What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-03-18 compared with 2020-03-19 · 304 added, 264 removed, 436 unchanged (57% of the section changed)

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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 February 1, 2020 , we had approximately $20 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%.

We also have an Revolving Credit Facility which includes a revolving line of credit, which bears interest at a variable rate.

Because our Revolving Credit Facility bears interest at a variable rate, we will be exposed to market risks relating to changes in interest rates.

As of January 30, 2021, we had approximately $191 million available on the line of credit.

The 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.

The interest rate and letter of credit fees under the 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.

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Report of KPMG LLP, Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of February 1, 2020 and February 2, 2019

Consolidated Balance Sheets as of January 30, 2021 and February 1, 2020

Consolidated Statements of Operations for Fiscal Years 2020, 2019 and 2018

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

To the Shareholders and Board of Directors

Five Below, Inc.:

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We have audited the accompanying consolidated balance sheets of Five Below, Inc.

(the Company) as of February 1, 2020 and February 2, 2019 , the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the fiscal years in the three-year period ended February 1, 2020 , and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February 1, 2020 and February 2, 2019 , and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended February 1, 2020 , in conformity with U.S.

and subsidiary (the Company) as of January 30, 2021 and February 1, 2020, the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the fiscal years in the three-year period ended January 30, 2021, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 30, 2021 and February 1, 2020, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended January 30, 2021, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of February 1, 2020 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 19, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 18, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Evaluation of slow-moving and obsolete inventories at net realizable value

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Slow-moving and obsolete inventories at net realizable value

As discussed in Note 1 to the consolidated financial statements, the Company monitors inventory levels in order to identify slow-moving or obsolete merchandise as these factors can indicate a decline in the market value of the inventory on hand.

Inventory cost is reduced to net realizable value when cost exceeds the market value less the cost of disposal.

The Company’s inventory balance was $281 million as of January 30, 2021.

Inventory cost is reduced to net realizable value when cost exceeds the selling price less the cost of disposal.

The market value is subject to the effects of consumer demands, customer preferences, and the broader economy.

The Company’s inventory balance was $324.0 million as of February 1, 2020, which represents 17% of total assets.

We identified the evaluation of slow-moving and obsolete inventories at net realizable value as a critical audit matter because a high degree of auditor judgment was required to evaluate the Company’s ability to sell certain products.

The primary procedures we performed to address this critical audit matter included the following.

We tested certain internal controls over the Company’s inventory process, including controls related to the review of historical product sales and inventory quantities on-hand, the estimate of net realizable value of slow-moving and obsolete inventories and adjustments of inventory cost to net realizable value.

We obtained an understanding of the costing method selected by the Company.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the critical audit matter.

This included controls related to the review of historical product sales and inventory quantities on hand, and the estimate of net realizable value of slow-moving and obsolete inventories and adjustments of inventory cost to net realizable value.

We evaluated the Company’s methodology for determining slow-moving and obsolete merchandise.

We selected certain products determined to be slow-moving or obsolete and considered current market trends or seasonal impacts by obtaining an understanding of the nature of the slow-moving and obsolete merchandise.

We assessed the Company’s inventory adjustments to net realizable value by performing a retrospective review of prior year inventory adjustments and analyzing sales for identified slow-moving and obsolete inventories subsequent to the measurement date.

Assessment of the adoption of Accounting Standards Codification Topic 842, Leases

As discussed in Notes 1 and 3 to the consolidated financial statements, the Company adopted ASC Topic 842 on February 3, 2019.

The Company adopted the standard on a modified retrospective basis and elected the package of practical expedients.

As part of the adoption $628.9 million of right-of-use assets and $709.9 million of lease liabilities related to operating leases were recognized on the consolidated balance sheet as of the Company’s adoption date.

We identified the assessment of the adoption of ASC Topic 842 as a critical audit matter.

A high degree of subjective auditor judgment and audit effort was required in evaluating the Company’s adoption of ASC Topic 842.

Such auditor judgment and effort included assessing the incremental borrowing rates used to discount the unpaid lease payments to present value and changes to internal controls and business processes.

In addition, the audit effort required the use of valuation professionals with specialized skills and knowledge to assist in performing the audit procedures and evaluating the audit evidence obtained over the incremental borrowing rates determined by the Company.

The primary procedures we performed to address this critical audit matter included the following.

We gained an understanding over the Company’s change in business process and tested certain internal controls over the Company’s ASC Topic 842 implementation process, including controls related to the determination of the incremental borrowing rates.

We gained an understanding of the Company’s ASC Topic 842 accounting analyses that documented the facts and circumstances in its lease contracts, as well as its selection of available practical expedients.

We evaluated these analyses by selecting a sample of lease contracts and comparing the relevant contract terms to those used by the Company in its determination of the right-of-use assets and lease liabilities.

We evaluated the Company’s methodology for determining the incremental borrowing rates.

In addition, we involved valuation professionals with specialized skills and knowledge who assessed the Company’s incremental borrowing rates by performing an independent analysis using publicly available market data.

We compared our analysis to the analysis performed by the Company.

We selected certain products determined to be slow-moving or obsolete and considered current market trends or seasonal impacts by assessing the nature of the slow-moving and obsolete merchandise.

We assessed the Company’s adjustments of inventory costs to net realizable value for certain slow-moving and obsolete inventories by (1) comparing the historical estimate for net realizable value adjustments to actual adjustments of inventory costs, and (2) analyzing sales subsequent to the measurement date.

We have served as the Company's auditor since 2002.

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(in thousands, except share and per share data)

February 1, 2020

February 2, 2019

January 30, 2021 February 1, 2020

Current assets:

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Short-term investment securities 140,928 59,229

Inventories 281,267 324,028

Prepaid income taxes 6,350 4,063

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Operating lease assets 975,862 842,988

Deferred income taxes

Other assets 18,144 10,874

$ 2,314,770 $ 1,958,661

Liabilities and Shareholders’ Equity

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Total current liabilities 435,670 351,345

Deferred rent and other

Other long-term liabilities 1,048 1,199

Deferred income taxes 28,911 8,716

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Total shareholders’ equity 881,886 759,778

$ 2,314,770 $ 1,958,661

See accompanying notes to consolidated financial statements.

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(in thousands, except share and per share data)

2020 2019 2018

Net sales $ 1,962,137 $ 1,846,730 $ 1,559,563

Cost of goods sold 1,309,807 1,172,764 994,478

Gross profit 652,330 673,966 565,085

Selling, general and administrative expenses 497,527 456,682 377,901

Operating income 154,803 217,284 187,184

Interest income and other, net

Interest (expense) income and other, net ( 1,736 ) 4,285 4,623

Income before income taxes 153,067 221,569 191,807

Income tax expense 29,706 46,513 42,162

Net income $ 123,361 $ 175,056 $ 149,645

Basic income per common share $ 2.21 $ 3.14 $ 2.68

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Weighted average shares outstanding:

Basic shares 55,816,508 55,823,535 55,763,034

Diluted shares 56,060,039 56,166,167 56,220,864

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(in thousands, except share and per share data)

paid-in capital

Common stock Additional

paid-in capital Retained

earnings Total

shareholders’ equity

Balance, January 28, 2017

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 — — 11,807 11,807

Issuance of unrestricted stock awards

2,056 — 180 — 180

Exercise of options to purchase common stock

145,157 1 4,026 — 4,027

Vesting of restricted stock units and performance-based restricted stock units 305,201 3 — — 3

Common shares withheld for taxes ( 113,058 ) ( 1 ) ( 7,989 ) — ( 7,990 )

Repurchase and retirement of common stock ( 21,810 ) — ( 1,987 ) — ( 1,987 )

Issuance of common stock to employees under employee stock purchase plan 3,413 — 365 — 365

Net income — — — 149,645 149,645

Balance, February 2, 2019 55,759,048 557 352,702 261,835 615,094

Cumulative effect of ASC 606 adoption

Share-based compensation expense — — 12,136 — 12,136

Issuance of unrestricted stock awards

1,634 — 198 — 198

Exercise of options to purchase common stock

141,582 2 4,107 — 4,109

Vesting of restricted stock units and performance-based restricted stock units 227,020 2 — — 2

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Issuance of common stock to employees under employee stock purchase plan 3,456 — 435 — 435

Net income — — — 175,056 175,056

Balance, February 1, 2020 55,712,067 557 322,330 436,891 759,778

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Issuance of unrestricted stock awards

1,518 — 208 — 208

Exercise of options to purchase common stock

176,846 2 5,344 — 5,346

Vesting of restricted stock units and performance-based restricted stock units 230,002 2 — — 2

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Repurchase and retirement of common stock

( 137,023 ) ( 1 ) ( 12,662 ) — ( 12,663 )

Issuance of common stock to employees under employee stock purchase plan 3,561 — 477 — 477

Balance, February 1, 2020

— — — 123,361 123,361

Balance, January 30, 2021 55,935,237 $ 559 $ 321,075 $ 560,252 $ 881,886

See accompanying notes to consolidated financial statements.

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(in thousands)

2020 2019 2018

Operating activities:

Net income $ 123,361 $ 175,056 $ 149,645

Adjustments to reconcile net income to net cash provided by operating activities:

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Changes in operating assets and liabilities:

Inventories 42,761 ( 80,392 ) ( 56,599 )

Prepaid income taxes ( 2,287 ) ( 2,726 ) 927

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Financing activities:

Borrowing on note payable under Revolving Credit Facility 50,000 — —

Repayment of note payable under Revolving Credit Facility ( 50,000 ) — —

Cash paid for Revolving Credit Facility financing costs ( 2,029 ) — —

Net proceeds from issuance of common stock 477 435 365

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Common shares withheld for taxes ( 3,917 ) ( 10,367 ) ( 7,990 )

Net cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net cash used in financing activities ( 12,784 ) ( 42,707 ) ( 5,582 )

Net increase (decrease) in cash and cash equivalents 66,293 ( 49,258 ) 139,079

Cash and cash equivalents at beginning of year 202,490 251,748 112,669

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(1) Summary of Significant Accounting Policies

Description of Business

(a) Description of Business

Five Below, Inc.

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thus, it is not dependent on a single vendor or a group of vendors.

The Company is incorporated in the Commonwealth of Pennsylvania and, as of February 1, 2020 , operated in 36 states that include Pennsylvania, New Jersey, Delaware, Maryland, Virginia, Massachusetts, New Hampshire, West Virginia, North Carolina, New York, Connecticut, Rhode Island, Ohio, Illinois, Indiana, Michigan, Missouri, Georgia, Texas, Tennessee, Maine, Alabama, Kentucky, Kansas, Florida, South Carolina, Mississippi, Louisiana, Wisconsin, Oklahoma, Minnesota, California, Arkansas, Iowa, Nebraska, and Arizona.

As of February 1, 2020 and February 2, 2019 , the Company operated 900 stores and 750 stores, respectively, each operating under the name “Five Below”, and sells merchandise on the internet, through the Company's fivebelow.com e-commerce website.

The Company is incorporated in the Commonwealth of Pennsylvania and, as of January 30, 2021, operated in 38 states that include Pennsylvania, New Jersey, Delaware, Maryland, Virginia, Massachusetts, New Hampshire, West Virginia, North Carolina, New York, Connecticut, Rhode Island, Ohio, Illinois, Indiana, Michigan, Missouri, Georgia, Texas, Tennessee, Maine, Alabama, Kentucky, Kansas, Florida, South Carolina, Mississippi, Louisiana, Wisconsin, Oklahoma, Minnesota, California, Arkansas, Iowa, Nebraska, Arizona, Nevada and Colorado.

As of January 30, 2021 and February 1, 2020, the Company operated 1,020 stores and 900 stores, respectively, each operating under the name “Five Below”, and sells merchandise on the internet, through the Company's fivebelow.com e-commerce website.

The Company's consolidated financial statements include the accounts of Five Below, Inc.

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All intercompany transactions and accounts are eliminated in the consolidation of the Company's and subsidiary's financial statements.

(b) Impact of COVID-19

As a result of the coronavirus (or COVID-19) pandemic in 2020, federal, state and local governments and private entities mandated various restrictions.

Such mandates required reduction of operating hours and forced temporary closures of certain retailers and other businesses.

As a result of these restrictions and out of concern for its customers and employees, the Company temporarily closed all of its stores as of March 20, 2020, with stores beginning to reopen at the end of April in compliance with federal, state and local requirements.

To seek to mitigate the effects of the pandemic and to create financial flexibility, the Company took a number of actions to preserve liquidity (some of which were temporary in nature such as temporary pay reductions or furloughs, and some of which were more permanent, such as the amendment of the Company’s credit facility).

The Company also took certain actions designed to ensure, as much as possible, a safe working environment for employees and a safe shopping environment for its customers.

Depending on future developments with respect to the COVID-19 pandemic, including any new federal, state and local governmental restrictions that may be imposed, the Company may determine to reinstate any of the foregoing temporary mitigation measures or take any additional steps that the Company considers necessary.

If the pandemic were to worsen, the Company's business operations and results of operations, including its net sales, earnings and cash flows, may be materially impacted.

The Company operates on a 52/53-week fiscal year ending on the Saturday closest to January 31.

References to "fiscal year 2020" or "fiscal 2020" refer to the period from February 2, 2020 to January 30, 2021, which consists of a 52-week fiscal year.

References to "fiscal year 2019" or "fiscal 2019" refer to the period from February 3, 2019 to February 1, 2020, which consists of a 52-week fiscal year.

References to "fiscal year 2018" or "fiscal 2018" refer to the period from February 4, 2018 to February 2, 2019, which consists of 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 consists of a 53-week fiscal year.

Cash and Cash Equivalents

(d) Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity date of three months or less when purchased to be cash equivalents.

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The majority of payments due from banks for third-party credit card and debit card transactions resulting from customer purchases at the Company’s retail stores process within 24 to 48 hours, except for transactions occurring on a Friday, which are generally processed the following Monday.

Amounts due from banks for these transactions classified as cash equivalents totaled $ 8.9 million and $ 7.4 million as of February 1, 2020 and February 2, 2019 , respectively.

Amounts due from banks for these transactions classified as cash equivalents totaled $ 12.8 million and $ 8.9 million as of January 30, 2021 and February 1, 2020, respectively.

Book overdrafts, which are outstanding checks in excess of funds on deposit, are recorded within accounts payable in the accompanying consolidated balance sheets and within operating activities in the accompanying consolidated statements of cash flows.

As of February 1, 2020 and February 2, 2019 , the Company had cash equivalents of $ 200.1 million and $ 215.7 million , respectively.

Fair Value of Financial Instruments

As of January 30, 2021 and February 1, 2020, the Company had cash equivalents of $ 250.7 million and $ 200.1 million, respectively.

(e) 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.

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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 February 1, 2020 and February 2, 2019 , the Company's short-term investment securities are classified as held-to-maturity since the Company has the intent and ability to hold the investments to maturity.

As of January 30, 2021 and February 1, 2020, the Company's short-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 February 1, 2020

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Market Value

As of January 30, 2021

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Market Value

Corporate bonds

$ 95,530 $ — $ 53 $ 95,477

Municipal bonds

45,398 — 7 45,391

Total $ 140,928 $ — $ 60 $ 140,868

As of February 1, 2020

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Market Value

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Market Value

Corporate bonds

$ 58,625 $ — $ 4 $ 58,621

Municipal bonds

Short-term investment securities as of February 1, 2020 and February 2, 2019 all mature in one year or less.

$ 59,229 $ — $ 4 $ 59,225

Short-term investment securities as of January 30, 2021 and February 1, 2020 all mature in one year or less.

(f) Inventories

Inventories consist of finished goods purchased for resale, including freight and tariffs, and are stated at the lower of cost and net realizable value, at the individual product level.

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The shrink estimate can be affected by changes in merchandise mix and changes in actual shrink trends.

Prepaid Expenses and Other Current Assets

(g) Prepaid Expenses and Other Current Assets

Prepaid expenses in fiscal 2020 and fiscal 2019 were $ 19.0 million and $ 17.2 million, respectively.

Other current assets in fiscal 2020 and fiscal 2019 were $ 39.1 million and $ 58.7 million, respectively.

Property and Equipment

(h) Property and Equipment

Property and equipment are stated at cost.

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Property and equipment, net, consists of the following (in thousands):

February 1, 2020

February 2, 2019

January 30, 2021 February 1, 2020

Land $ 23,541 $ 14,773

Furniture and fixtures 261,324 202,340

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Property and equipment, net $ 565,351 $ 439,086

Impairment of Long-Lived Assets

(i) Impairment of Long-Lived Assets

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

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In the event of a store closure, the Company will record an impairment charge, if appropriate, or accelerate depreciation over the revised useful life of the asset.

Based on its Company's most recent analysis, management believes that no impairment of long-lived assets exists for the period ended February 1, 2020 .

Deferred Financing Costs

Based on its Company's most recent analysis, management believes that no impairment of long-lived assets exists for the period ended January 30, 2021.

(j) Deferred Financing Costs

Deferred financing costs are amortized to interest expense over the term of the related credit agreement.

As of February 1, 2020 and February 2, 2019 , the Company had an immaterial balance remaining on the balance sheet.

Operating Leases

As of January 30, 2021, the Company had $ 1.6 million remaining on the balance sheet within Other Assets.

As of February 1, 2020, the Company had an immaterial balance remaining on the balance sheet.

(k) Operating Leases

The Company leases store locations, distribution centers, the corporate headquarters and equipment used in its operations and evaluates and classifies its leases as operating or capital leases for financial reporting purposes.

Any assets held under a capital lease are included in property and equipment, net.

Any assets held under a finance lease are included in property and equipment, net.

Operating lease expense is recorded on a straight-line basis over the lease term.

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Generally, the Company’s store leases have expected lease terms of ten years, which are comprised of an initial term of ten years or an initial term of five years and one assumed five-year extension, resulting in a ten-year life.

The expected lease term is used to determine whether a lease is capital or operating and to calculate straight-line rent expense.

The expected lease term is used to determine whether a lease is finance or operating and to calculate straight-line rent expense.

Substantially all of the Company's leases include options that allow the Company to renew or extend the lease term beyond the initial lease period, subject to terms and conditions agreed upon at the inception of the lease.

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In addition, the Company's leases may include early termination options.

Capital Leases

(l) Finance Leases

The Company establishes assets and liabilities for the estimated construction costs incurred under lease arrangements where the Company is considered the owner for accounting purposes only, or build-to-suit leases, to the extent the Company is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease.

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If the transaction does not qualify for sales recognition under the sale-leaseback accounting guidance, the Company continues to be the deemed accounting owner.

As of February 2, 2019 , the Company had approximately $ 7 million of a capital lease land asset and liability.

There were no material capital leases as of February 1, 2020 .

Other Accrued Expenses

There were no material finance leases as of January 30, 2021 and February 1, 2020, respectively.

(m) Other Accrued Expenses

Other accrued expenses include accrued capital expenditures of $ 29.2 million and $ 28.9 million in fiscal 2020 and fiscal 2019, respectively .

Deferred Rent and Other

The following disclosures for the year ended February 2, 2019 were made in accordance with the accounting guidance for operating leases in effect at that time.

Certain of the Company’s operating leases contain either rent holidays and/or predetermined fixed escalations of minimum rental payments during the original and/or extended lease terms.

For these leases, the Company recognizes the related rent expense on a straight-line basis over the life of the lease and records the difference between the amounts charged to operations and amounts paid as deferred rent.

The life of the lease is the initial term plus assumed extensions.

The Company also receives certain lease incentives in conjunction with entering into operating leases.

These lease incentives are recorded as deferred rent at the beginning of the lease term and recognized as a reduction of rent expense over the lease term.

In addition, certain of the Company’s leases contain future contingent increases in rents.

Such increases in rent expense are recorded in the period in which such contingent increases to the rents take place.

The following table summarizes the Company's deferred rent and other long-term liabilities balances (in thousands):

February 1, 2020

February 2, 2019

Deferred rent (1)

Total current liabilities

Deferred rent

Total long-term liabilities

The current portion of deferred rent is included in the other accrued expenses line item in the accompanying

consolidated balance sheets.

(n) Equity Method Investments

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The cost is adjusted to recognize the Company's proportionate share of the investee’s net income or loss after the date of investment and is also adjusted for any impairments resulting from other-than-temporary declines in fair value.

These adjustments are recorded in interest income and other, net in the consolidated statements of operations.

These adjustments are recorded in interest (expense) income and other, net in the consolidated statements of operations.

Additional adjustments to cost may include any additional contributions made and dividends received and both are recorded in other assets in the consolidated balance sheets.

Share-Based Compensation

(o) Share-Based Compensation

The Company measures the cost of employee services received in exchange for share-based compensation based on the grant date fair value of the employee stock award.

The Company recognizes compensation expense generally on a straight-line basis over the employee's requisite service period (generally the vesting period of the equity grant) based on the estimated grant date fair value of restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs") except for PSUs that have a market condition based on our total shareholder return relative to a pre-defined peer group which are subject to multi-year performance objectives with a vesting date in 2023 (if the applicable performance objectives are achieved).

The fair value of these PSUs are determined using a Monte Carlo valuation model.

The Company uses the Black-Scholes option-pricing model for grants of stock options.

The fair value of restricted stock awards are based on the closing price of the Company's common stock on the grant date and the fair value of stock options are based on the Black-Scholes option-pricing model utilizing the closing price of the Company's common stock on the grant date as the fair value of common stock in the model.

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Share-based compensation cost recognized and included in expenses for fiscal 2020, fiscal 2019 and fiscal 2018, was $ 9.6 million, $ 12.4 million and $ 12.0 million, respectively.

Revenue Recognition

Revenue is recognized at the point of sale when control of the product is transferred to the customer at such time.

(p) Revenue Recognition

Revenue from store operations is recognized at the point of sale when control of the product is transferred to the customer at such time.

Internet sales, through the Company's fivebelow.com e-commerce website, are recognized when the consumer receives the product as control transfers upon delivery.

Returns are accepted under certain conditions within 14 days of purchase.

Returns subsequent to the period end are immaterial;

accordingly, no reserve has been recorded.

Gift card sales to customers are initially recorded as liabilities and recognized as sales upon redemption for merchandise or as breakage revenue in proportion to the pattern of redemption of the gift cards by the consumer in net sales.

accordingly, no significant reserve has been recorded.

Sales tax collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, excluded from sales in the accompanying consolidated statements of operations.

Shipping and Handling Revenues and Costs

The transaction price for the Company’s sales is based on the item’s stated price.

To the extent that the Company charges customers for shipping and handling on e-commerce sales, the Company records such amounts in net sales.

Shipping and handling costs, which include fulfillment and shipping costs related to the Company's e-commerce operations, are included in costs of goods sold.

The Company has chosen ASU 2014-09's policy election which allows it to exclude all sales taxes from net sales in the accompanying consolidated statements of operations.

(q) Shipping and Handling Revenues and Costs

The Company includes all shipping and handling revenue from e-commerce sales in net sales.

Shipping and handling costs, which are included in cost of goods sold in the accompanying consolidated statements of operations, include fulfillment and shipping costs related to the Company's e-commerce operations.

Cost of Goods Sold

(r) Cost of Goods Sold

Cost of goods sold reflects the direct costs of purchased merchandise and inbound freight, as well as store occupancy, distribution and buying expenses.

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Buying costs include compensation expense for the Company's internal buying organization.

Selling, General and Administrative Expenses

(s) Selling, General and Administrative Expenses

Selling, general and administrative expenses include payroll and other compensation, marketing and advertising expense, depreciation and amortization expense, and other selling and administrative expenses.

Vendor Allowances

(t) Vendor Allowances

The Company receives various incentives in the form of allowances, free product and promotional funds from its vendors based on product purchases and advertising activities.

The amounts received are subject to changes in market conditions, vendor marketing strategies and changes in the profitability or sell-through of the related merchandise for the Company.

Merchandise allowances are recorded in cost of goods sold and recognized in the period the related merchandise is sold.

Merchandise allowances are recognized in the period the related merchandise is sold within cost of goods sold.

Marketing allowances are recorded in selling, general and administrative expenses and are recognized in the period the related advertising occurs to the extent the allowance is a reimbursement that is specific and incremental, and identifiable costs have been incurred by the Company to sell the vendor’s products.

To the extent these conditions are not met, these allowances are recorded as merchandise allowances.

Store Pre-Opening Costs

(u) Store Pre-Opening Costs

Costs incurred between completion of a new store location’s construction and its opening (pre-opening costs) are charged to expense as incurred.

Pre-opening costs were $ 9.0 million, $ 9.3 million and $ 6.5 million in fiscal 2020, fiscal 2019, and fiscal 2018, respectively, and are recorded in the accompanying consolidated statements of operations based on the nature of the expense.

Advertising Costs

(v) Advertising Costs

Advertising costs are charged to expense the first time the advertising takes place.

Advertising expenses were $ 31.6 million, $ 48.1 million and $ 42.2 million in fiscal 2020, fiscal 2019 and fiscal 2018, respectively, and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

(w) Income Taxes

Income taxes are accounted for under the asset-and-liability method.

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Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

Commitments and Contingencies

(x) Commitments and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

Legal costs incurred in connection with loss contingencies are expensed as incurred.

Use of Estimates

(y) Use of Estimates

The preparation of consolidated financial statements requires management of the Company to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period.

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Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, adjustments to net realizable value for inventories, income taxes, share-based compensation expense and the incremental borrowing rate utilized in operating lease liabilities.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 clarifies the principles for recognizing revenue from contracts with customers and outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.

On February 4, 2018, the Company adopted the pronouncement using the modified retrospective method by recognizing the cumulative effect of gift card breakage as an adjustment to retained earnings resulting in a $ 0.5 million increase to retained earnings.

(z) Recently Issued Accounting Standards

In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than 12 months.

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Although the standard impacts the treatment of certain initial direct leases costs that were previously capitalizable, it did not materially impact the Company's consolidated statements of operations and had no impact on the Company's cash flows.

The following is a discussion of the Company’s lease policy under the new lease accounting standard:

The Company determines if an arrangement contains a lease at the inception of a contract.

Operating lease assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

Operating lease assets and operating lease liabilities are recognized at the commencement date based on the present value of the remaining future minimum lease payments.

As the rate implicit in the lease is not readily determinable for the Company's leases, the Company utilizes its incremental borrowing rate to determine the present value of future lease payments.

The incremental borrowing rate represents a significant judgment and is determined based on an analysis of the Company's synthetic credit rating, prevailing financial market conditions, corporate bond yields, treasury bond yields, and the effect of collateralization.

The operating lease assets also include lease payments made before commencement and exclude lease incentives.

The Company’s real estate leases typically contain options that permit renewals for additional periods of up to five years.

For real estate leases, except for renewals that generally take the lease to a ten-year term, the options to renew are not considered reasonably certain at lease commencement because the Company reevaluates each lease on a regular basis to consider the economic and strategic incentives of exercising the renewal options, and regularly opens, relocates or closes stores to align with its operating strategy.

Therefore, generally, except for renewals that take the lease to a ten-year term, the renewal option periods are not included within the lease term and the associated payments are not included in the measurement of the operating lease asset and operating lease liability as the exercise of such options is not reasonably certain.

Similarly, renewal options are not included in the lease term for non-real estate leases because they are not considered reasonably certain of being exercised at lease commencement.

Leases with an initial term of 12 months or less are not recorded on the balance sheets and lease expense is recognized on a straight-line basis over the term of the short-term lease.

For certain real estate leases, the Company accounts for lease components and nonlease components as a single lease component.

Certain real estate leases require additional payments based on sales volume, as well as reimbursement for real estate taxes, common area maintenance and insurance, which are expensed as incurred as variable lease costs.

Other real estate leases contain one fixed lease payment that includes real estate taxes, common area maintenance and insurance.

These fixed payments are considered part of the lease payment and included in the operating lease assets and operating lease liabilities.

See Note 3 ‘‘Leases’’ for additional information.

Impact of New Lease Standard on Balance Sheet Line Items

As a result of applying the new lease standard using the modified retrospective method, the following adjustments were made to accounts on the consolidated balance sheet as of February 3, 2019 (in thousands):

Impact of ASC 842 Adoption

As Reported February 2, 2019

Adjusted February 3, 2019

Current assets:

Prepaid expenses and other current assets

Total current assets

Operating lease assets

Liabilities and Shareholders’ Equity

Current liabilities:

Other accrued expenses

Total current liabilities

Deferred rent and other

Long-term operating lease liabilities

Total liabilities

Shareholders’ equity:

Total shareholders’ equity

In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 affects all entities that issue share-based payment awards to their employees.

This accounting standards update makes several modifications to the accounting for employee share-based payment transactions, including the requirement that the excess income tax benefits or deficiencies that arise when the tax consequences of share-based compensation differ from amounts previously recognized in the consolidated statement of operations be recognized as income tax benefit or expense in the consolidated statement of operations rather than as additional paid-in capital in the consolidated balance sheets.

The guidance also clarifies the classification of components of share-based awards on the consolidated statement of cash flows such that excess income tax benefits should not be presented separately from other income taxes in the consolidated statement of cash flows and, thus, should be classified as an operating activity rather than a financing activity as they are under the current guidance.

ASU 2016-09 is effective for financial statements issued for annual reporting periods beginning after December 15, 2016 and interim periods within those years.

The Company adopted this standard prospectively in the first quarter of fiscal 2017.

This standard will result in a decrease or increase to the Company's effective tax rate, net income, and earnings per share based upon the requirement to recognize the excess income tax benefits or deficiencies in the consolidated statements of operations and change the Company's earnings per share calculation to exclude excess tax benefits previously assumed under the treasury stock method.

No changes were required related to the classification of employee taxes paid for withheld shares in the Company's consolidated statements of cash flows since the Company has historically classified these within financing cash flows.

In August 2018, the FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." ASU 2018-15 requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the noncancelable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider.

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The new standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align the Company's credit loss methodology with the new standard.

The adoption of this ASU is not expected to have a material impact on the consolidated financial statements.

The Company adopted the standard on February 2, 2020.

The adoption did not impact the Company's financial statements.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04").

The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates.

The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022.

The Company is currently evaluating the impact the adoption of ASU 2020-04 will have on its consolidated financial statements.

(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 on February 4, 2018 using the modified retrospective method by recognizing the cumulative effect as an adjustment to retained earnings.

Revenue Transactions

Revenue from store operations is recognized at the point of sale when control of the product is transferred to the customer at such time.

Internet sales, through the Company's fivebelow.com e-commerce website, are recognized when the consumer receives the product as control transfers upon delivery.

Returns subsequent to the period end are immaterial;

accordingly, no reserve has been recorded.

The transaction price for the Company’s sales is based on the item’s stated price.

To the extent that the Company charges customers for shipping and handling on e-commerce sales, the Company records such amounts in net sales.

Shipping and handling costs, which include fulfillment and shipping costs related to the Company's e-commerce operations, are included in costs of goods sold.

The Company has chosen the pronouncement's policy election which allows it to exclude all sales taxes from net sales in the accompanying consolidated statements of operations.

Disaggregation of Revenue

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leisure, fashion and home, and party and snack (in thousands):

Percentage of Net Sales

Fiscal Year Fiscal Year Fiscal Year

2020 2019 2018

Amount Percentage of Net Sales Amount Percentage of Net Sales Amount Percentage of Net Sales

Leisure $ 928,342 47.3 % $ 919,627 49.8 % $ 793,180 50.9 %

Fashion and home 701,461 35.8 % 577,458 31.3 % 482,424 30.9 %

Party and snack 332,334 16.9 % 349,645 18.9 % 283,959 18.2 %

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 fifty-two weeks ended February 2, 2019 .

The Company leases property and equipment under noncancelable operating leases.

Certain retail store lease agreements provide for contingent rental payments if the store’s net sales exceed stated levels (percentage rents) and/or contain escalation clauses, which provide for increases in base rental payments for increases in future operating costs.

Many of the Company’s leases provide for one or more renewal options for periods of five years.

Total $ 1,962,137 100.0 % $ 1,846,730 100.0 % $ 1,559,563 100.0 %

The Company determines if an arrangement contains a lease at the inception of a contract.

Operating lease assets and operating lease liabilities are recognized at the commencement date based on the present value of the remaining future minimum lease payments.

As the rate implicit in the lease is not readily determinable for the Company's leases, the Company utilizes its incremental borrowing rate to determine the present value of future lease payments.

The operating lease assets also include lease payments made before commencement and exclude lease incentives.

The Company’s real estate leases typically contain options that permit renewals for additional periods of up to five years .

For real estate leases, except for renewals that generally take the lease to a ten-year term, the options to renew are not considered reasonably certain at lease commencement because the Company reevaluates each lease on a regular basis to consider the economic and strategic benefits of exercising the renewal options, and regularly opens, relocates or closes stores to align with its operating strategy.

The Company’s operating lease agreements, including assumed renewals, which are generally those that take the lease to a ten-year term, expire through fiscal 2034.

Similarly, renewal options are not included in the lease term for non-real estate leases because they are not considered reasonably certain of being exercised at lease commencement.

Leases with an initial term of 12 months or less are not recorded on the balance sheets and lease expense is recognized on a straight-line basis over the term of the short-term lease.

For certain real estate leases, the Company accounts for lease components and nonlease components as a single lease component.

Certain real estate leases require additional payments for reimbursement of real estate taxes, common area maintenance and insurance as well as payments based on sales volume, all of which are expensed as incurred as variable lease costs.

Other real estate leases contain one fixed lease payment that includes real estate taxes, common area maintenance and insurance.

These fixed payments are considered part of the lease payment and included in the operating lease assets and operating lease liabilities.

In response to the COVID-19 pandemic, certain of the Company's landlords agreed to temporary rent concessions.

These rent concessions generally related to abatements and deferrals of certain rent payments due between April through October into future periods.

In accordance with the Financial Accounting Standards Board's recent staff guidance regarding rent concessions related to the effects of the COVID-19 pandemic, the Company has elected to account for the concessions agreed to by landlords that do not result in a substantial increase in the obligations of the lessee as if the enforceable rights and obligations for those concessions existed in the original lease agreements and the Company has elected to not remeasure the related lease liabilities and right-of-use assets.

For qualifying rent abatement concessions, the Company has recorded negative variable lease expense for the amount of the concession during the period of relief, and for qualifying deferrals of rental payments, the Company has recognized a non-interest bearing payable in lieu of recognizing a decrease in cash for the lease payment that would have been made based on the original terms of the lease agreement, which will be reduced when the deferred payment is made in the future.

All of the Company's leases are classified as operating leases and the associated assets and liabilities are presented as separate captions in the consolidated balance sheets.

As of February 1, 2020 , 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 2034.

As of February 1, 2020 , the weighted average remaining lease term for the Company's operating leases is 8.1 years , and the weighted average discount rate is 6.6 % .

For the year ended February 1, 2020 , cash paid for amounts included in the measurement of operating lease liabilities of $ 129.7 million was reflected in cash flows from operating activities in the consolidated statements of cash flows.

The following table is a summary of the Company's components for net lease costs as of February 1, 2020 (in thousands):

February 1, 2020

As of January 30, 2021 and February 1, 2020, the weighted average remaining lease term for the Company's operating leases was 7.9 years and 8.1 years respectively, and the weighted average discount rate is 6.2 % and 6.6 %, respectively.

The following table is a summary of the Company's components for net lease costs as of January 30, 2021 and February 1, 2020 (in thousands):

Fifty-Two Weeks Ended

Lease Cost January 30, 2021 February 1, 2020

Operating lease cost $ 171,390 $ 144,971

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* Excludes short-term lease cost, which is immaterial

The following table summarizes the maturity of lease liabilities under operating leases as of February 1, 2020 (in thousands):

Maturity of Lease Liabilities

Operating Leases

The following table summarizes the maturity of lease liabilities under operating leases as of January 30, 2021 (in thousands):

Maturity of Lease Liabilities Operating Leases

2021 $ 204,238

After 2025 494,814

Total lease payments 1,394,513

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Present value of lease liabilities $ 1,110,329

The following table summarizes the supplemental cash flow disclosures related to leases as of January 30, 2021 and February 1, 2020 (in thousands):

Fifty-Two Weeks Ended

January 30, 2021 February 1, 2020

Cash paid for amounts included in the measurement of lease liabilities:

Cash payments arising from operating lease liabilities (1)

$ 134,130 $ 129,670

Supplemental non-cash information:

Operating lease liabilities arising from obtaining right-of-use assets $ 233,174 $ 273,832

(1) Included within operating activities in the Company's Consolidated Statements of Cash Flows.

As of January 30, 2021, the Company has entered into commitments for new stores for which the leases have not yet commenced that have future minimum lease payments of approximately $ 174.5 million.

During the fifty-two weeks ended January 30, 2021, the Company committed to 138 new store leases with average terms of approximately ten years that have future minimum lease payments of approximately $ 286.8 million.

The following disclosures for the year ended February 2, 2019 were made in accordance with the accounting guidance for operating leases in effect at that time.

The Company’s minimum rental commitments under operating lease agreements, including assumed extensions, as of February 2, 2019, are as follows (in thousands):

Retail stores

Corporate office, distribution centers and other

Rent expense, including base and contingent rent under operating leases, was $ 119.0 million and $ 98.2 million in fiscal 2018 and fiscal 2017 , respectively.

Contingent rents were $ 0.6 million and $ 0.6 million in fiscal 2018 and fiscal 2017 , respectively.

During fiscal 2019, the Company opened new stores and modified leases for existing stores which resulted in an increase in our right of use assets and lease liabilities of approximately $ 273.1 million and $ 278.9 million , respectively.

In addition, as of February 1, 2020 , the Company has entered into commitments for new stores for which the leases have not yet commenced that have future minimum lease payments of approximately $ 289.4 million .

During the thirteen weeks ended February 1, 2020 , the Company committed to 77 new store leases with average terms of approximately ten years that have future minimum lease payments of approximately $ 141.2 million .

From February 2, 2020 to March 19, 2020 , the Company committed to 19 new store leases with terms of ten years that have future minimum lease payments of approximately $ 34.4 million .

Retail stores Corporate office, distribution centers and other Total

2019 $ 136,858 $ 10,529 $ 147,387

2020 139,892 11,885 151,777

2021 133,356 11,834 145,190

2022 123,858 11,441 135,299

2023 115,229 9,897 125,126

Thereafter 379,150 55,071 434,221

$ 1,028,343 $ 110,657 $ 1,139,000

Rent expense, including base and contingent rent under operating leases, was $ 119.0 million in fiscal 2018.

Contingent rents was $ 0.6 million in fiscal 2018.

From January 31, 2021 to March 18, 2021, the Company committed to 23 new leases with terms of ten years that have future minimum lease payments of approximately $ 46.0 million.

(4) Income Per Common Share

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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 dilutive impact, if any, for performance-based restricted stock units, which are subject to market conditions based on our total shareholder return relative to a pre-defined peer group, are included in the weighted average shares.

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):

2020 2019 2018

Net income $ 123,361 $ 175,056 $ 149,645

Weighted average common shares outstanding - basic 55,816,508 55,823,535 55,763,034

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Diluted income per common share $ 2.20 $ 3.12 $ 2.66

The effects of the assumed exercise of stock options outstanding as of February 3, 2018 for 66,624 shares of common stock were excluded from the fiscal 2017 calculation of diluted income per common share as their impact would have been anti-dilutive.

The effects of restricted stock units outstanding as of February 1, 2020 , February 2, 2019 and February 3, 2018 for 576 , 2,315 and 13,323 shares of common stock, respectively, were excluded from the fiscal 2019 , fiscal 2018 and fiscal 2017 calculation of diluted income per common share as their impact would have been anti-dilutive.

The effects of restricted stock units outstanding as of January 30, 2021, February 1, 2020 and February 2, 2019 for 20,425 , 576 and 2,315 shares of common stock, respectively, were excluded from the fiscal 2020, fiscal 2019 and fiscal 2018 calculation of diluted income per common share as their impact would have been anti-dilutive.

The aforementioned excluded shares do not reflect the impact of any incremental repurchases under the treasury stock method.

(5) Line of Credit

On May 10, 2017, the Company entered into a Fourth Amended and Restated Loan and Security Agreement (the “Amended Loan and Security Agreement”), among the Company, 1616 Holdings, Inc., a wholly owned subsidiary of the Company, and Wells Fargo Bank, National Association.

The Amended Loan and Security Agreement amends and restates the Third Amended and Restated Loan and Security Agreement, dated June 12, 2013, among the Company, 1616 Holdings, Inc.

and Wells Fargo Bank, National Association, which governed the Revolving Credit Facility.

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 up to $ 50.0 million , subject to certain conditions.

The Amended Revolving Credit Facility also includes a $ 20.0 million sub limit for the issuance of letters of credit.

The Amended Loan and Security Agreement reduces the interest rate payable on borrowings to be, at the Company’s option, a per annum rate equal to (a) a prime rate or (b) a LIBOR-based rate plus a margin of 1.00 % .

Letter of credit fees are equal to the interest rate payable on LIBOR-based loans.

The interest rate and letter of credit fees under the Amended Loan and Security Agreement are subject to an increase of 2.00 % per annum upon an event of default.

The Amended Loan and Security Agreement removes restrictions on the Company’s ability to pay or make dividends and distributions or repurchase its stock, but the Amended Loan and Security Agreement continues to include other customary negative and affirmative covenants including, among other things, limitations on the Company’s ability to (i) incur additional debt;

(ii) create liens;

(iii) make certain investments, loans and advances;

(iv) sell assets;

(v) engage in mergers or consolidations;

or (vi) change its business.

The Amended Loan and Security Agreement also removes the provisions that required the Company to make prepayments on outstanding Amended Revolving Credit Facility balances upon the receipt of certain proceeds, including those from the sale of certain assets.

Amounts under the Amended Revolving Credit Facility may become due upon certain events of default including, among other things, the Company’s failure to comply with the Amended Revolving Credit Facility’s covenants, bankruptcy, default on certain other indebtedness or a change in control.

Under the Amended Loan and Security Agreement, all obligations under the Amended Revolving Credit Facility continue to be guaranteed by 1616 Holdings, Inc.

and are secured by substantially all of the assets of the Company and 1616 Holdings, Inc.

During fiscal 2019 , fiscal 2018 and fiscal 2017 , the Company had no borrowings or interest expense under the Amended Revolving Credit Facility.

As of February 1, 2020 , February 2, 2019 and February 3, 2018 , the Company had approximately $ 20.0 million available on the line of credit.

All obligations under the Amended Revolving Credit Facility and Revolving Credit Facility are secured by substantially all of the Company's assets and are guaranteed by the subsidiary.

As of February 1, 2020 and February 2, 2019 , the Company was in compliance with the covenants applicable to it under the Amended Revolving Credit Facility and Revolving Credit Facility.

Effective March 18, 2020, the Company exercised the right to increase the Amended Revolving Credit Facility to $50.0 million and have this full amount available on the line of credit.

On May 10, 2017, the Company entered into a Fourth Amended and Restated Loan and Security Agreement (the “Prior Credit Agreement”), among the Company, 1616 Holdings, Inc., a wholly owned subsidiary of the Company ("1616 Holdings"), and Wells Fargo Bank, National Association, which includes a secured asset-based revolving line of credit in the amount of up to $ 20.0 million (the "Revolving Credit Facility”).

On March 20, 2020, the Company exercised its right under the Prior Credit Agreement to increase the aggregate commitments under the Revolving Credit Facility from $ 20 million to $ 50 million.

On April 24, 2020, the Company entered into a Fifth Amended and Restated Credit Agreement (the “Credit Agreement”), among the Company, 1616 Holdings, Inc.

(together with the Company, the "Loan Parties), Wells Fargo Bank, National Association as administrative agent (the “Agent”), and other lenders party thereto (the "Lenders").

The Credit Agreement amends and restates the Prior Credit Agreement.

The Credit Agreement increased the Revolving Credit Facility to $ 225.0 million.

Pursuant to the Credit Agreement, advances under the Revolving Credit Facility are tied to a borrowing base consisting of eligible credit card receivables and inventory, as reduced by certain reserves in effect from time to time.

The Revolving Credit Facility expires on the earliest to occur of (i) April 24, 2023 or (ii) an event of default.

The Revolving Credit Facility may be increased by up to $ 150.0 million, subject to certain conditions, including obtaining commitments from one or more Lenders.

The entire amount of the Revolving Credit Facility is available for the issuance of letters of credit and allows for swingline loans.

The Credit Agreement provides that the interest rate payable on borrowings shall be, at the Company’s option, a per annum rate equal to (a) a base rate plus an applicable margin ranging from 1.00 % to 1.25 % or (b) a LIBOR rate plus a margin ranging from 2.00 % to 2.25 %.

Letter of credit fees will range from 2.00 % to 2.25 %.

The interest rate and letter of credit fees under the Credit Agreement are subject to an increase of 2.00 % per annum upon an event of default.

The Credit Agreement contains customary covenants that limit, absent lender approval, the ability of Company and certain of its affiliates to, among other things, pay cash dividends, incur debt, create liens and encumbrances, redeem or repurchase stock, enter into certain acquisition transactions or transactions with affiliates, merge, dissolve, repay certain indebtedness, change the nature of Company’s business, enter sale or leaseback transactions, make investments or dispose of assets.

In some cases, these restrictions are subject to certain negotiated exceptions or permit Company to undertake otherwise restricted activities if it satisfies certain required conditions.

In addition, the Company will be required to maintain availability of not less than (i) 15 % of the lesser of (x) aggregate commitments under the Revolving Credit Facility and (y) the borrowing base (the "loan cap") prior to a stepdown date (as described below) and (ii) 10 % of the loan cap after the stepdown date.

The stepdown date is the first date occurring after both (i) the date that 75 % of the number of stores as of the closing date of the Revolving Credit Facility have reopened ("store opening date") and (ii) the date occurring at least six months after the store reopening date on which the fixed charge coverage ratio is at least 1.00 to 1.00.

If there exists an event of default or availability under the Revolving Credit Facility is less than 15 % of the loan cap, amounts in any of the Loan Parties’ or subsidiary guarantors' designated deposit accounts will be transferred daily into a blocked account held by the Agent and applied to reduce outstanding amounts under the Revolving Credit Facility (the “Cash Dominion Event”), so long as (i) such event of default has not been waived and/or (ii) until availability has exceeded 15 % of the loan cap for sixty ( 60 ) consecutive calendar days (provided that such ability to discontinue the Cash Dominion Event shall be limited to two times during the term of the Credit Agreement).

The Credit Agreement also contains a provision stating that the Company cannot borrow in excess of $ 50 million under the Revolving Credit Facility at any time the amount of the consolidated cash and cash equivalents of the Loan Parties (excluding certain long-term investments and certain other items) exceeds $ 50 million.

The Credit Agreement contains customary events of default including, among other things, failure to pay obligations when due, initiation of bankruptcy or insolvency proceedings, defaults on certain other indebtedness, change of control, incurrence of certain material judgments that are not stayed, satisfied, bonded or discharged within 30 days, certain ERISA events, invalidity of the credit documents, and violation of affirmative and negative covenants or breach of representations and warranties set forth in the Credit Agreement.

Amounts under the Revolving Credit Facility may become due upon events of default (subject to any applicable grace or cure periods).

Under the Credit Agreement, all obligations under the Revolving Credit Facility are guaranteed by 1616 Holdings and are secured by substantially all of the assets of the Company and 1616 Holdings.

On January 27, 2021, the Company entered into a First Amendment to Credit Agreement (the “First Amendment”) among the Loan Parties, the Lenders and Agent, which amended Credit Agreement.

Pursuant to the First Amendment, the Company obtained commitments from the Lenders that would allow the Company at its election (subject only to satisfaction of certain customary conditions such as the absence of any Event of Default), to increase the amount of the Revolving Credit Facility by an aggregate principal amount up to $ 50,000,000 (the “Committed Increase”).

The First Amendment preserves the existing provisions of the Credit Agreement allowing for further increases to the total commitment under the Revolving Credit Facility, subject to certain conditions including obtaining commitments from one or more Lenders (“Uncommitted Incremental Capacity”), provided that the total amount of the facility, as increased pursuant to a Committed Increase or Uncommitted Incremental Capacity, cannot exceed $ 375,000,000 .

The current amount of the Revolving Credit Facility is maintained at $ 225,000,000 .

Pursuant to the First Amendment, availability under the Revolving Credit Facility will continue to be based upon quarterly (or monthly or weekly, in certain cases) borrowing base certifications valuing the Loan Parties’ eligible credit card receivables and inventory, as reduced by certain reserves in effect from time to time.

The First Amendment provides for the deferral of inventory appraisals and certain other diligence items, with reduced advance rates applicable during the period that such appraisals have not been delivered.

The First Amendment also reduced the pricing under the Revolving Credit Facility.

Giving effect to the First Amendment, outstanding borrowings under the Revolving Credit Facility would accrue interest at floating rates plus an applicable margin ranging from 1.25 % to 1.75 % for LIBOR loans and 0.25 % to 0.75 % for base rate loans, and letter of credit fees range from 1.25 % to 1.75 %., in each case based on the average availability under the Revolving Credit Facility.

The First Amendment makes a number of other revisions to the covenants in the Credit Agreement, including a revision to the minimum availability covenant to require availability of 12.5 % during the diligence deferral period referenced above and 10.0 % at all other times.

During fiscal 2020, the Company borrowed and repaid approximately $ 50 million from its Revolving Credit Facility.

During fiscal 2019 and fiscal 2018, the Company had no borrowings or interest expense under the Revolving Credit Facility.

As of January 30, 2021, the Company had approximately $ 191 million available on the Revolving Credit Facility.

As of February 1, 2020 and February 2, 2019, the Company had approximately $ 20 million available on the Revolving Credit Facility.

All obligations under the First Amendment are secured by substantially all of the Company's assets and are guaranteed by 1616 Holdings.

As of January 30, 2021 and February 1, 2020, the Company was in compliance with the covenants applicable to it under the First Amendment and the Revolving Credit Facility.

(6) Commitments and Contingencies

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The Company has an executive severance plan that is applicable to certain key employees that provide for, among other things, salary, bonus, severance, and change-in-control provisions.

As of February 1, 2020 , the Company had other purchase commitments of approximately $ 7.1 million consisting of purchase agreements for materials that will be used in the construction of new stores.

In August 2019, the Company acquired land in Conroe, Texas, to build an approximately 860,000 square foot distribution center.

The total cost of the land and building is expected to be approximately $ 56 million , of which approximately $ 31 million has been paid through February 1, 2020.

The Company expects to occupy the distribution center in Conroe, Texas in 2020.

As of January 30, 2021, the Company had other purchase commitments of approximately $ 5.9 million consisting of purchase agreements for materials that will be used in the construction of new stores.

In July 2020, the Company acquired land in Buckeye, Arizona, to build an approximately 860,000 square foot distribution center to support the Company's anticipated growth.

The total cost of the land and building is expected to be approximately $ 65 million, of which approximately $ 36 million has been paid through January 30, 2021.

The Company expects to occupy the distribution center in Buckeye, Arizona in the second half of 2021.

Contingencies

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(7) Shareholders’ Equity

As of February 1, 2020 , the Company is authorized to issue 120,000,000 shares of $ 0.01 par value common stock and 5,000,000 shares of $ 0.01 par value preferred stock.

As of January 30, 2021, the Company is authorized to issue 120,000,000 shares of $ 0.01 par value common stock and 5,000,000 shares of $ 0.01 par value preferred stock.

The holders of the common stock are entitled to one vote per share of common stock and are entitled to receive dividends if declared by the Board of Directors.

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The Plan, as amended, allows for the issuance of up to a total of 7.6 million shares under the Plan.

As of February 1, 2020 , 3,293,081 stock options, restricted shares, or restricted stock units were available for grant.

As of January 30, 2021, 2.8 million stock options, restricted shares, or restricted stock units were available for grant.

Common Stock Options

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Stock option activity under the Plan was as follows:

Balance as of January 28, 2017

outstanding Weighted

price Weighted

Balance as of February 3, 2018 519,485 $ 29.53 5.9

Forfeited ( 71 ) 4.95

Exercised ( 145,157 ) 27.73

Balance as of February 2, 2019 374,257 30.23 5.1

Forfeited ( 1,150 ) 39.47

Exercised ( 141,582 ) 29.02

Balance as of February 1, 2020 231,525 30.92 4.1

Exercisable as of February 1, 2020

Forfeited ( 1,650 ) 31.49

Exercised ( 176,846 ) 30.23

Balance as of January 30, 2021 53,029 33.22 3.2

Exercisable as of January 30, 2021 53,029 $ 33.22 3.2

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.

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The total intrinsic value of stock options exercised during fiscal 2020, fiscal 2019 and fiscal 2018 was $ 17.6 million, $ 14.0 million and $ 9.9 million, respectively.

The aggregate intrinsic value of stock options exercisable and stock options outstanding as of February 1, 2020 was $ 18.2 million and $ 19.0 million , respectively.

The aggregate intrinsic value of stock options outstanding and exercisable was $7.5 million as of January 30, 2021.

In fiscal 2020, fiscal 2019 and fiscal 2018, the Company received cash from the exercise of options of $ 5.3 million, $ 4.1 million and $ 4.0 million, respectively.

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Restricted Stock Units and Performance-Based Restricted Stock Units

All RSUs and PSUs vest in accordance with vesting conditions set by the compensation committee of the Company’s board of directors.

RSUs granted to date have vesting periods ranging from less than one year to five years from the date of grant.

PSUs granted to date have vesting periods ranging from one year to five years from the date of grant, including grants that have a cumulative three year performance period, subject to satisfaction of the applicable performance goals established for the respective grant.

All restricted stock units ("RSU") and performance-based restricted stock units ("PSU") vest in accordance with vesting conditions set by the compensation committee of the Company’s Board of Directors.

RSUs granted to date have vesting periods ranging from less than one year to five years from the date of grant and the fair value of RSUs is the market price of the underlying common stock on the date of grant.

PSUs granted to date have vesting periods ranging from less than one year to five years from the date of grant.

PSUs that have a performance condition are 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.

The fair value of these PSUs is the market price of the underlying common stock on the date of grant.

Compensation is recognized over the vesting period and adjusted for the probability of achievement of the performance criteria.

PSUs that have a market condition based on our total shareholder return relative to a pre-defined peer group are subject to multi-year performance objectives with a vesting date in 2023 (if the applicable performance objectives are achieved).

The fair value of these PSUs are determined using a Monte Carlo valuation model.

RSU and PSU activity under the Plan was as follows:

Restricted Stock Units

Performance-Based Restricted Stock Units

Weighted-Average Grant Date Fair Value

Non-vested balance as of January 28, 2017

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 115,411 77.28 121,333 69.59

Vested ( 107,695 ) 37.98 ( 197,534 ) 35.69

Forfeited ( 24,382 ) 43.75 ( 3,258 ) 69.03

Non-vested balance as of February 2, 2019 292,888 53.52 416,200 47.38

Granted 89,337 119.28 85,939 116.92

Vested ( 109,924 ) 44.70 ( 117,137 ) 39.21

Forfeited ( 21,949 ) 70.48 ( 27,836 ) 45.23

Non-vested balance as of February 1, 2020 250,352 79.37 357,166 66.96

Granted 179,947 107.82 370,613 134.73

Vested ( 102,382 ) 66.33 ( 127,622 ) 39.89

Forfeited ( 23,519 ) 87.54 ( 340,381 ) 89.54

Non-vested balance as of January 30, 2021 304,398 $ 99.94 259,776 $ 151.73

In connection with the vesting of RSUs and PSUs during fiscal 2020, the Company withheld 51,734 shares with an aggregate value of $ 3.9 million in satisfaction of minimum tax withholding obligations due upon vesting.

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In connection with the vesting of RSUs during fiscal 2018, the Company withheld 113,058 shares with an aggregate value of $ 8.0 million in satisfaction of minimum tax withholding obligations due upon vesting.

As of February 1, 2020 , there was $ 19.5 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements (including stock options, RSUs and PSUs) granted under the Plan.

As of January 30, 2021, there was $ 35.9 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements (including stock options, RSUs and PSUs) granted under the Plan.

The cost is expected to be recognized over a weighted average vesting period of 2.7 years.

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On March 20, 2018, the Company's Board of Directors approved a share repurchase program authorizing the repurchase of up to $ 100 million of the Company's common stock through March 31, 2021, on the open market, in privately negotiated transactions, or otherwise.

On March 9, 2021, our Board of Directors approved a new share repurchase program for up to $100 million of its common shares through March 31, 2024.

In fiscal 2018, the Company repurchased 21,810 shares under this program at an aggregate cost of approximately $ 2.0 million, or an average price of $ 91.07 per share.

In fiscal 2019, the Company repurchased 337,552 shares under this program at an aggregate cost of approximately $ 36.9 million, or an average price of $ 109.27 per share.

Subsequent to February 1, 2020, we repurchased 137,023 shares under this program at an aggregate cost of approximately $ 12.7 million , or an average price of $ 92.42 per share.

In fiscal 2020, the Company repurchased 137,023 shares under this program at an aggregate cost of approximately $ 12.7 million, or an average price of $ 92.42 per share.

There can be no assurances that any additional repurchases will be completed, or as to the timing or amount of any repurchases.

The share repurchase program may be modified or discontinued at any time.

(9) Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

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The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible.

As of February 1, 2020 , no valuation allowance has been provided for net deferred tax assets as management believes that it is more likely than not that the Company will realize all deferred tax assets as of February 1, 2020 .

As of January 30, 2021, no valuation allowance has been provided for net deferred tax assets as management believes that it is more likely than not that the Company will realize all deferred tax assets as of January 30, 2021.

The components of the income tax expense are as follows (in thousands):

2020 2019 2018

Federal $ 2,276 $ 25,069 $ 33,297

State 7,235 6,602 8,315

9,511 31,671 41,612

Federal 21,954 13,487 2,000

State ( 1,759 ) 1,355 ( 1,450 )

20,195 14,842 550

Income tax expense $ 29,706 $ 46,513 $ 42,162

The reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows:

2020 2019 2018

Statutory federal tax rate 21.0 % 21.0 % 21.0 %

State taxes, net of federal benefit 2.8 2.8 2.8

( 4.4 ) ( 2.8 ) ( 1.8 )

19.4 % 21.0 % 22.0 %

(1) Other line includes excess tax benefits relating to share-based payment accounting.

The effective tax rate for fiscal 2019 compared to fiscal 2018 was primarily driven by discrete items, which includes the impact of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" with respect to the requirements to recognize excess income tax benefits or deficiencies as income tax benefit or expense in the consolidated statements of operations rather than as additional paid-in capital in the consolidated balance sheets.

The effective tax rate for fiscal 2018 compared to fiscal 2017 was primarily driven by the impact of tax reform as a result of the TCJA and the adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting."

The effective tax rate for fiscal 2020 compared to fiscal 2019 was primarily driven by discrete items, which includes the impact of the CARES Act, partially offset by a reduction of the benefit of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" with respect to the requirements to recognize excess income tax benefits or deficiencies as income tax benefit or expense in the consolidated statements of operations rather than as additional paid-in capital in the consolidated balance sheets.

The tax effects of temporary differences that give rise to deferred tax assets and liabilities are (in thousands):

February 1, 2020

February 2, 2019

January 30, 2021 February 1, 2020

Deferred tax assets:

Net operating loss carryforwards $ 1,139 $ —

Inventories 10,626 13,182

Deferred revenue 851 1,255

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Operating lease liabilities 287,351 242,432

Other 4,662 5,208

Deferred tax assets 305,757 263,084

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Operating lease assets ( 252,541 ) ( 214,935 )

Other ( 998 ) ( 912 )

Deferred tax liabilities ( 334,668 ) ( 271,800 )

The Company had no material accrual for uncertain tax positions or interest or penalties related to income taxes on the Company’s balance sheets as of February 1, 2020 and February 2, 2019 , and has not recognized any material uncertain tax positions or interest and/or penalties related to income taxes in the consolidated statements of operations for fiscal 2019 , fiscal 2018 , or fiscal 2017 .

$ ( 28,911 ) $ ( 8,716 )

The Company had no material accrual for uncertain tax positions or interest or penalties related to income taxes on the Company’s balance sheets as of January 30, 2021 and February 1, 2020, and has not recognized any material uncertain tax positions or interest and/or penalties related to income taxes in the consolidated statements of operations for fiscal 2020, fiscal 2019, or fiscal 2018.

The Company files a federal income tax return as well as state tax returns.

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Percentage of Net Sales

2020 2019 2018

Leisure 47.3 % 49.8 % 50.9 %

Fashion and home 35.8 % 31.3 % 30.9 %

Party and snack 16.9 % 18.9 % 18.2 %

Total 100.0 % 100.0 % 100.0 %

Leisure includes items such as sporting goods, games, toys, tech, books, electronic accessories, and arts and crafts.

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Fiscal Year 2019 (1)

Basic income per common share

Diluted income per common share

Quarter Third

Quarter Second

Quarter First

Quarter Fourth

Quarter Third

Quarter Second

Quarter First

Net sales $ 858,514 $ 476,614 $ 426,110 $ 200,899 $ 687,130 $ 377,438 $ 417,400 $ 364,762

Gross profit $ 340,930 $ 151,100 $ 139,839 $ 20,461 $ 289,128 $ 118,682 $ 146,171 $ 119,985

Net income (loss) $ 123,937 $ 20,425 $ 29,581 $ ( 50,582 ) $ 110,374 $ 10,189 $ 28,831 $ 25,662

Basic income (loss) per common share $ 2.22 $ 0.37 $ 0.53 $ ( 0.91 ) $ 1.98 $ 0.18 $ 0.52 $ 0.46

Diluted income (loss) per common share $ 2.20 $ 0.36 $ 0.53 $ ( 0.91 ) $ 1.97 $ 0.18 $ 0.51 $ 0.46

(1) The sum of the quarterly per share amounts may not equal per share amounts reported for the fiscal year due to rounding.

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As a result of this seasonality, and generally because of variation in consumer spending habits, the Company experiences fluctuations in net sales and working capital requirements during the fiscal year.

Subsequent Events

Effective March 18, 2020, the Company exercised the right to increase the Amended Revolving Credit Facility to $50.0 million and have this full amount available on the line of credit.

The outbreak of the Coronavirus (or COVID-19) continues to grow both in the U.S.

and globally, and related government and private sector responsive actions are expected to adversely affect the Company's business operations.

It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic as the situation is rapidly evolving.

As a result of these developments, and out of concern for the customers, crew members and community, effective at the close of business on March 19, 2020, the Company will be temporarily closing all of the Company's retail stores until at least March 31, 2020, while the Company's e-commerce website will remain available to customers.

This matter is expected to have an adverse effect on our business, results of operations, and financial position and liquidity, the extent of which cannot be reasonably estimated at this time.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk