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Update: FIVE price range raised to $15-$17

Based in Philadelphia, PA, Five Below (FIVE) scheduled a $125 million IPO with a market capitalization of $702 million at a price range mid-point of $13 for Thursday, July 19, 2012.

Five other IPOs scheduled for this week. Full IPO calendar here.

Updated [S-1] filed July 9, 2012.

UNDERWRITERS

  • Manager, Joint Managers: Goldman, Sachs/ Barclays/ Jefferies.
  • Co Managers: Credit Suisse; Deutsche Bank; UBS; Wells Fargo Securities.

SUMMARY

FIVE targets the pre-teen to late teen crowd with all merchandise under $5. Anecdotal comments suggest that some in that demographic just 'can't stay out' of the FIVE stores.

FIVE was purchased on a private equity leveraged buyout basis in 2010. To-date FIVE has paid out almost $300 million in dividends. On the IPO shareholders intend to sell half the offering.

PREMIUM PRICED

Compared to 10 other specialty retailers in the approximate same space, FIVE (at the price range mid-point of $13) expects to IPO at a premium relative to the other's price-to-sales, price-to-earnings and price-to-book value ratios. See chart at bottom.

RECOMMENTATION

Even though the recent private equity owners have cashed out as much as possible and intend to sell 50% of the IPO stock, IPOdesktop expects FIVE to increase from the IPO price.

FIVE has discovered a demographic price-point sweet spot. And new stores have achieved average payback periods of less than one year.

Because FIVE is in only 17 states, IPOdesktop believes this specialty retailer will grow top line revenue and bottom line profit by expanding to a number of other states, with a proven success formula.

BUSINESS

Five Below is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise. FIVE targeted at the aspirational teen and pre-teen customer.

FIVE's products are all priced at $5 and below, including select brands and licensed merchandise across a number of categories, referred to as "worlds": Style, Room, Sports, Media, Crafts, Party, Candy and Seasonal.

Anecdotal comments suggest that teens flock to the stores because of the $5 or less price point & the merchandise selection.

Founded in 2002 FIVE opened its first store in 2002 and has since expanded across the eastern half of the U.S.

As of April 28, 2012, FIVE operated a total of 199 locations across 17 states. Stores average 7,500 square feet. Stores are typically located within power, community and lifestyle shopping centers across a variety of urban, suburban and semi-rural markets.

MARKET

According to the U.S. Census Bureau, there were over 63 million people in the U.S. between the ages of 5 and 19, which represented over 20% of the U.S. population as of April 1, 2010.

According to EPM Communications, Inc., a publishing, research and consulting firm, teens and pre-teens between the ages of 8 and 19 were projected to spend over $250 billion in the U.S. in 2011.

GROWTH PLAN

FIVE opened 50 net new stores in fiscal 2011 and plans to open 50 in fiscal 2012 and 60 in fiscal 2013.

FIVE believes it has "the potential to grow its store base in the U.S. from 199 locations, as of April 28, 2012, to more than 2,000 locations over 20 years."

IPOdesktop note: This is the first time in memory a company has put in a 20 year horizon in an S-1 filing.

New store economics

New stores have achieved average payback periods of less than one year.

FIVE's new store model anticipates a target store size of 7,500 square feet that achieves annual sales of $1.5 million to $1.6 million in the first full year of operation.

FIVE's new store model assumes an average new store investment of $300,000. New store investment includes store buildout (net of tenant allowances), inventory and cash pre-opening expenses.

CAPITAL EXPENDITURES

FIVE's capital expenditures typically vary depending on the timing of new store openings and infrastructure-related investments.

FIVE plans to make capital expenditures of $20.0 million in fiscal 2012 and $23.0 million in fiscal 2013, which FIVE expects to fund from cash generated from operations.

FIVE expects to devote $15.0 million of its capital expenditure budget in fiscal 2012 to construct and open 50 new stores and a new distribution center, which will continue into fiscal 2013, with the remainder projected to be spent on corporate infrastructure and store relocations and remodels.

TAX RATE

For the remainder of fiscal 2012, FIVE believes its effective tax rate will be 40.0%.

SEASONAL

FIVE's business is seasonal, with the highest percentage of sales (42% of total annual sales over the last two fiscal years) occurring during the last fiscal quarter (November, December and January), which includes the holiday season.

COMPETITION

FIVE competes with a broad range of retailers including discount, mass merchandise, grocery, drug, convenience, variety and other specialty stores.

FIVE competes by offering an assortment of products, all priced at $5 or below and including select brands and licensed merchandise, targeted at the teen and pre-teen customer.

PRIVATE EQUITY

Funds managed by Advent International Corporation, 62.5%

Funds managed by LLR Capital II, LLC, 9.6%

LEVERAGED BUYOUT

On October 14, 2010, Advent and Sargent Family Investment, LLC, a limited liability company controlled by Ronald Sargent, invested $192.9 million and $1.1 million, respectively, in Five Below in consideration for 88,785,489 and 506,284 shares of Series A 8% convertible preferred stock, respectively

DIVIDENDS

FIVE used the proceeds of the above investment as well as cash on hand to pay a special dividend to the holders of common stock on October 14, 2010. The aggregate amount of such dividend was approximately $196.7 million

On May 15, 2012, FIVE declared and subsequently paid on May 16, 2012 a special dividend $99.5 million.

FIVE has paid out stockholder dividends of $296 million - that's what leveraged buyouts are all about from the private equity side.

EMPLOYEES

As of April 28, 2012, FIVE employed approximately 630 full-time and 2,330 part-time personnel.

USE OF PROCEEDS

From the sale of 4.8 million shares FIVE expects to net $54 million from the IPO, allocated to repay debt of $50 million used to finance the May 2012 dividend of $99 million. The remaining proceeds (if any) are allocated for general corporate purposes, including working capital.

Shareholders intend to also sell 4.8 million shares.

COMPARE

Cap ((NYSE:MM))

Sales

Earnings

BookValue

YTD

Price Chge

Profit %

SORTED By P/E ratio
Five Below

$702

2.2

33

30.5

34%

Zumiez (ZUMZ)

$1,110

2.0

30

4.1

28%

36%

American Eagle Outfitters (AEO)

$3,890

1.2

26

2.7

28%

36%

Aeropostale (ARO)

$1,570

0.7

22

3.8

27%

26%

Abercrombie & Fitch (ANF)

$2,810

0.7

22

15.4

-30%

61%

Tilly's (TLYS)*

$459

1.1

22

5.0

7%

32%

Urban Outfitters (URBN)

$3,970

1.6

21

3.7

-1%

35%

Wet Seal (WTSLA)

$286

0.5

19

1.2

-3%

31%

The Buckle (BKE)

$1,820

1.7

12

5.0

-7%

44%

Pacific Sunwear of California (PSUN)

$133

0.2

-1

0.7

15%

22%

Hot Topic (HOTT)

$407

0.6

-226

2.2

46%

34%

*IPO'd May 3 at $15.50, recent price was $16.64
Source: IPO Preview: Five Below