 2013 and fiscal 2012 were as follows: (in thousands except for per share data).
Fiscal Year 2013 (1)
Fiscal Year 2012 (1)
Net sales
Gross profit
Net income (loss)
Basic income (loss) income per common
share
Fourth
Quarter (1)
$ 211,964
84,169
24,826
$
$
0.46
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter (1)
$ 110,747
$ 117,087
$ 95,604
$ 173,589
34,234
1,677
0.03
$
$
39,400
4,069
0.08
$
$
30,213
1,570
0.03
$
$
$
$
71,138
19,206
0.36
$
$
Third
Quarter
Second
Quarter
$ 86,587 $ 86,820
28,747
26,931
729 $
1,247
First
Quarter
$ 71,829
23,020
$ (1,157)
0.01
$
(3.41) $
(0.32)
Diluted income (loss) income per common
share
$
(1) The Company operates 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. Fiscal 2013 consists of a 52-week fiscal year and Fiscal 2012 consists of a 53-week fiscal year and the fourth quarter of fiscal 2012
included an extra week, representing the 53rd week.
$
$
$
$
$
0.01
$
(3.41) $
(0.32)
0.03
0.07
0.03
0.35
0.45
The Company's business is seasonal in nature and demand is generally the highest in the fourth fiscal quarter due to the
fourth quarter holiday season and therefore, operating results for any fiscal quarter are not necessarily indicative of results for
the full fiscal year. To prepare for the holiday season, the Company must order and keep in stock more merchandise than it
carries during other parts of the year. The Company expects inventory levels, along with an increase in accounts payable and
accrued expenses, generally to reach their highest levels in the third and fourth fiscal quarters in anticipation of the increased
net sales during the year-end holiday season. As a result of this seasonality, and generally because of variation in consumer
spending habits, the Company experiences fluctuations in net sales and working capital requirements during the fiscal year.
69
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e), as of the end of
the period covered by this Annual Report on Form 10-K pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934
(the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that
our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K 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 February 1, 2014
that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Management, including the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of internal
control over financial reporting as of February 1, 2014. Management based this assessment on criteria for effective internal
control over financial reporting described in “Internal Control - Integrated Framework (1992)” issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that, as
of February 1, 2014, the company maintained effective internal control over financial reporting at a reasonable assurance level.
The effectiveness of the company’s internal control over financial reporting as of February 1, 2014 has been audited by
KPMG LLP, an independent registered public accounting firm, as stated in their report dated March 26, 2014 that appears
below.
70
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Five Below, Inc.:
We have audited Five Below, Inc.’s internal control over financial reporting as of February 1, 2014, based on criteria
established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Five Below, Inc.’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Control over Financial Reporting presented above. Our responsibility
is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Five Below, Inc. maintained, in all material respects, effective internal control over financial reporting as of
February 1, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Five Below, Inc. and subsidiary as of February 1, 2014 and February 2, 2013, and the related
consolidated statements of operations, changes in convertible preferred stock and shareholders’ equity (deficit), and cash flows
for each of the fiscal years in the three-year period ended February 1, 2014, and our report dated March 26, 2014 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 26, 2014
71
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 is included in the “Board of Directors–Nominees for Election to the Board of
Directors for a Three-Year Term Expiring at the 2017 Annual Meeting,” “Board of Directors–Members of the Board of
Directors Continuing in Office for a Term Expiring at the 2015 Annual Meeting,” “Board of Directors–Members of the Board
of Directors Continuing in Office for a Term Expiring at the 2016 Annual Meeting,” “Executive Officers,” “Section 16(a)
Beneficial Ownership Reporting Compliance,” “Board of Directors–Code of Business Conduct and Ethics,” “Board of
Directors–Committees of the Board of Directors,” and “Board of Directors–Director Nomination Process” sections of our
proxy statement for the 2014 annual meeting of shareholders, which will be filed with the Securities and Exchange
Commission no later than June 1, 2014, and is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is included in the “Compensation Discussion and Analysis,” “Executive
Compensation,” “Board of Directors–Director Compensation,” “Board of Directors–Board Leadership Structure and Board’s
Role in Risk Oversight,” “Board of Directors–Compensation Committee Interlocks and Insider Participation” and
“Compensation Committee Report” sections of our proxy statement for the 2014 annual meeting of shareholders, which will be
filed with the Securities and Exchange Commission no later than June 1, 2014, and is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
The information required by this Item 12 is included in the “Security Ownership of Certain Beneficial Owners and
Management” and “Equity Compensation Plan Information” sections of our proxy statement for the 2014 annual meeting of
shareholders, which will be filed with the Securities and Exchange Commission no later than June 1, 2014, and is incorporated
by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is included in the “Certain Relationships and Related Party Transactions” and
“Board of Directors–Director Independence” sections of our proxy statement for the 2014 annual meeting of shareholders,
which will be filed with the Securities and Exchange Commission no later than June 1, 2014, and is incorporated by reference
herein.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is included in the “Proposal 3, Ratification of Independent Registered Public
Accounting Firm” section of our proxy statement for the 2014 annual meeting of shareholders, which will be filed with the
Securities and Exchange Commission no later than June 1, 2014, and is incorporated by reference herein.
PART IV
ITEM 15. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENTS SCHEDULES
(a)
1. Consolidated Financial Statements
The consolidated financial statements of the Company filed as part of this Annual Report on Form 10-K are
included in Part II, Item 8 beginning on page 48:
72
2. Consolidated Financial Statements Schedules
All schedules are omitted because they are not applicable or because the required information is either not
material or is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits
Exhibit
Number
Description
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Amended and Restated Articles of Incorporation of Five Below, Inc., as currently in effect (incorporated by
reference to Exhibit 3.5 of Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-
180780) filed with the Commission on June 12, 2012)
Amended Bylaws, as currently in effect (incorporated by reference to Exhibit 3.6 of Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission on June 12, 2012)
Form of Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 of Amendment No. 3 to the
Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission on July 9, 2012)
Investment Agreement, dated September 1, 2010, by and among Five Below, Inc., the Founders signatory
thereto, the Significant Common Shareholders signatory thereto and the Purchasers signatory thereto
(incorporated by reference to Exhibit 10.1 of the Registration Statement on Form S-1 (File No. 333-180780)
filed with the Commission on April 18, 2012)
Amendment No. 1 to the Investment Agreement, dated October 14, 2010, by and among Five Below, Inc., the
Purchasers signatory to the Investment Agreement and Sargent Family Investment, LLC (incorporated by
reference to Exhibit 10.2 of the Registration Statement on Form S-1 (File No. 333-180780) filed with the
Commission on April 18, 2012)
Amended and Restated Investor Rights Agreement, dated September 1, 2010, by and among Five Below,
Inc., the Significant Common Shareholders signatory thereto, the Series A Preferred Shareholders signatory
thereto and the Other Holders party thereto and any other Persons signatory thereto from time to time
(incorporated by reference to Exhibit 10.3 of the Registration Statement on Form S-1 (File No. 333-180780)
filed with the Commission on April 18, 2012)
First Amendment to Amended and Restated Investor Rights Agreement, dated October 14, 2010, by Five
Below, Inc. (incorporated by reference to Exhibit 10.4 of the Registration Statement on Form S-1 (File No.
333-180780) filed with the Commission on April 18, 2012)
Second Amendment to Amended and Restated Investor Rights Agreement, dated May 23, 2012, by and
among Five Below, Inc., the Significant Common Shareholders signatory thereto and the Series A Preferred
Shareholders signatory thereto (incorporated by reference to Exhibit 10.5 of Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission on May 24, 2012)
Second Amended and Restated Shareholders Agreement, dated September 1, 2010, by and among Five
Below, Inc. and the Shareholders party thereto and any other Persons signatory thereto from time to
time(incorporated by reference to Exhibit 10.5 of the Registration Statement on Form S-1 (File No. 333-
180780) filed with the Commission on April 18, 2012)
First Amendment to Second Amended and Restated Shareholders Agreement, dated October 14, 2010, by
Five Below, Inc. (incorporated by reference to Exhibit 10.6 of the Registration Statement on Form S-1 (File
No. 333-180780) filed with the Commission on April 18, 2012)
Second Amendment to Second Amended and Restated Shareholders Agreement, dated November 22, 2011,
by and among Five Below, Inc. and the Consenting Shareholders signatory thereto (incorporated by reference
73
10.9
10.10a†
10.10b†
10.11a†
10.11b†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
10.18†
10.19†
10.20†
to Exhibit 10.7 of the Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission
on April 18, 2012)
Third Amendment to Second Amended and Restated Shareholders Agreement, dated May 23, 2012, by and
among Five Below, Inc. and the Shareholders party thereto and any other Persons signatory thereto from time
to time (incorporated by reference to Exhibit 10.9 of Amendment No. 1 to the Registration Statement on
Form S-1 (File No. 333-180780) filed with the Commission on May 24, 2012)
Form of Non-Qualified Stock Option Agreement (Employees) (used for options granted prior to May 21,
2013) (incorporated by reference to Exhibit 10.10 of the Registration Statement on Form S-1 (File No. 333-
180780) filed with the Commission on April 18, 2012)
Form of Non-Qualified Stock Option Agreement (Employees) (used for options granted after to May 21,
2013) (incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q filed with the
Commission on September 10, 2013)
Form of Non-Qualified Stock Option Agreement (Executives) (used for options granted prior to May 21,
2013) (incorporated by reference to Exhibit 10.11 of the Registration Statement on Form S-1 (File No. 333-
180780) filed with the Commission on April 18, 2012)
Form of Non-Qualified Stock Option Agreement (Executives) (used for options granted after to May 21,
2013) (incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q filed with the
Commission on September 10, 2013)
Form of Award Agreement for Restricted Shares under the Five Below, Inc. Equity Incentive Plan
(Employees) (incorporated by reference to Exhibit 10.14 of Amendment No. 2 to the Registration Statement
on Form S-1 (File No. 333-180780) filed with the Commission on June 12, 2012)
Form of Award Agreement for Restricted Shares under the Five Below, Inc. Equity Incentive Plan (Directors)
(incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the Commission on
March 11, 2013)
Five Below, Inc. Amended and Restated Equity Incentive Plan (incorporated by reference to Exhibit 10.15 of
Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-180780) filed with the
Commission on June 12, 2012)
Five Below, Inc. Performance Bonus Plan (incorporated by reference to Exhibit 10.16 of Amendment No. 2
to the Registration Statement on Form S-1 (File No. 333-180780) filed with the Commission on June 12,
2012)
Form of Director and Officer Indemnification Agreement(incorporated by reference to Exhibit 10.17 of
Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-180780) filed with the
Commission on May 24, 2012)
Letter Employment Agreement, dated October 14, 2010, by and between David Schlessinger and Five Below,
Inc. (incorporated by reference to Exhibit 10.17 of the Registration Statement on Form S-1 (File No. 333-
180780) filed with the Commission on April 18, 2012)
Amendment to Employment Agreement, dated September 28, 2011, by and between David Schlessinger and
Five Below, Inc. (incorporated by reference to Exhibit 10.18 of the Registration Statement on Form S-1 (File
No. 333-180780) filed with the Commission on April 18, 2012)
Letter Employment Agreement, dated October 14, 2010, by and between Thomas Vellios and Five Below,
Inc. (incorporated by reference to Exhibit 10.19 of the Registration Statement on Form S-1 (File No. 333-
180780) filed with the Commission on April 18, 2012)
Amendment to Employment Agreement, dated September 28, 2011, by and between Thomas Vellios and Five
Below, Inc. (incorporated by reference to Exhibit 10.20 of the Registration Statement on Form S-1 (File No.
333-180780) filed with the Commission on April 18, 2012)
74
10.21†
10.22†
10.23†
10.24†
10.25†
10.26
10.27a
10.27b
10.28a
10.28b
10.29
Letter Employment Agreement, dated April 16, 2012, by and between Kenneth R. Bull and Five Below, Inc.
(incorporated by reference to Exhibit 10.21 of the Registration Statement on Form S-1 (File No. 333-180780)
filed with the Commission on April 18, 2012)
Non-Qualified Stock Option Agreement, dated October 14, 2010, by and between David Schlessinger and
Five Below, Inc. (incorporated by reference to Exhibit 10.22 of the Registration Statement on Form S-1 (File
No. 333-180780) filed with the Commission on April 18, 2012)
Non-Qualified Stock Option Agreement, dated October 14, 2010, by and between Thomas Vellios and Five
Below, Inc. (incorporated by reference to Exhibit 10.23 of the Registration Statement on Form S-1 (File No.
333-180780) filed with the Commission on April 18, 2012)
Option Cancellation Agreement, dated March 22, 2012, by and between David Schlessinger and Five Below,
Inc. (incorporated by reference to Exhibit 10.24 of the Registration Statement on Form S-1 (File No. 333-
180780) filed with the Commission on April 18, 2012)
Option Cancellation Agreement, dated March 22, 2012, by and between Thomas Vellios and Five Below, Inc.
(incorporated by reference to Exhibit 10.25 of the Registration Statement on Form S-1 (File No. 333-180780)
filed with the Commission on April 18, 2012)
Lease Agreement, dated April 1, 2007, by and between Twin Spans Business Park, LLC and Five Below, Inc.,
as amended (incorporated by reference to Exhibit 10.27 of Amendment No. 1 to the Registration Statement
on Form S-1 (File No. 333-180780) filed with the Commission on May 24, 2012)
Credit Agreement, dated as of May 16, 2012, among Five Below, Inc. and the Lenders Party thereto, and
Goldman Sachs Bank USA, Barclays Bank PLC and Jefferies Finance, LLC, collectively as lead arrangers
and lead bookrunners and, individually, as administrative agent and collateral agent, syndication agent, and
documentation agent, respectively, and Credit Suisse AG, Cayman Islands Branch, Deutsche Bank Trust
Company Americas, UBS Securities LLC and Wells Fargo Bank, National Association, as arrangers and
bookrunners (incorporated by reference to Exhibit 10.28 of Amendment No. 1 to the Registration Statement
on Form S-1 (File No. 333-180780) filed with the Commission on May 24, 2012)
Guarantee Joinder Agreement, dated June 12, 2013, by Five Below Merchandising, Inc. and acknowledged
and accepted by Goldman Sachs Bank USA, to the Credit Agreement, dated as of May 16, 2012, among Five
Below, Inc. and the Lenders Party thereto, and Goldman Sachs Bank USA, Barclays Bank PLC and Jefferies
Finance, LLC, collectively as lead arrangers and lead bookrunners and, individually, as administrative agent
and collateral agent, syndication agent, and documentation agent, respectively, and Credit Suisse AG,
Cayman Islands Branch, Deutsche Bank Trust Company Americas, UBS Securities LLC and Wells Fargo
Bank, National Association, as arrangers and bookrunners (incorporated by reference to Exhibit 10.6 of the
Quarterly Report on Form 10-Q filed with the Commission on June 13, 2013)
Security Agreement, dated as of May 16, 2012, among Five Below, Inc. and Goldman Sachs Bank USA
(incorporated by reference to Exhibit 10.29 of Amendment No. 1 to the Registration Statement on Form S-1
(File No. 333-180780) filed with the Commission on May 24, 2012)
Supplement No. 1, dated as of June 12, 2013, by and between Five Below Merchandising, Inc. and Goldman
Sachs Bank USA, to the Security Agreement, dated as of May 16, 2012, among Five Below, Inc. and
Goldman Sachs Bank USA (incorporated by reference to Exhibit 10.7 of the Quarterly Report on Form 10-Q
filed with the Commission on June 13, 2013)
Third Amended and Restated Loan and Security Agreement, dated June 12, 2013, among Five Below, Inc.,
Five Below Merchandising, Inc., and Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 10.5 of the Quarterly Report on Form 10-Q filed with the Commission on June 13, 2013)
10.30†
Five Below, Inc. Compensation Policy for Non-Employee Directors (filed herewith)
75
10.31†
10.32†
10.33
10.34†
23.1
31.1
31.2
32.1
32.2
101*
Letter Employment Agreement, dated May 16, 2012, by and between David Johnston and Five Below, Inc.
(incorporated by reference to Exhibit 10.33 of Amendment No. 2 to the Registration Statement on Form S-1
(File No. 333-180780) filed with the Commission on June 12, 2012)
Non-Qualified Stock Option Agreement, dated May 23, 2012, by and between David Johnston and Five
Below, Inc. (incorporated by reference to Exhibit 10.34 of Amendment No. 2 to the Registration Statement on
Form S-1 (File No. 333-180780) filed with the Commission on June 12, 2012)
Separation and General Release Agreement, dated August 6, 2013, by and between David Johnston and Five
Below, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the
Commission on August 6, 2013)
Five Below, Inc. 2012 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 of the
Quarterly Report on Form 10-Q filed with the Commission on November 29, 2012)
Consent of KPMG LLP (filed herewith)
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith)
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
The following financial information from this Annual Report on Form 10-K, formatted in XBRL (Extensible
Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets as
of February 1, 2014 and February 2, 2013; (ii) the Consolidated Statements of Operations for Fiscal Years
2013, 2012 and 2011; (iii) the Consolidated Statements of Changes in Convertible Preferred Stock and
Shareholders’ Equity (Deficit) For Fiscal Years 2013, 2012 and 2011; (iv) the Consolidated Statements of
Cash Flows for Fiscal Years 2013, 2012 and 2011 and (v) the Notes to Consolidated Financial Statements, in
each case, tagged in detail.
† Management contract or compensatory plan or arrangement.
* Pursuant to applicable securities laws and regulations, this interactive data file is deemed not filed or part of a registration
statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for
purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under those
sections.
76
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, in Philadelphia, Pennsylvania, on the 26th day
of March 2014.
SIGNATURES
FIVE BELOW, INC.
By: /s/ David Schlessinger
Name: David Schlessinger
Title: Executive Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ David Schlessinger
David Schlessinger
/s/ Thomas G. Vellios
Thomas G. Vellios
/s/ Kenneth R. Bull
Kenneth R. Bull
/s/ Steven Collins
Steven Collins
/s/ Andrew Crawford
Andrew Crawford
/s/ David Mussafer
David Mussafer
/s/ Thomas Ryan
Thomas Ryan
/s/ Ronald Sargent
Ronald Sargent
/s/ Michael Devine
Michael Devine
Executive Chairman
March 26, 2014
President, Chief Executive Officer and
Director (Principal Executive Officer)
March 26, 2014
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
March 26, 2014
March 26, 2014
March 26, 2014
March 26, 2014
March 26, 2014
March 26, 2014
March 26, 2014
Director
Director
Director
Director
Director
Director
77
Exhibit Index
No. Description
10.30 Five Below, Inc. Compensation Policy for Non-Employee Directors (filed herewith)
23.1
Consent of KPMG LLP
31.1
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101*
The following financial information from this Annual Report on Form 10-K, formatted in XBRL (Extensible Business
Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets as of February 1,
2014 and February 2, 2013; (ii) the Consolidated Statements of Operations for Fiscal Years 2013, 2012 and 2011; (iii)
the Consolidated Statements of Changes in Convertible Preferred Stock and Shareholders’ Equity (Deficit) For Fiscal
Years 2013, 2012 and 2011; (iv) the Consolidated Statements of Cash Flows for Fiscal Years 2013, 2012 and 2011 and
(v) the Notes to Consolidated Financial Statements, in each case, tagged in detail.
* Pursuant to applicable securities laws and regulations, this interactive data file is deemed not filed or part of a registration
statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for
purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under those
sections.
78
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sports. tech. crafts. party. candy. room. style. now.everythingExEcutivE OfficErs David schlessingerExecutive Chairman and Founder thomas G. velliosPresident, Chief Executive Officer and Founder Kenneth r. BullChief Financial Officer, Secretary and TreasurerBOarD Of DirEctOrs steven J. collinsManaging Director, Advent Internationalandrew W. crawford Principal, Advent InternationalMichael f. Devine, iii Former Chief Financial Officer and Executive Vice President, Coach, Inc.David M. Mussafer Managing Partner, Advent Internationalthomas M. ryanFormer Chairman, President and Chief Executive Officer, CVS Caremark Corporation ronald L. sargentChairman and Chief Executive Officer, Staples, Inc.David schlessingerExecutive Chairman and Founder, Five Below, Inc. thomas G. velliosPresident, Chief Executive Officer and Founder, Five Below, Inc. corporate HeadquartersFive Below1818 Market StreetSuite 2000Philadelphia, PA 19103fivebelow.comindependent registered Public accounting firmKPMG LLP1601 Market StreetPhiladelphia, PA 19103transfer agentRegistrar and Transfer Company10 Commerce DriveCranford, NJ 07016stock Exchange ListingThe NASDAQ Global Select MarkettickerFIVEannual MeetingThe 2014 Annual Meeting of Shareholders of Five Below, Inc. will be held on Tuesday, June 24, 2014 at 9:00 A.M. Eastern Daylight Time at the offices of:Pepper Hamilton LLP3000 Two Logan Square, 18th and Arch StreetsPhiladelphia, PA 19103investor relationsICR, Inc. Farah Soi203-682-8200farah.soi@icrinc.com 2013aNNuaL
RePoRT
t hing
ever y
1818 market street, suite 2000
philadelphia, pa 19103
215-546-7909
fivebelow.com