Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
Form 10-Q
 
(mark one)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 4, 2018.
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

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  ý    No  ¨

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
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨

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




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of September 6, 2018 was 55,726,878.




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





3


PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

FIVE BELOW, INC.
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and per share data) 
 
August 4, 2018
 
February 3, 2018
 
July 29, 2017
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
133,256

 
$
112,669

 
$
74,759

Short-term investment securities
131,441

 
131,958

 
92,721

Inventories
228,109

 
187,037

 
184,517

Prepaid income taxes
7,358

 
2,264

 
3,698

Prepaid expenses and other current assets
50,210

 
45,434

 
34,876

Total current assets
550,374

 
479,362

 
390,571

Property and equipment, net of accumulated depreciation and amortization of $147,031, $127,679 and $114,534, respectively.
214,923

 
180,349

 
159,717

Deferred income taxes
3,949

 
6,676

 
9,653

Long-term investment securities
1,404

 
27,702

 

Other assets
1,687

 
1,619

 
1,638


$
772,337

 
$
695,708

 
$
561,579


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

 
$

 
$

Accounts payable
103,891

 
73,033

 
76,880

Income taxes payable
407

 
25,275

 
3,271

Accrued salaries and wages
13,509

 
22,906

 
8,550

Other accrued expenses
66,933

 
43,246

 
44,772

Total current liabilities
184,740

 
164,460

 
133,473

Deferred rent and other
79,639

 
72,690

 
61,591

Total liabilities
264,379

 
237,150

 
195,064

Commitments and contingencies (note 5)


 


 


Shareholders’ equity:
 
 
 
 
 
Common stock, $0.01 par value. Authorized 120,000,000 shares; issued and outstanding 55,723,267, 55,438,089 and 55,197,314 shares, respectively.
557

 
554

 
552

Additional paid-in capital
348,344

 
346,300

 
331,515

Retained earnings
159,057

 
111,704

 
34,448

Total shareholders’ equity
507,958

 
458,558

 
366,515

 
$
772,337

 
$
695,708

 
$
561,579

See accompanying notes to consolidated financial statements.

4


FIVE BELOW, INC.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except share and per share data) 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
August 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
Net sales
$
347,734

 
$
283,320

 
$
644,056

 
$
516,201

Cost of goods sold
225,982

 
184,814

 
425,066

 
343,909

Gross profit
121,752

 
98,506

 
218,990

 
172,292

Selling, general and administrative expenses
91,330

 
72,205

 
163,862

 
133,209

Operating income
30,422

 
26,301

 
55,128

 
39,083

Interest income, net
983

 
259

 
2,062

 
568

Income before income taxes
31,405

 
26,560

 
57,190

 
39,651

Income tax expense
6,342

 
9,756

 
10,323

 
14,456

Net income
$
25,063

 
$
16,804

 
$
46,867

 
$
25,195

Basic income per common share
$
0.45

 
$
0.30

 
$
0.84

 
$
0.46

Diluted income per common share
$
0.45

 
$
0.30

 
$
0.84

 
$
0.45

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic shares
55,730,621

 
55,150,108

 
55,671,729

 
55,101,406

Diluted shares
56,191,984

 
55,519,303

 
56,110,361

 
55,423,034

See accompanying notes to consolidated financial statements.


5


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

 
$
554

 
$
346,300

 
$
111,704

 
$
458,558

 
Cumulative effect of ASC 606 adoption
 

 

 

 
486

 
486

 
Share-based compensation expense
 

 

 
6,052

 

 
6,052

 
Issuance of unrestricted stock awards
 
1,325

 

 
90

 

 
90

 
Exercise of options to purchase common stock
 
109,267

 
1

 
3,363

 

 
3,364

 
Vesting of restricted stock units and performance-based restricted stock units
 
283,104

 
3

 

 

 
3

 
Common shares withheld for taxes
 
(110,151
)
 
(1
)
 
(7,629
)
 

 
(7,630
)
 
Issuance of common stock to employees under employee stock purchase plan
 
1,633

 

 
168

 

 
168

 
Net income
 

 

 

 
46,867

 
46,867

 
Balance, August 4, 2018
 
55,723,267

 
$
557

 
$
348,344

 
$
159,057

 
$
507,958

See accompanying notes to consolidated financial statements.

6


FIVE BELOW, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
 
Twenty-Six Weeks Ended
August 4, 2018
 
July 29, 2017
Operating activities:
 
 
 
Net income
$
46,867

 
$
25,195

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
19,367

 
15,479

Share-based compensation expense
6,157

 
7,992

Deferred income tax expense
2,727

 
1,386

Other non-cash expenses
43

 
66

Changes in operating assets and liabilities:

 

Inventories
(41,072
)
 
(30,069
)
Prepaid income taxes
(5,094
)
 
(2,146
)
Prepaid expenses and other assets
(4,844
)
 
(5,826
)
Accounts payable
35,424

 
22,323

Income taxes payable
(24,868
)
 
(20,668
)
Accrued salaries and wages
(9,397
)
 
(2,244
)
Deferred rent
7,013

 
9,507

Other accrued expenses
12,066

 
10,107

Net cash provided by operating activities
44,389

 
31,102

Investing activities:
 
 


Purchases of investment securities
(59,569
)
 
(72,804
)
Sales, maturities, and redemptions of investment securities
86,384

 
68,387

Capital expenditures
(46,522
)
 
(29,949
)
Net cash used in investing activities
(19,707
)
 
(34,366
)
Financing activities:
 
 

Net proceeds from issuance of common stock
168

 
135

Proceeds from exercise of options to purchase common stock and vesting of restricted and performance-based restricted stock units
3,367

 
2,845

Common shares withheld for taxes
(7,630
)
 
(1,045
)
Net cash (used in) provided by financing activities
(4,095
)
 
1,935

Net increase (decrease) in cash and cash equivalents
20,587

 
(1,329
)
Cash and cash equivalents at beginning of period
112,669

 
76,088

Cash and cash equivalents at end of period
$
133,256

 
$
74,759

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Non-cash investing activities
 
 
 
Increase in accrued purchases of property and equipment
$
6,056

 
$
6,897

See accompanying notes to consolidated financial statements.

7

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


(1)
Summary of Significant Accounting Policies
(a)
Nature of Business
Five Below, Inc. (collectively referred to herein with its wholly owned subsidiary as the "Company") is a specialty value retailer offering merchandise targeted at the 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 August 4, 2018, operated in 33 states that include Pennsylvania, New Jersey, Delaware, Maryland, Virginia, Massachusetts, New Hampshire, West Virginia, North Carolina, New York, Connecticut, Rhode Island, Ohio, Illinois, Indiana, Michigan, Missouri, Georgia, Texas, Tennessee, Maine, Alabama, Kentucky, Kansas, Florida, South Carolina, Mississippi, Louisiana, Wisconsin, Oklahoma, Minnesota, California and Arkansas. As of August 4, 2018 and July 29, 2017, the Company operated 692 stores and 584 stores, respectively, each operating under the name “Five Below” and in August 2016, the Company commenced selling merchandise on the internet, through the Company's fivebelow.com e-commerce website.
(b)
Fiscal Year
The Company operates on a 52/53-week fiscal year ending on the Saturday closest to January 31. References to "fiscal year 2018" or "fiscal 2018" refer to the period from February 4, 2018 to February 2, 2019, which is a 52-week fiscal year. References to "fiscal year 2017" or "fiscal 2017" refer to the period from January 29, 2017 to February 3, 2018, which is a 53-week fiscal year. The fiscal quarters ended August 4, 2018 and July 29, 2017 refer to the thirteen weeks ended as of those dates. The year-to-date periods ended August 4, 2018 and July 29, 2017 refer to the twenty-six weeks ended as of those dates.
(c) Basis of Presentation
The consolidated balance sheets as of August 4, 2018 and July 29, 2017, the consolidated statements of operations for the thirteen and twenty-six weeks ended August 4, 2018 and July 29, 2017, the consolidated statement of shareholders’ equity for the twenty-six weeks ended August 4, 2018 and the consolidated statements of cash flows for the twenty-six weeks ended August 4, 2018 and July 29, 2017 have been prepared by the Company in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim reporting and are unaudited. In the opinion of management, the aforementioned financial statements include all known adjustments (which consist primarily of normal, recurring accruals, estimates and assumptions that impact the financial statements) necessary to present fairly the financial position at the balance sheet dates and the results of operations and cash flows for the periods ended August 4, 2018 and July 29, 2017. The balance sheet as of February 3, 2018, presented herein, has been derived from the audited balance sheet included in the Company's Annual Report on Form 10-K for fiscal 2017 as filed with the Securities and Exchange Commission on March 22, 2018 and referred to herein as the “Annual Report,” but does not include all annual disclosures required by U.S. GAAP. These consolidated financial statements should be read in conjunction with the financial statements for the fiscal year ended February 3, 2018 and footnotes thereto included in the Annual Report. The consolidated results of operations for the thirteen and twenty-six weeks ended August 4, 2018 and July 29, 2017 are not necessarily indicative of the consolidated operating results for the year ending February 2, 2019 or any other period. The Company's business is seasonal and as a result, the Company's net sales fluctuate from quarter to quarter. Net sales are usually highest in the fourth fiscal quarter due to the year-end holiday season.
(d) Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 clarifies the principles for recognizing revenue from contracts with customers and outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The effective date of this pronouncement is for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. On February 4, 2018, the Company adopted the pronouncement using the modified retrospective method by recognizing the cumulative effect of gift card breakage as an adjustment to retained earnings resulting in a $0.5 million increase to retained earnings. The comparative information for the years ended prior to February 4, 2018 were not restated to comply with the pronouncement.

8


In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 requires that lease arrangements longer than 12 months result in an entity recognizing an asset and a liability. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The standard requires use of the modified retrospective transition approach. The Company plans to adopt this pronouncement in the first quarter of fiscal 2019, coinciding with the pronouncement's effective date. The Company’s ability to adopt this standard depends on various factors including system readiness and completing an analysis of information necessary to quantify the financial statement impact. The Company has selected its leasing software solution and is in the process of identifying changes to its business processes, systems and controls to support the adoption of this standard. While the Company is still evaluating the impact of this new guidance on its consolidated financial statements, it expects it will result in a significant increase in total assets and total liabilities on the Company’s balance sheet given that the Company has a significant number of leases for its stores.
In August 2018, the FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." ASU 2018-15 requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the noncancellable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. The effective date of this pronouncement is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. The standard can be adopted either using the prospective or retrospective transition approach. The Company is currently evaluating the impact of this pronouncement on the Company's consolidated financial statements and disclosures.
(e) Use of Estimates
The preparation of the consolidated financial statements requires management of the Company to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, valuation allowances for inventories, income taxes and share-based compensation expense.
(f) Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation at the measurement date:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Inputs, other than Level 1, that are either directly or indirectly observable.
Level 3: Unobservable inputs developed using the Company’s estimates and assumptions which reflect those that market participants would use.
The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement.
The Company’s financial instruments consist primarily of cash equivalents, short-term and long-term investment securities, accounts payable, and borrowings, if any, under a line of credit. The Company believes that: (1) the carrying value of cash equivalents and accounts payable are representative of their respective fair value due to the short-term nature of these instruments; and (2) the carrying value of the borrowings, if any, under the line of credit approximates fair value because the line of credit’s interest rates vary with market interest rates. Under the fair value hierarchy, the fair market values of the short-term and long-term investments in corporate bonds are level 1 while the short-term and long-term investments in municipal bonds are level 2. The fair market values of level 2 instruments are determined by management with the assistance of a third party pricing service. Since quoted prices in active markets for identical assets are not available, these prices are determined by the third party pricing service using observable market information such as quotes from less active markets and quoted prices of similar securities.
As of August 4, 2018, February 3, 2018, and July 29, 2017, the Company had cash equivalents of $63.9 million, $91.2 million and $35.8 million, respectively. The Company’s cash equivalents consist of credit and debit card receivables, money market funds, corporate bonds, and municipal bonds. Fair value for cash equivalents was determined based on level 1 inputs.

9


As of August 4, 2018, February 3, 2018, and July 29, 2017, the Company's short-term and long-term investment securities are classified as held-to-maturity since the Company has the intent and ability to hold the investments to maturity. Such securities are carried at amortized cost plus accrued interest and consist of the following (in thousands):
 
 
As of August 4, 2018
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Market Value
Short-term:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
125,027

 
$

 
$
222

 
$
124,805

Municipal bonds
 
6,414

 

 
5

 
6,409

Total
 
$
131,441

 
$

 
$
227

 
$
131,214

 
 
 
 
 
 
 
 
 
Long-term:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
1,404

 
$

 
$

 
$
1,404

Total
 
$
1,404

 
$


$


$
1,404

 
 
As of February 3, 2018
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Market Value
Short-term:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
117,373

 
$

 
$
177

 
$
117,196

Municipal bonds
 
14,585

 

 

 
14,585

Total
 
$
131,958

 
$

 
$
177

 
$
131,781

 
 
 
 
 
 
 
 
 
Long-term:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
25,465

 
$

 
$
170

 
$
25,295

Municipal bonds
 
2,237

 

 
2

 
2,235

Total
 
$
27,702

 
$

 
$
172

 
$
27,530

 
 
As of July 29, 2017
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Market Value
Short-term:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
74,177

 
$

 
$
48

 
$
74,129

Municipal bonds
 
18,544

 
10

 

 
18,554

Total
 
$
92,721

 
$
10

 
$
48

 
$
92,683

Short-term investment securities as of August 4, 2018, February 3, 2018, and July 29, 2017 all mature in one year or less. Long-term investment securities as of August 4, 2018, February 3, 2018, and July 29, 2017 all mature after one year but in less than three years.
(g) Prepaid Expenses and Other Current Assets
Prepaid expenses as of August 4, 2018, February 3, 2018, and July 29, 2017 were $32.7 million, $17.8 million, and $16.7 million, respectively. Other current assets as of August 4, 2018, February 3, 2018, and July 29, 2017 were $17.5 million, $27.6 million, and $18.2 million, respectively.
(h) Other Accrued Expenses
Other accrued expenses include accrued capital expenditures of $15.6 million, $5.0 million, and $7.5 million as of August 4, 2018, February 3, 2018, and July 29, 2017, respectively.

10


(2)
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 clarifies the principles for recognizing revenue from contracts with customers. The Company adopted the standard during the thirteen weeks ended May 5, 2018 using the modified retrospective method by recognizing the cumulative effect as an adjustment to retained earnings.
Revenue Transactions
Revenue from store operations are recognized at the point of sale when control of the product is transferred to the customer at such time. Internet sales, through the Company's fivebelow.com e-commerce website, are recognized when the consumer receives the product as control transfers upon delivery. Returns subsequent to the period end are immaterial; accordingly, no reserve has been recorded. Gift card sales to customers are initially recorded as liabilities and recognized as sales upon redemption for merchandise or as breakage revenue in proportion to the pattern of redemption of the gift cards by the customer in net sales.
The transaction price for the Company’s sales are based on the item’s stated price. To the extent that the Company charges customers for shipping and handling on e-commerce sales, the Company records such amounts in net sales. Shipping and handling costs, which include fulfillment and shipping costs related to the Company's e-commerce operations, are included in costs of goods sold. The Company has chosen the pronouncement's policy election which allows it to exclude all sales taxes from net sales in the accompanying consolidated statements of operations.
Disaggregation of Revenue
The following table provides information about disaggregated revenue by groups of products: leisure, fashion and home, and party and snack (in thousands):

 
Thirteen Weeks Ended
 
Thirteen Weeks Ended
 
August 4, 2018
 
July 29, 2017
 
Amount
 
Percentage of Net Sales
 
Amount
 
Percentage of Net Sales
Leisure
$
187,279

 
53.9
%
 
$
153,997

 
54.4
%
Fashion and home
100,255

 
28.8
%
 
79,724

 
28.1
%
Party and snack
60,200

 
17.3
%
 
49,599

 
17.5
%
Total
$
347,734

 
100.0
%
 
$
283,320

 
100.0
%
 
Twenty-Six Weeks Ended
 
Twenty-Six Weeks Ended
 
August 4, 2018
 
July 29, 2017
 
Amount
 
Percentage of Net Sales
 
Amount
 
Percentage of Net Sales
Leisure
$
332,011

 
51.5
%
 
$
265,806

 
51.5
%
Fashion and home
191,838

 
29.8
%
 
151,064

 
29.3
%
Party and snack
120,207

 
18.7
%
 
99,331

 
19.2
%
Total
$
644,056

 
100.0
%
 
$
516,201

 
100.0
%
Financial Statement Impact of Adopting ASU 2014-09
All of the Company's revenue is recognized from contracts with customers and, therefore, is subject to ASU 2014-09. The Company adopted ASU 2014-09 using a modified retrospective approach during the thirteen weeks ended May 5, 2018 and recognized the cumulative effect as an adjustment by increasing retained earnings by $0.5 million and income taxes payable by $0.1 million, and reducing accrued expenses by $0.7 million and deferred tax asset by $0.1 million. The cumulative adjustment was related to the recognition of gift card breakage. The adoption of ASU 2014-09 had an immaterial impact on the Company’s financial statements for the twenty-six weeks ended August 4, 2018.

11


(3)
Income Per Common Share
Basic income per common share amounts are calculated using the weighted average number of common shares outstanding for the period. Diluted income per common share amounts are calculated using the weighted average number of common shares outstanding for the period and include the dilutive impact of exercised stock options as well as assumed 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. Performance-based restricted stock units are considered contingently issuable shares for diluted income per common share purposes and the dilutive impact, if any, is not included in the weighted average shares until the performance conditions are met.
The following table reconciles net income and the weighted average common shares outstanding used in the computations of basic and diluted income per common share (in thousands, except for share and per share data):
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
August 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
Numerator:
 
 
 
 
 
 
 
Net income
$
25,063

 
$
16,804

 
$
46,867

 
$
25,195

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
55,730,621

 
55,150,108

 
55,671,729

 
55,101,406

Dilutive impact of options, restricted stock units and employee stock purchase plan
461,363

 
369,195

 
438,632

 
321,628

Weighted average common shares outstanding - diluted
56,191,984

 
55,519,303

 
56,110,361

 
55,423,034

Per common share:
 
 
 
 
 
 
 
Basic income per common share
$
0.45

 
$
0.30

 
$
0.84

 
$
0.46

Diluted income per common share
$
0.45

 
$
0.30

 
$
0.84

 
$
0.45

The effects of the assumed exercise of restricted stock units for 4,592 and 2,296 shares of common stock for the thirteen weeks ended and twenty-six weeks ended August 4, 2018, respectively, were excluded from the calculation of diluted net income per share as their impact would have been anti-dilutive.
The effects of the assumed exercise of stock options for 53,480 and 133,248 shares of common stock for the thirteen weeks ended and twenty-six weeks ended July 29, 2017, respectively, 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 restricted stock units of 387 and 26,646 shares of common stock for the thirteen weeks ended and twenty-six weeks ended July 29, 2017, respectively, were excluded from the calculation of diluted net income per share as their impact would have been anti-dilutive.
The aforementioned excluded shares do not reflect the impact of any incremental repurchases under the treasury stock method.
(4)
Line of Credit
On May 10, 2017, the Company entered into a Fourth Amended and Restated Loan and Security Agreement (the “Amended Loan and Security Agreement”), among the Company, Five Below Merchandising, Inc. and Wells Fargo Bank, National Association. The Amended Loan and Security Agreement amends and restates the Third Amended and Restated Loan and Security Agreement, dated June 12, 2013, among the Company, Five Below Merchandising, Inc. and Wells Fargo Bank, National Association, which governed the Revolving Credit Facility.
The Amended Loan and Security Agreement includes a revolving line of credit in the amount of up to $20.0 million (the “Amended Revolving Credit Facility”). Pursuant to the Amended Loan and Security Agreement, advances under the Amended Revolving Credit Facility are no longer tied to a borrowing base; however, the Company is required to maintain eligible inventory at all times in an amount equal to at least $100.0 million. The Amended Revolving Credit Facility expires on the earliest to occur of (i) May 10, 2022 or (ii) an event of default. The Amended Revolving Credit Facility may be increased to up to $50.0 million, subject to certain conditions. The Amended Revolving Credit Facility also includes a $20.0 million sub-limit for the issuance of letters of credit.
The Amended Loan and Security Agreement reduces the interest rate payable on borrowings to be, at the Company’s option, a per annum rate equal to (a) a prime rate or (b) a LIBOR-based rate plus a margin of 1.00%. Letter of credit fees are equal to the interest rate payable on LIBOR-based loans. The interest rate and letter of credit fees under the Amended Loan and Security Agreement are subject to an increase of 2.00% per annum upon an event of default.
The Amended Loan and Security Agreement removes restrictions on the Company’s ability to pay or make dividends and distribute or repurchase its stock, but the Amended Loan and Security Agreement continues to include other customary negative and affirmative covenants including, among other things, limitations on the Company’s ability to (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) engage in mergers or consolidations; or (vi) change its business.

12


The Amended Loan and Security Agreement also removes the provisions that required the Company to make prepayments on outstanding Amended Revolving Credit Facility balances upon the receipt of certain proceeds, including those from the sale of certain assets. Amounts under the Amended Revolving Credit Facility may become due upon certain events of default including, among other things, the Company’s failure to comply with the Amended Revolving Credit Facility’s covenants, bankruptcy, default on certain other indebtedness or a change in control.
Under the Amended Loan and Security Agreement, all obligations under the Amended Revolving Credit Facility continue to be guaranteed by Five Below Merchandising, Inc., a wholly-owned subsidiary of the Company, and are secured by substantially all of the assets of the Company and Five Below Merchandising, Inc.
As of August 4, 2018, the Company had no borrowings under the Amended Revolving Credit Facility and had approximately $20.0 million available on the line of credit.
All obligations under the Amended Revolving Credit Facility are secured by substantially all of the Company's assets and are guaranteed by the Company's subsidiary. As of August 4, 2018 and July 29, 2017, the Company was in compliance with the covenants applicable to it under the Amended Revolving Credit Facility.
(5)
Commitments and Contingencies
Commitments
Leases
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 payments for increases in future operating costs. Many of the Company’s leases provide for one or more renewal options for periods of five years. The Company’s operating lease agreements, including assumed extensions, which are generally those that take the lease to a ten-year term, expire through fiscal 2033.
During the thirteen weeks ended August 4, 2018, the Company committed to 41 new store leases with terms of 10 to 15 years that have future minimum lease payments of approximately $85.0 million.
Other contractual commitments
As of August 4, 2018, the Company has other purchase commitments of approximately $2.3 million consisting of purchase agreements for materials that will be used in the construction of new stores.
In June 2018, the Company signed a purchase agreement to build an approximate 700,000 square foot distribution center located in Georgia for approximately $42 million to support the Company's anticipated growth. The Company expects to occupy the space in early 2019.
Contingencies
Legal Matters
From time to time, the Company is involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcome of such actions will not have a material adverse effect on the Company’s financial condition or results of operations.
(6)
Share-Based Compensation
Equity Incentive Plan
Pursuant to the Company's 2002 Equity Incentive Plan (the “Plan”), the Company’s board of directors may grant stock options, restricted shares, and restricted stock units to officers, directors, key employees and professional service providers. The Plan, as amended, allows for the issuance of up to a total of 7,600,000 shares under the Plan. As of August 4, 2018, 3,219,060 stock options, restricted shares, or restricted stock units were available for grant.
Common Stock Options
All stock options have a term not greater than ten years. Stock options vest and become exercisable in whole or in part, in accordance with vesting conditions set by the compensation committee of the Company’s board of directors. Options granted to date generally vest over four years from the date of grant.

13


Stock option activity under the Plan was as follows:
 
Options
Outstanding
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
(in years)
Balance as of February 3, 2018
519,485

 
$
29.53

 
5.9
Forfeited
(71
)
 
4.95

 

Exercised
(109,267
)
 
30.92

 

Balance as of August 4, 2018
410,147

 
29.16

 
5.4
Exercisable as of August 4, 2018
355,581

 
$
28.52

 
5.2

The fair value of each option award granted to employees, including outside directors, is estimated on the date of grant using the Black-Scholes option-pricing model. There were no stock options granted during the twenty-six weeks ended August 4, 2018.
Restricted Stock Units and Performance-Based Restricted Stock Units
All restricted stock units ("RSU") and performance-based restricted stock units ("PSU") vest in accordance with vesting conditions set by the compensation committee of the Company’s board of directors. RSU's granted to date have vesting periods ranging from less than one year to five years from the date of grant. PSU's granted to date have vesting periods ranging from one year to five years from the date of grant, including grants that have a cumulative three year performance period, subject to satisfaction of the applicable performance goals established for the respective grant. The Company periodically assesses the probability of achievement of the performance criteria and adjusts the amount of compensation expense accordingly. Compensation is recognized over the vesting period and adjusted for the probability of achievement of the performance criteria.
RSU and PSU activity during the twenty-six weeks ended August 4, 2018 was as follows:
 
Restricted Stock Units
 
Performance-Based Restricted Stock Units
 
Number
 
Weighted-Average Grant Date Fair Value
 
Number
 
Weighted-Average Grant Date Fair Value
Non-vested balance as of February 3, 2018
309,554

 
$
38.48

 
495,659

 
$
37.43

Granted
104,276

 
73.94

 
121,333

 
69.59

Vested
(85,570
)
 
38.62

 
(197,534
)
 
35.69

Forfeited
(13,384
)
 
42.71

 

 

Non-vested balance as of August 4, 2018
314,876

 
$
50.01

 
419,458

 
$
47.55

In connection with the vesting of RSU's and PSU's during the twenty-six weeks ended August 4, 2018, the Company withheld 110,151 shares with an aggregate value of $7.6 million in satisfaction of minimum tax withholding obligations due upon vesting.
As of August 4, 2018, there was $20.8 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements (including stock options, restricted stock units and performance-based restricted stock units) granted under the Plan. The cost is expected to be recognized over a weighted average vesting period of 2.5 years.
(7)
Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted. The TCJA includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate tax rate from 35% to 21%, for tax years beginning after December 31, 2017. The TCJA also provides for acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning in 2018, including additional limitations on deductibility of executive compensation and employee meal benefits.
In fiscal 2017, the Company recorded a net $0.5 million benefit that represents what the Company believes is the impact of the TCJA. As the benefit is based on currently available information and interpretations, which are continuing to evolve, the benefit should be considered provisional. The Company will continue to analyze additional information and guidance related to the TCJA as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. The final impacts may differ from the recorded amounts in fiscal 2017, and the Company will continue to refine such amounts within the measurement period provided by Staff Accounting Bulletin No. 118.
The following table summarizes the Company’s income tax expense and effective tax rates for the thirteen and twenty-six weeks ended August 4, 2018 and July 29, 2017 (dollars in thousands):
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
August 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
Income before income taxes
$
31,405

 
$
26,560

 
$
57,190

 
$
39,651

Income tax expense
$
6,342

 
$
9,756

 
$
10,323

 
$
14,456

Effective tax rate
20.2
%
 
36.7
%
 
18.1
%
 
36.5
%

The effective tax rates for the thirteen and twenty-six weeks ended August 4, 2018 and July 29, 2017 were based on the Company’s forecasted annualized effective tax rates and were adjusted for discrete items that occurred within the periods presented. The effective tax rate for the thirteen and twenty-six weeks ended August 4, 2018 was lower than such rate for the thirteen and twenty-six weeks ended July 29, 2017 primarily due to the impact of tax reform as a result of the TCJA and due to discrete items, which include the recognition of net excess income tax benefits related to ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," with respect to the requirement to recognize excess income tax benefits or deficiencies as income tax benefit or expense in the consolidated statements of operations.
The Company had no material accrual for uncertain tax positions or interest and/or penalties related to income taxes on the Company’s balance sheets as of August 4, 2018, February 3, 2018, or July 29, 2017 and has not recognized any material uncertain tax positions or interest and/or penalties related to income taxes in the consolidated statements of operations for the thirteen and twenty-six weeks ended August 4, 2018 or July 29, 2017.
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 31, 2015 and thereafter remain subject to examination by the U.S. Internal Revenue Service. State returns are filed in various state jurisdictions, as appropriate, with varying statutes of limitation and remain subject to examination for varying periods up to three to four years depending on the state.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with “Selected Financial Data,” and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for our fiscal year ended February 3, 2018 and referred to herein as the "Annual Report," and the consolidated financial statements and related notes as of and for the thirteen and twenty-six weeks ended August 4, 2018 included in Part I, Item I of this Quarterly Report on Form 10-Q. The statements in this discussion regarding expectations of our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described below in “Special Note Regarding Forward-Looking Statements” and in Part II, Item 1A "Risk Factors." Our actual results may differ materially from those contained in or implied by any forward-looking statements.
We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31 of the following year. References to "fiscal year 2018" or "fiscal 2018" refer to the period from February 4, 2018 to February 2, 2019, which is a 52-week fiscal year. References to "fiscal year 2017" or "fiscal 2017" refer to the period from January 29, 2017 to February 3, 2018, which is a 53-week fiscal year. The fiscal quarters ended August 4, 2018 and July 29, 2017 refer to the thirteen weeks ended as of those dates. The year-to-date periods ended August 4, 2018 and July 29, 2017 refer to the twenty-six weeks ended as of those dates. Historical results are not necessarily indicative of the results to be expected for any future period and results for any interim period may not necessarily be indicative of the results that may be expected for a full year.

14


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or present facts or conditions, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the introduction of new merchandise, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or the negative of these terms or other comparable terminology.
The forward-looking statements contained in this Quarterly Report on Form 10-Q reflect our views as of the date of this report about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described in Part I, Item 1A “Risk Factors” in our Annual Report, as amended by the risk factors included in Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q. These factors include without limitation:
failure to successfully implement our growth strategy;
disruptions in our ability to select, obtain, distribute and market merchandise profitably;
reliance on merchandise manufactured outside of the United States;
dependence on a volume of traffic to our stores;
inability to attract and retain qualified employees;
inability to successfully build, operate or expand our distribution centers or network capacity;
disruptions to our distribution network or the timely receipt of inventory;
extreme weather conditions in the areas in which our stores are located could negatively affect our business and results of operations;
failure to secure customers’ confidential or credit card information, or other private data relating to our employees or our company;
increased operating costs or exposure to fraud or theft due to customer payment-related risks;
inability to increase sales and improve the efficiencies, costs and effectiveness of our operations;
dependence on our executive officers, senior management and other key personnel or inability to hire additional qualified personnel;
inability to successfully manage our inventory balances and inventory shrinkage;
inability to meet our lease obligations;
changes in our competitive environment, including increased competition from other retailers and the presence of online retailers;
increasing costs due to inflation, increased operating costs, wage rate increases or energy prices;
the seasonality of our business;
inability to successfully implement our expansion into online retail;
disruptions to our information technology systems in the ordinary course or as a result of system upgrades;
the impact of damage or interruptions to our technology systems;
failure to maintain adequate internal controls;
complications with the design or implementation of the new enterprise resource system;
natural disasters, adverse weather conditions, pandemic outbreaks, global political events, war and terrorism;
the impact of changes in tax legislation;
current economic conditions and other economic factors;
the impact of governmental laws and regulations;

15


the direct and indirect impact of recent and potential tariffs imposed and proposed by the United States on foreign imports, including, without limitation, the tariffs themselves, any counter-measures thereto and any indirect effects on consumer discretionary spending, which could increase the cost to us of certain products, lower our margins, increase our import related expenses, and reduce consumer spending for discretionary items, each of which could have a material adverse effect on our business, financial condition and results of future operations;
the impact of changes in accounting standards;
the impact to our financial performance related to insurance programs;
the costs and consequences of legal proceedings;
inability to protect our brand name, trademarks and other intellectual property rights;
the impact of product and food safety claims and effects of legislation;
inability to obtain additional financing, if needed;
restrictions imposed by our indebtedness on our current and future operations; and
regulations related to conflict minerals.
Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this Quarterly Report on Form 10-Q are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.
Overview
Five Below, Inc. (collectively referred to herein with its wholly owned subsidiary as "we," "us," or "our") is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the teen and pre-teen customer. We offer a dynamic, edited assortment of exciting products, priced at $5 and below, including select brands and licensed merchandise across our category worlds. As of August 4, 2018, we operated 692 stores in 33 states.
In August 2016, we commenced selling merchandise on the internet, through our fivebelow.com e-commerce website. We launched our e-commerce operation as an additional channel to service our customers. All e-commerce sales, which includes shipping and handling revenue, are included in net sales and beginning with the third fiscal quarter of 2016, are included in comparable sales. Our e-commerce expenses will have components classified as both cost of goods sold and selling, general and administrative expenses.
On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted. The TCJA includes a numbers of changes to existing U.S. tax laws that impact us, most notably a reduction of the U.S. corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. We will continue to analyze additional information and guidance related to the TCJA as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. See discussion below under "Income Tax Expense" for further information about the tax benefits and expenses that we recognized this year. In fiscal 2018 and future years, we may invest a portion of any savings generated by the TCJA into expenses that could significantly increase and impact the comparability between periods of Cost of Goods Sold and Gross Profit, Selling, General and Administrative Expenses and Operating Income.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales, comparable sales, cost of goods sold and gross profit, selling, general and administrative expenses and operating income.
Net Sales
Net sales constitute gross sales net of merchandise returns for damaged or defective goods. Net sales consist of sales from comparable stores, non-comparable stores, and e-commerce, which includes shipping and handling revenue. Revenue from the sale of gift cards is deferred and not included in net sales until the gift cards are redeemed to purchase merchandise or as breakage revenue in proportion to the pattern of redemption of the gift cards by the customer.
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.

16


Comparable Sales
Comparable sales include net sales from stores that have been open for at least 15 full months from their opening date, and e-commerce sales. Comparable stores include the following:
Stores that have been remodeled while remaining open;
Stores that have been relocated within the same trade area, to a location that is not significantly different in size, in which the new store opens at about the same time as the old store closes; and
Stores that have expanded, but are not significantly different in size, within their current locations.
For stores that are relocated or expanded, the following periods are excluded when calculating comparable sales:

The period beginning when the closing store receives its last merchandise delivery from one of our distribution centers through:
the last day of the fiscal year in which the store was relocated or expanded (for stores that increased significantly in size); or
the last day of the fiscal month in which the store re-opens (for all other stores); and
The period beginning on the first anniversary of the date the store received its last merchandise delivery from one of our distribution centers through the first anniversary of the date the store re-opened.
Comparable sales exclude the 53rd week of sales for 53-week fiscal years. In the 52-week fiscal year subsequent to a 53-week fiscal year, we exclude the sales in the non-comparable week from the same-store sales calculation.
Due to the 53rd week in fiscal 2017, comparable sales for the thirteen and twenty-six weeks ended August 4, 2018 are reported on a restated calendar basis. Reference to the "restated calendar” is based on using the National Retail Federation's restated calendar comparing similar weeks, which are the thirteen weeks from May 6, 2018 to August 4, 2018 as compared to the thirteen weeks from May 7, 2017 to August 5, 2017 and the twenty-six weeks from February 4, 2018 to August 4, 2018 as compared to the twenty-six weeks from February 5, 2017 to August 5, 2017.
There may be variations in the way in which some of our competitors and other retailers calculate comparable or “same store” sales. As a result, data in this Quarterly Report on Form 10-Q regarding our comparable sales may not be comparable to similar data made available by other retailers. Non-comparable sales are comprised of new store sales, sales for stores not open for a full 15 months, and sales from existing store relocation and expansion projects that were temporarily closed (or not receiving deliveries) and not included in comparable sales.
Measuring the change in fiscal year-over-year comparable sales allows us to evaluate how our store base is performing. Various factors affect comparable sales, including:

consumer preferences, buying trends and overall economic trends;
our ability to identify and respond effectively to customer preferences and trends;
our ability to provide an assortment of high-quality, trend-right and everyday product offerings that generate new and repeat visits to our stores;
the customer experience we provide in our stores and online;
the level of traffic near our locations in the power, community and lifestyle centers in which we operate;
competition;
changes in our merchandise mix;
pricing;
our ability to source and distribute products efficiently;
the timing of promotional events and holidays;
the timing of introduction of new merchandise and customer acceptance of new merchandise;
our opening of new stores in the vicinity of existing stores;
the number of items purchased per store visit; and
weather conditions.
Opening new stores is an important part of our growth strategy. As we continue to pursue our growth strategy, we expect that a significant percentage of our net sales will continue to come from new stores not included in comparable sales. Accordingly, comparable sales is only one measure we use to assess the success of our growth strategy.

17


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

18


Results of Consolidated Operations
The following tables summarize key components of our results of consolidated operations for the periods indicated, both in dollars and as a percentage of our net sales.
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
August 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
(in millions, except percentages and total stores)
Consolidated Statements of Operations Data (1):
 
 
 
 
 
 
 
Net sales
$
347.7

 
$
283.3

 
$
644.1

 
$
516.2

Cost of goods sold
226.0

 
184.8

 
425.1

 
343.9

Gross profit
121.8

 
98.5

 
219.0

 
172.3

Selling, general and administrative expenses
91.3

 
72.2

 
163.9

 
133.2

Operating income
30.4

 
26.3

 
55.1

 
39.1

Interest income, net
1.0

 
0.3

 
2.1

 
0.6

Income before income taxes
31.4

 
26.6

 
57.2

 
39.7

Income tax expense
6.3

 
9.8

 
10.3

 
14.5

Net income
$
25.1

 
$
16.8

 
$
46.9

 
$
25.2

Percentage of Net Sales (1):
 
 
 
 
 
 
 
Net sales
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of goods sold
65.0

 
65.2

 
66.0

 
66.6

Gross profit
35.0

 
34.8

 
34.0

 
33.4

Selling, general and administrative expenses
26.3

 
25.5

 
25.4

 
25.8

Operating income
8.7

 
9.3

 
8.6

 
7.6

Interest income, net
0.3

 
0.1

 
0.3

 
0.1

Income before income taxes
9.0

 
9.4

 
8.9

 
7.7

Income tax expense
1.8

 
3.4

 
1.6

 
2.8

Net income
7.2
%
 
5.9
%
 
7.3
%
 
4.9
%
Operational Data:
 
 
 
 
 
 
 
Total stores at end of period
692

 
584

 
692

 
584

Comparable sales growth
2.7
%
 
9.3
%
 
3.0
%
 
6.1
%
Average net sales per store (2)
$
0.5

 
$
0.5

 
$
1.0

 
$
0.9


(1) 
Components may not add to total due to rounding.
(2) 
Only includes stores open during the full thirteen and twenty-six weeks ended.

Thirteen Weeks Ended August 4, 2018 Compared to the Thirteen Weeks Ended July 29, 2017
Net Sales
Net sales increased to $347.7 million in the thirteen weeks ended August 4, 2018 from $283.3 million in the thirteen weeks ended July 29, 2017, an increase of $64.4 million, or 22.7%. The increase was the result of a non-comparable sales increase of $53.1 million and a comparable sales increase of $11.3 million. The increase in non-comparable sales was primarily driven by new stores that opened in fiscal 2018 and the number of stores that opened in fiscal 2017 but have not been open for 15 full months. We plan to open approximately 125 new stores in fiscal 2018.
Comparable sales, based on the restated calendar, increased 2.7%. This increase resulted from an increase of approximately 3.4% in the average dollar value of transactions partially offset by a decrease of approximately 0.7% in the number of transactions.

19


Cost of Goods Sold and Gross Profit
Cost of goods sold increased to $226.0 million in the thirteen weeks ended August 4, 2018 from $184.8 million in the thirteen weeks ended July 29, 2017, an increase of $41.2 million, or 22.3%. The increase in cost of goods sold was primarily the result of an increase in the merchandise cost of goods resulting from the increase in net sales. Also contributing to the increase in cost of goods sold was an increase in store occupancy costs resulting from new store openings.
Gross profit increased to $121.8 million in the thirteen weeks ended August 4, 2018 from $98.5 million in the thirteen weeks ended July 29, 2017, an increase of $23.3 million, or 23.6%. Gross margin increased to 35.0% for the thirteen weeks ended August 4, 2018 from 34.8% in the thirteen weeks ended July 29, 2017, an increase of approximately 20 basis points. The increase in gross margin was primarily the result of a decrease as a percentage of net sales in store occupancy costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $91.3 million in the thirteen weeks ended August 4, 2018 from $72.2 million in the thirteen weeks ended July 29, 2017, an increase of $19.1 million, or 26.5%. As a percentage of net sales, selling, general and administrative expenses increased approximately 80 basis points to 26.3% in the thirteen weeks ended August 4, 2018 compared to 25.5% in the thirteen weeks ended July 29, 2017. The increase in selling, general and administrative expenses was primarily the result of increases of $15.0 million in store-related expenses to support new store growth and $4.1 million of corporate-related expenses.
Income Tax Expense
Income tax expense decreased to $6.3 million in the thirteen weeks ended August 4, 2018 from $9.8 million in the thirteen weeks ended July 29, 2017, a decrease of $3.5 million, or 35.0%. The decrease in income tax expense was primarily the result of the impact of tax reform as a result of the TCJA and due to discrete items, which include the recognition of net excess income tax benefits related to ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." These decreases were partially offset by a $4.8 million increase in pre-tax income.
Our effective tax rate for the thirteen weeks ended August 4, 2018 was 20.2% compared to 36.7% in the thirteen weeks ended July 29, 2017. Our effective tax rate for the thirteen weeks ended August 4, 2018 was lower than the comparable period primarily due to the impact of tax reform as a result of the TCJA and discrete items, which include the impact of the adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting."
Net Income
As a result of the foregoing, net income increased to $25.1 million in the thirteen weeks ended August 4, 2018 from $16.8 million in the thirteen weeks ended July 29, 2017, an increase of $8.3 million or 49.1%.

Twenty-Six Weeks Ended August 4, 2018 Compared to the Twenty-Six Weeks Ended July 29, 2017
Net Sales
Net sales increased to $644.1 million in the twenty-six weeks ended August 4, 2018 from $516.2 million in the twenty-six weeks ended July 29, 2017, an increase of $127.9 million, or 24.8%. The increase was the result of a non-comparable sales increase of $104.2 million and a comparable sales increase of $23.7 million. The increase in non-comparable sales was primarily driven by the number of stores that opened in fiscal 2017 but have not been open for 15 full months and new stores that opened in fiscal 2018. We plan to open approximately 125 new stores in fiscal 2018.
Comparable sales, based on the restated calendar, increased 3.0%. This increase resulted from an increase of approximately 3.6% in the average dollar value of transactions partially offset by a decrease of approximately 0.6% in the number of transactions.
Cost of Goods Sold and Gross Profit
Cost of goods sold increased to $425.1 million in the twenty-six weeks ended August 4, 2018 from $343.9 million in the twenty-six weeks ended July 29, 2017, an increase of $81.2 million, or 23.6%. The increase in cost of goods sold was primarily the result of an increase in the merchandise cost of goods resulting from the increase in net sales. Also contributing to the increase in cost of goods sold was an increase in store occupancy costs resulting from new store openings.

20


Gross profit increased to $219.0 million in the twenty-six weeks ended August 4, 2018 from $172.3 million in the twenty-six weeks ended July 29, 2017, an increase of $46.7 million, or 27.1%. Gross margin increased to 34.0% for the twenty-six weeks ended August 4, 2018 from 33.4% in the twenty-six weeks ended July 29, 2017, an increase of approximately 60 basis points. The increase in gross margin was primarily the result of a decrease as a percentage of net sales in store occupancy costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $163.9 million in the twenty-six weeks ended August 4, 2018 from $133.2 million in the twenty-six weeks ended July 29, 2017, an increase of $30.7 million, or 23.0%. As a percentage of net sales, selling, general and administrative expenses decreased approximately 40 basis points to 25.4% in the twenty-six weeks ended August 4, 2018 compared to 25.8% in the twenty-six weeks ended July 29, 2017. The increase in selling, general and administrative expenses was primarily the result of increases of $25.2 million in store-related expenses to support new store growth and $5.5 million of corporate-related expenses.
Income Tax Expense
Income tax expense decreased to $10.3 million in the twenty-six weeks ended August 4, 2018 from $14.5 million in the twenty-six weeks ended July 29, 2017, a decrease of $4.2 million, or 28.6%. The decrease in income tax expense was primarily the result of the impact of tax reform as a result of the TCJA and due to discrete items, which include the recognition of net excess income tax benefits related to ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." These decreases were partially offset by a $17.5 million increase in pre-tax income.
Our effective tax rate for the twenty-six weeks ended August 4, 2018 was 18.1% compared to 36.5% in the twenty-six weeks ended July 29, 2017. Our effective tax rate for the twenty-six weeks ended August 4, 2018 was lower than the comparable period primarily due to the impact of tax reform as a result of the TCJA and discrete items, which include the impact of the adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting".
Net Income
As a result of the foregoing, net income increased to $46.9 million in the twenty-six weeks ended August 4, 2018 from $25.2 million in the twenty-six weeks ended July 29, 2017, an increase of $21.7 million or 86.0%.

Liquidity and Capital Resources
Overview
Our primary source of liquidity is cash flows from operations. Our primary cash needs are for capital expenditures and working capital.
Cash capital expenditures typically vary depending on the timing of new store openings and infrastructure-related investments. We plan to make cash capital expenditures of approximately $130 million in fiscal 2018, which exclude the impact of tenant allowances, and which we expect to fund from cash generated from operations. We expect to incur approximately $38 million of our cash capital expenditure budget in fiscal 2018 to construct and open approximately 125 new stores, with the remainder projected to be spent on our distribution facilities, including the new distribution center in Georgia, existing stores, and our corporate infrastructure.
Our primary working capital requirements are for the purchase of store inventory and payment of payroll, rent, other store operating costs and distribution costs. Our working capital requirements fluctuate during the year, rising in the third and fourth fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak, year-end holiday shopping season in the fourth fiscal quarter. Fluctuations in working capital are also driven by the timing of new store openings.
Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with cash on hand, net cash provided by operating activities and borrowings under our Amended Revolving Credit Facility. When we have used our Amended 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. To the extent that we have drawn on the facility, we have paid down the borrowings before the end of the fiscal year with cash generated during our peak selling season in the fourth quarter. We did not have any direct borrowings under our Amended Revolving Credit Facility during the twenty-six weeks ended August 4, 2018. As of August 4, 2018, we had approximately $20.0 million available on the line of credit.
On March 20, 2018, our board of directors approved a share repurchase program authorizing the repurchase of up to $100 million of our common stock through March 31, 2021, on the open market, in privately negotiated transactions, or otherwise. There can be no assurances that any such repurchases will be completed, or as to the timing or amount of any repurchases. For the twenty-six weeks ended August 4, 2018, we did not execute any repurchases.

21


Based on our growth plans, we believe that our cash position, which includes our cash equivalents and short-term investments, net cash provided by operating activities and availability under our Amended Revolving Credit Facility will be adequate to finance our planned capital expenditures, authorized share repurchases and working capital requirements over the next 12 months and for the foreseeable future thereafter. If cash flows from operations and borrowings under our Amended Revolving Credit Facility are not sufficient or available to meet our requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance that equity or debt financing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to our then-current shareholders.
Cash Flows
A summary of our cash flows from operating, investing and financing activities is presented in the following table (in millions):
 
Twenty-Six Weeks Ended
August 4, 2018
 
July 29, 2017
Net cash provided by operating activities
$
44.4

 
$
31.1

Net cash used in investing activities
(19.7
)
 
(34.4
)
Net cash (used in) provided by financing activities
(4.1
)
 
1.9

Net increase (decrease) during period in cash and cash equivalents (1)
$
20.6

 
$
(1.3
)
(1) Components may not add to total due to rounding.

Cash Provided by Operating Activities
Net cash provided by operating activities for the twenty-six weeks ended August 4, 2018 was $44.4 million, an increase of $13.3 million compared to the twenty-six weeks ended July 29, 2017. The increase was primarily due to an increase in operating cash flows from store performance partially offset by changes in working capital.
Cash Used in Investing Activities
Net cash used in investing activities for the twenty-six weeks ended August 4, 2018 was $19.7 million, a decrease of $14.7 million compared to the twenty-six weeks ended July 29, 2017. The decrease was primarily due to an increase in net sales, maturities, and redemptions of investment securities partially offset by an increase in capital expenditures. The increase in capital expenditures was primarily for our new store construction, our distribution facilities, and our corporate infrastructure.
Cash (Used in) Provided by Financing Activities
Net cash used in financing activities for the twenty-six weeks ended August 4, 2018 was $4.1 million, an increase of $6.0 million compared to the twenty-six weeks ended July 29, 2017. The increase was primarily the result of an increase in the common shares withheld for taxes.
Line of Credit
On May 10, 2017, we entered into a Fourth Amended and Restated Loan and Security Agreement (the “Amended Loan and Security Agreement”), among Five Below Inc., Five Below Merchandising, Inc. and Wells Fargo Bank, National Association. The Amended Loan and Security Agreement amends and restates the Third Amended and Restated Loan and Security Agreement, dated June 12, 2013, among Five Below Inc., Five Below Merchandising, Inc. and Wells Fargo Bank, National Association, which governed the Revolving Credit Facility.

22


The Amended Loan and Security Agreement includes a revolving line of credit in the amount of up to $20.0 million (the “Amended Revolving Credit Facility”). Pursuant to the Amended Loan and Security Agreement, advances under the Amended Revolving Credit Facility are no longer tied to a borrowing base; however, we are required to maintain eligible inventory at all times in an amount equal to at least $100.0 million. The Amended Revolving Credit Facility expires on the earliest to occur of (i) May 10, 2022 or (ii) an event of default. The Amended Revolving Credit Facility may be increased to up to $50.0 million, subject to certain conditions. The Amended Revolving Credit Facility also includes a $20.0 million sub-limit for the issuance of letters of credit.
The Amended Loan and Security Agreement reduces the interest rate payable on borrowings to be, at our option, a per annum rate equal to (a) a prime rate or (b) a LIBOR-based rate plus a margin of 1.00%. Letter of credit fees are equal to the interest rate payable on LIBOR-based loans. The interest rate and letter of credit fees under the Amended Loan and Security Agreement are subject to an increase of 2.00% per annum upon an event of default.
The Amended Loan and Security Agreement removes restrictions related to our ability to pay or make dividends and distribute or repurchase our stock, but the Amended Loan and Security Agreement continues to include other customary negative and affirmative covenants including, among other things, limitations on our ability to (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) engage in mergers or consolidations; or (vi) change our business.
The Amended Loan and Security Agreement also removes the provisions that required us to make prepayments on outstanding Amended Revolving Credit Facility balances upon the receipt of certain proceeds, including those from the sale of certain assets. Amounts under the Amended Revolving Credit Facility may become due upon certain events of default including, among other things, our failure to comply with the Amended Revolving Credit Facility’s covenants, bankruptcy, default on certain other indebtedness or a change in control.
Under the Amended Loan and Security Agreement, all obligations under the Amended Revolving Credit Facility continue to be guaranteed by our subsidiary and are secured by substantially all of our and our subsidiary's assets.
As of August 4, 2018, we had approximately $20.0 million available on the line of credit.
All obligations under the Amended Revolving Credit Facility are secured by substantially all of our assets and are guaranteed by our subsidiary. As of August 4, 2018 and July 29, 2017, we were in compliance with the covenants applicable to us under the Amended Revolving Credit Facility.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from estimates in amounts that may be material to the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements. Our critical accounting policies and estimates are discussed in the Annual Report. We believe that there have been no significant changes to our critical accounting policies during the twenty-six weeks ended August 4, 2018.
Contractual Obligations
Except as set forth below, there have been no material changes to our contractual obligations as disclosed in the Annual Report, other than those which occur in the ordinary course of business.
From February 4, 2018 to August 4, 2018, we have entered into 84 new fully executed retail leases with terms of 10 to 15 years and other lease modifications that have future minimum lease payments of approximately $165.6 million.
In June 2018, we signed a purchase agreement to build an approximate 700,000 square foot distribution center located in Georgia for approximately $42 million to support our anticipated growth. We expect to occupy the space in early 2019.
Off-Balance Sheet Arrangements
For the quarterly period ended August 4, 2018, except for operating leases entered into in the normal course of business, we were not party to any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, net sales, expenses, results of operations, liquidity, capital expenditures or capital resources.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 clarifies the principles for recognizing revenue from contracts with customers and outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The effective date of this pronouncement is for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. On February 4, 2018, we adopted the pronouncement using the modified retrospective method by recognizing the cumulative effect of gift card breakage as an adjustment to retained earnings resulting in a $0.5 million increase to retained earnings. The comparative information for the years ended prior to February 4, 2018 were not restated to comply with the pronouncement.
In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 requires that lease arrangements longer than 12 months result in an entity recognizing an asset and a liability. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The standard requires use of the modified retrospective transition approach. We plan to adopt this pronouncement in the first quarter of fiscal 2019, coinciding with the pronouncement’s effective date. Our ability to adopt this standard depends on various factors including system readiness and completing an analysis of information necessary to quantify the financial statement impact. We have selected our leasing software solution and are in the process of identifying changes to our business processes, systems and controls to support the adoption of this standard. While we are still evaluating the impact of this new guidance on our consolidated financial statements, we expect it will result in a significant increase in total assets and total liabilities on our balance sheet given that we have a significant number of leases for our stores.
In August 2018, the FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." ASU 2018-15 requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the noncancellable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. The effective date of this pronouncement is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. The standard can be adopted either using the prospective or retrospective transition approach. We are currently evaluating the impact of this pronouncement on our consolidated financial statements and disclosures.
ITEM 3. 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 short-term investment securities that are interest-bearing securities and if there are changes in interest rates, those changes would affect the interest income we earn on these investments and, therefore, impact our cash flows and results of operations. However, due to the short term nature of our investment portfolio, we do not believe an immediate 100 basis point increase or decrease in interest rates would have a material effect on the fair market value of our portfolio, and accordingly we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.
We also have an Amended Revolving Credit Facility which includes a revolving line of credit, which bears interest at a variable rate. Because our Amended Revolving Credit Facility bears interest at a variable rate, we will be exposed to market risks relating to changes in interest rates.
As of August 4, 2018, we had approximately $20.0 million available on the line of credit. The Amended Revolving Credit Facility reduces the interest rate payable on borrowings to be, at our option, a per annum rate equal to (a) a prime rate or (b) a LIBOR-based rate plus a margin of 1.00%. Letter of credit fees are equal to the interest rate payable on LIBOR-based loans. The interest rate and letter of credit fees under the Amended Revolving Credit Facility are subject to an increase of 2.00% per annum upon an event of default. We do not use derivative financial instruments for speculative or trading purposes, but this does not preclude our adoption of specific hedging strategies in the future.
Impact of Inflation
Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. We cannot assure you, however, that our results of operations and financial condition will not be materially impacted by inflation in the future.

23


ITEM 4. 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) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q pursuant to Rule 13a-15(b) of the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q are effective at a reasonable assurance level in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent or detect all errors and all fraud. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting during the thirteen weeks ended August 4, 2018 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.


24


PART II - OTHER INFORMATION

ITEM 1. 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.


25


ITEM 1A. RISK FACTORS
Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors” in our Annual Report. There have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.
Tariffs imposed and proposed by the U.S. government could increase the cost to us of certain products, lower our margins, increase our import related expenses, and reduce consumer spending on discretionary items, each of which could have a material adverse effect on our business, financial condition and results of future operations.
The United States has recently imposed increased tariffs on certain imports from China. While the current tariffs only affect a limited number of the products that we currently either import from China or purchase from domestic vendors which import from China, the U.S. administration has proposed additional tariffs on a list of thousands of categories of products that may be imposed imminently and expressed a willingness for further tariffs on goods imported from China, including on additional items that we purchase. While it is too early to predict how the recently enacted, proposed and any future tariffs on items imported from China or elsewhere will impact our business, such tariffs would likely result in lower gross margin on impacted products, unless we are able to take successfully any one or more of the following mitigating actions: increase our prices, move production to countries with no or lower tariffs or away from domestic vendors who source from China or other tariff impacted countries, or alter or cease offering certain products. Any increase in pricing, alteration of products or reduced product offering could reduce the competitiveness of our products. Furthermore, any retaliatory counter-measures imposed by countries subject to such tariffs, such as China, could increase our, or our vendors’, import expenses. Additionally, even if the products we import are not directly impacted by additional tariffs, the imposition of such additional tariffs on goods imported into the United States could cause increased prices for consumer goods, in general, which could have a negative impact on consumer spending for discretionary items reducing demand for our product. These direct and indirect impacts of increased tariffs or trade restrictions implemented by the United States, both individually and cumulatively, could have a material adverse effect on our business, financial condition and results of future operations.    
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.

26


ITEM 6. EXHIBITS
(a) Exhibits
 
No.
 
Description
 
 
 
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 Quarterly Report on Form 10-Q for the fiscal quarter ended August 4, 2018, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Unaudited Consolidated Balance Sheets as of August 4, 2018, February 3, 2018 and July 29, 2017; (ii) the Unaudited Consolidated Statements of Operations for the Thirteen Weeks Ended and Twenty-Six Weeks Ended August 4, 2018 and July 29, 2017; (iii) the Unaudited Consolidated Statement of Shareholders’ Equity for the Twenty-Six Weeks Ended August 4, 2018; (iv) the Unaudited Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended August 4, 2018 and July 29, 2017 and (v) the Notes to Unaudited Consolidated Financial Statements, 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 Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.


27


SIGNATURES
Pursuant to the requirements 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.
 
 
 
FIVE BELOW, INC.
 
 
 
Date: September 7, 2018
 
/s/ Joel D. Anderson
 
 
Joel D. Anderson
 
 
President and Chief Executive Officer (Principal Executive Officer)
 
 
 
Date: September 7, 2018
 
/s/ Kenneth R. Bull
 
 
Kenneth R. Bull
 
 
Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)



28


EXHIBIT INDEX
 
No.
  
Description
 
 
 
31.1
 
 
 
 
31.2
  
 
 
 
32.1
  
 
 
 
32.2
  
 
 
 
101†
  


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 Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.


29
Exhibit


 
CERTIFICATION
Exhibit 31.1
I, Joel D. Anderson, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Five Below, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
By:
 
/s/ Joel D. Anderson
 
 
Name:
Joel D. Anderson
 
 
Title:
 
President and Chief Executive Officer
Dated: September 7, 2018



Exhibit


 
CERTIFICATION
Exhibit 31.2
I, Kenneth R. Bull, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Five Below, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
By:
 
/s/ Kenneth R. Bull
 
 
Name:
Kenneth R. Bull
 
 
Title:
 
Chief Financial Officer and Treasurer
Dated: September 7, 2018


Exhibit


Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Five Below, Inc. (the “Company”) on Form 10-Q for the fiscal quarter ended August 4, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joel D. Anderson, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/ Joel D. Anderson
 
Joel D. Anderson
 
President and Chief Executive Officer
Date: September 7, 2018


Exhibit


Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Five Below, Inc. (the “Company”) on Form 10-Q for the fiscal quarter ended August 4, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kenneth R. Bull, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/ Kenneth R. Bull
 
Kenneth R. Bull
 
Chief Financial Officer and Treasurer
Date: September 7, 2018