FIVE BELOW, INC 10-K

ITEM 1. BUSINESS General Five Below, Inc. was incorporated in Pennsylvania in January 2002. Our principal executive office is located at 701 Market Street, Suite 300, Philadelphia, PA 19106 and our telephone number is (215) 546-7909. Our corporate website address is www.fivebelow.com . The information contained on, or accessible through, our corporate website does not constitute part of this Annual Report. As used herein, “Five Below,” the “Company,” “we,” “us,” “our” or “our business” refers to Five Below, Inc. (collectively with its wholly owned subsidiary), except as expressly indicated or unless the context otherwise requires. We purchase products in reaction to existing marketplace trends and, hence, refer to our products as “trend-right.” We use the term “dynamic” merchandise to refer to the broad range and frequently changing nature of the products we display in our stores. We use the term “power” shopping center to refer to an unenclosed shopping center with 250,000 to 750,000 square feet of gross leasable area that contains three or more “big box” retailers (large retailers with floor space over 50,000 square feet) and various smaller retailers with a common parking area shared by the retailers. We use the term “lifestyle” shopping center to refer to a shopping center or commercial development that is often located in suburban areas and combines the traditional retail functions of a shopping mall with leisure amenities oriented towards upscale consumers. We use the term “community” shopping center to refer to a shopping area designed to serve a trade area of 40,000 to 150,000 people where the lead tenant is a variety discount, junior department store and/or supermarket. We use the term “trade area” to refer to the geographic area from which a given retailer generates a majority of its customers. Trade areas vary by market based on geographic size, population density, demographics and proximity to alternative shopping opportunities. We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31 of the following year. References to "fiscal year 2022" or "fiscal 2022" refer to the period from January 30, 2022 to January 28, 2023, which consists of a 52-week fiscal year. References to "fiscal year 2021" or "fiscal 2021" refer to the period from January 31, 2021 to January 29, 2022, which consists of a 52-week fiscal year. 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. References to 2022, 2021, 2020, 2019, 2018, and 2017 are to our fiscal years unless otherwise specified. Due to the 53rd week in fiscal 2017, all comparable sales related to any reporting period during the year ended February 2, 2019 are reported on a restated calendar basis using the National Retail Federation's restated calendar comparing similar weeks. Our Company Five Below is a leading high-growth value retailer offering trend-right, high-quality products loved by tweens, teens and beyond. We know life is way better when you’re free to “let go & have fun” in an amazing experience filled with unlimited possibilities. We offer a dynamic, edited assortment of exciting products, most priced at $5 and below, including select brands and licensed merchandise across eight worlds: Style, Room, Sports, Tech, Create, Party, Candy and New & Now. Based on our management’s experience and industry knowledge, we believe our customer-centric, experience-first, innovative approach to retail has led to a fiercely loyal customer base and has fostered universal appeal across a variety of age groups beyond our target demographic. We opened the first Five Below store in the greater Philadelphia area in 2002 and, since then, have been expanding throughout the United States. As of January 29, 2022, we operated a total of 1,190 locations across 40 states. Our new store model assumes a store size of approximately 9,000 square feet and is typically located within power, community and lifestyle shopping centers across a variety of urban, suburban and semi-rural markets. We opened 170 net new stores in fiscal 2021 and we plan to open approximately 375 to 400 new stores over the next two fiscal years including approximately 160 new stores in fiscal 2022. We believe that we have the opportunity to grow our store base to more than 3,500 locations over time. In August 2016, we commenced selling merchandise on the internet, through our fivebelow.com e-commerce website. We launched our e-commerce operation as an additional channel to serve our customers. During fiscal 2020, we entered into a partnership with an on demand third party delivery service to enable our customers to shop online and receive convenient same day delivery. All e-commerce sales, which includes shipping and handling revenue, are included in net sales and are included in comparable sales. Our e-commerce expenses will have components classified as both cost of goods sold and selling, general and administrative expenses. 6 We believe that our business model has resulted in strong financial performance when considered in light of the economic environment: • Our comparable sales increased by 30.3% in fiscal 2021, decreased by 5.5% in fiscal 2020, and increased by 0.6% in fiscal 2019. Comparable sales results in fiscal 2021 and fiscal 2020 were impacted by the COVID-19 pandemic. • We expanded our store base from 900 stores at the end of fiscal year 2019 to 1,190 stores at the end of fiscal year 2021, representing a compounded annual growth rate of 15.0%. • Between fiscal 2019 and 2021, our net sales increased from $1.8 billion to $2.8 billion, representing a compounded annual growth rate of 24.2%. Over the same period, our operating income increased from $217.3 million to $379.9 million, representing a compounded annual growth rate of 32.2%. Our Competitive Strengths We believe the following strengths differentiate Five Below from competitors and are the key drivers of our success: • Unique Focus on the Tween and Teen Customer. We target an attractive customer segment of tweens and teens with trend-right merchandise at differentiated price points. We have built our concept to appeal to this customer base, which we believe to be economically influential and resilient based on our industry knowledge and experience, as well as their parents and others who shop for them. Our brand concept, merchandising strategy and store ambience work in concert to create an upbeat and vibrant retail experience that is designed to appeal to our target audience, drive traffic to our stores and website, and keep our customers engaged throughout their visits. We monitor trends in the ever-changing tween and teen markets and are able to quickly identify and respond to trends. Our price points enable tweens and teens to shop independently, often using their own money to make frequent purchases of items geared primarily to them and to exercise self-expression through their independent retail purchases. • Broad Assortment of Trend-Right, High-Quality Merchandise with Universal Appeal. We deliver an edited assortment of trend-right as well as everyday products within each of our category worlds that changes frequently to create a sense of anticipation and freshness, which we believe provides excitement for our customers. We have a broad range of vendors, most of which are domestically-based, which enables us to shorten response lead times, maximizes our speed to market and equips us to make more informed buying decisions. Our unique approach encourages frequent customer visits, and the breadth, depth and quality of our product mix and the diversity of our category worlds attract shoppers across a broad range of age and socio-economic demographics. • Exceptional Value Proposition for Customers. We believe we offer a clear value proposition to our customers. Our price points, with most products priced at $5 and below, resonate with our target demographic and with other value-oriented customers. We are able to deliver on this value proposition through sourcing products in a manner that is designed to achieve low cost, fast response and high item velocity and sell-through. We maintain a dynamic and collaborative relationship with our vendor partners that provides us with favorable access to quality merchandise at attractive prices. We also have the ability to employ an opportunistic buying strategy, when appropriate, capitalizing on select excess inventory opportunities with our vendors. This unique and flexible sourcing strategy allows us to offer high-quality products at exceptional value across all of our category worlds. • Differentiated Shopping Experience. We believe we have created a unique and engaging in-store and online atmosphere that customers find fun and exciting. While we refresh our products frequently, we maintain a floor layout, designed with an easy-to-navigate flow and featuring sight-lines across the entire store enabling customers to easily identify our category worlds. All of our stores feature a sound system playing popular music throughout the shopping day. We employ novel and dynamic techniques to display our products, including distinctive merchandise fixtures and colorful and stimulating signage. This approach makes our stores a destination, encouraging hands-on interaction with our products and conveying our value pricing. We have developed a unique culture that emanates from our employees, many of whom frequently shop at Five Below, to our customers, thereby driving a higher level of connectivity and engagement. Additionally, we believe our price points, coupled with our dynamic merchandising approach, create an element of discovery, driving repeat visits and customer engagement. 7 • Powerful and Consistent Store Economics. We have a proven store model that generates strong cash flow, consistent store-level financial results and a high level return on investment. Our stores have been successful in varying geographic regions, population densities and real estate settings and our new stores have achieved average payback periods of less than one year. We believe our robust store model, reinforced by our rigorous site selection process and in-store execution, drives the strength and consistency of our comparable sales and financial results across all geographic regions and store-year classes. • Highly Experienced and Passionate Senior Management Team with Proven Track Record. Our senior management team, led by Joel Anderson, our President and Chief Executive Officer, has extensive retail experience across a broad range of disciplines, including merchandising, real estate, finance, store operations, digital, supply chain management and information technology. Our management team drives our operating philosophy, which is based on a relentless focus on providing high-quality merchandise at exceptional value and a superior shopping experience utilizing a disciplined, low-cost operating and sourcing structure. We believe our management team is integral to our success and has positioned us well for long-term growth. Growth Strategy We believe we can grow our net sales and earnings by executing on the following strategies: • Grow Our Store Base. We believe there is significant opportunity to expand our store base throughout the United States from 1,190 locations as of January 29, 2022 to more than 3,500 locations within the United States over time. Based upon our strategy of store densification, we expect most of our near-term growth will occur within our existing markets, as well as new markets. This strategy allows us to benefit from enhanced brand awareness and achieve operational efficiencies. We opened 120 net new stores in fiscal 2020 and 170 net new stores in fiscal 2021, and we plan to open approximately 375 to 400 new stores over the next two fiscal years including approximately 160 new stores in fiscal 2022. Our new store model assumes approximatel y 9,000 s quare feet and is primarily in-line locations within power, community and lifestyle shopping centers across a variety of urban, suburban and semi-rural markets. We have a talented and disciplined real estate management team and a rigorous real estate site selection process. We analyze the demographics of the surrounding trade areas and the performance of adjacent retailers, as well as traffic and specific site characteristics and other variables. As of January 29, 2022, we have executed lease agreements for the opening of 89 new stores in fiscal 2022. • Drive Comparable Sales. We expect to continue generating positive comparable sales growth by continuing to hone and refine our dynamic merchandising offering and differentiated in-store shopping experience. We intend to increase our brand awareness through cost-effective marketing efforts and enthusiastic customer engagement. We believe that executing on these strategies will increase the frequency of purchases by our existing customers and attract new customers to our stores. • Increase Brand Awareness. We have a cost-effective marketing strategy designed to promote brand awareness and drive store and website traffic. Our strategy predominantly includes the use of digital marketing, streaming video, television, philanthropic and local community marketing to support existing and new market entries. We leverage our growing e-mail database, mobile website and social media presence to drive brand engagement and increased store visits within existing and new markets. We believe that our digital experience is an extension of our brand and retail stores, serving as a marketing and customer engagement tool for us. Our digital experience allows us to continue to build brand awareness, grow online sales and expand our customer base. • Enhance Operating Margins. We believe we have further opportunities to drive margin improvement over time. A primary driver of our expected margin expansion will come from leveraging our cost structure as we continue to increase our store base and drive our average net sales per store. We intend to capitalize on opportunities across our supply chain as we grow our business and achieve further economies of scale. Our History The Company was incorporated in Pennsylvania in January 2002 under the name of Cheap Holdings, Inc. by David Schlessinger and Thomas Vellios, who recognized a market need for a fun and affordable shopping destination aimed at our target customer. We changed our name to Five Below, Inc. in August 2002. In July 2014, Joel Anderson joined the Five Below senior management team and he was appointed Chief Executive Officer effective February 1, 2015. 8 Our Market Opportunity As a result of our unique merchandise offering and value proposition, we believe we have effectively tapped the tween and teen markets. According to the U.S. Census Bureau, there were over 62 million people in the United States between the ages of 5 and 19, which represented approximately 20% of the U.S. population as of April 1, 2020. Based on management’s experience and industry knowledge, we believe that this segment of the population has a significant amount of disposable income as the vast majority of this age group’s basic needs are already met. Our Merchandise Strategy We offer a dynamic, edited assortment of trend-right, high-quality products, with most priced at $5 or below, including select brands and licensed merchandise, targeted at the tween and teen customer. We believe we are transforming the shopping experience of our target demographic with a unique merchandising strategy and high-energy retail concept that our customers consider fun and exciting. Based on management’s experience and industry knowledge, we believe our compelling value proposition and the dynamic nature of our merchandise offering has fostered universal appeal to customers across a variety of age groups beyond our target demographic. Our typical store features in excess of 4,000 stock-keeping units, or SKUs, across a number of our category worlds including Style , Room, Sports, Tech , Create , Party, Candy and New & Now . We focus our merchandising strategy on maintaining core categories within our stores, but aim to generate high item velocity and sell-through to keep our assortment fresh and drive repeat visits. We monitor trends in our target demographic market, historical sales trends of current and prior products and the success of new product launches to ensure that our merchandise is relevant for our customers. We have a highly planned merchandise strategy focused on trend-right and everyday products supplemented by selected opportunistic purchases from our vendors to drive traffic and therefore offer our customers a consistently exciting shopping experience. We believe we offer a compelling value proposition to our customers across all of our core product categories. The common element of our dynamic merchandise selection is the consistent delivery of exceptional value to the consumer, with most products offered at or below the $5 price point. Our pricing enables us to provide an extensive range of exciting products, while maintaining the attraction of a value retailer. Many of the products we sell can also be found in mall specialty stores, department stores, mass merchandisers and drug stores; however, we offer all of these products in an exciting and easy to shop retail environment at exceptional price points. Product Mix We organize the merchandise in our stores into the following category worlds: • Style : Consists primarily of accessories such as novelty socks, sunglasses, jewelry, scarves, gloves, hair accessories, athletic tops and bottoms and “attitude” t-shirts. Our style offering also includes products such as nail polish, lip gloss, fragrance, and branded cosmetics. • Room : Consists of items used to complete and personalize our customer’s living space, including glitter lamps, posters, frames, fleece blankets, plush items, pillows, candles, incense, lighting, novelty décor, accent furniture and related items. We also offer storage options for the customer’s room. • Sports : Consists of an assortment of sport balls, team sports merchandise and fitness accessories, including hand weights, jump ropes and gym balls. We also offer a variety of games, including name brand board games, puzzles, collectibles and toys including remote control. In the summer season, our sports offering also includes pool, beach and outdoor toys, games and accessories. • Tech : Consists of a selection of accessories for cell phones, tablets, audio and computers. The offering includes cases, chargers, headphones and other related items. We also carry a range of media products including books, video games and DVDs. • Create : We offer an assortment of craft activity kits, as well as arts and crafts supplies such as crayons, markers and stickers. We also offer trend-right items for school such as backpacks, fashion notebooks and journals, novelty pens and pencils, locker accessories as well as everyday name brand items. 9 • Party : Consists of party goods, decorations, gag gifts and greeting cards, as well as every day and special occasion merchandise. • Candy : Consists of branded items that appeal to tweens and teens. This category includes an assortment of classic and novelty candy bars and movie-size box candy, seasonal-related candy as well as gum and snack food. We also sell chilled drinks via coolers. • New & Now : Consists of seasonally-specific items used to celebrate and decorate for events such as Christmas, Easter, Halloween and St. Patrick’s Day. These products are most often placed at the front of the store. Set forth below is data for the following groups of products – leisure, fashion and home, and party and snack. The percentage of net sales represented by each product group for each of the last three fiscal years was as follows: Percentage of Net Sales 2021 2020 2019 Leisure 47.8 % 47.3 % 49.8 % Fashion and home 30.2 % 35.8 % 31.3 % Party and snack 22.0 % 16.9 % 18.9 % Total 100.0 % 100.0 % 100.0 % Leisure includes items such as sporting goods, games, toys, tech, books, electronic accessories, and arts and crafts. Fashion and home includes items such as personal accessories, “attitude” t-shirts, beauty offerings, home goods and storage options. Party and snack includes items such as party and seasonal goods, greeting cards, candy and other snacks, and beverages. Our Stores As of January 29, 2022, we operated 1,190 stores throughout the United States. Our new store model assumes a store size of approxim ately 9,000 squa re feet. Our stores are primarily located in power, community and lifestyle shopping centers; approximately 5% of our stores are located in malls. The following map shows the number of stores in each of the states in which we operated and the locations of our distribution centers as of January 29, 2022. 10 Store Design and Layout We present our products in a unique and engaging in-store atmosphere. We maintain a floor layout designed with an easy-to-navigate flow and featuring sight-lines across the entire store enabling customers to easily identify our category worlds. All of our stores feature a sound system playing popular music throughout the shopping day. We employ novel and dynamic techniques to display our products, including distinctive merchandise fixtures and colorful and stimulating signage, which attract customers, encourage hands-on interaction with our products and convey our value pricing. In addition to traditional perimeter and gondola shelving, racks and tables, we utilize innovative approaches such as wheelbarrows, oil drums and bins strategically placed throughout our stores. These techniques foster customer interaction with products, supporting the strong relationship we strive to develop with our customers and enhance our upbeat and vibrant shopping environment. Each of our category worlds is strategically located within our stores in an effort to enhance the customer’s shopping experience. For example, ou r New & Now offerings are located in the front of the store with the goal of catching customers’ attention and being “top of mind,” and specially featured value items and other key items are positioned along the center aisle. Impulse items and “dollar value” items surround the checkout areas to capture add-on purchases. Expansion Opportunities and Site Selection Our unique focus on the tween and teen customer is supported by our real estate strategy to locate stores in high-visibility locations. We seek to operate stores in high-visibility, high-traffic retail venues, which reinforce our brand message, heighten brand awareness and drive customer traffic. Our strategy is to densify markets with clusters of stores because of the considerable benefit that stores derive from market concentration. Our store model is profitable across a variety of urban, suburban and semi-rural markets and in multiple real estate venues including power, community and lifestyle shopping centers. Our retail concept works well with a large and varied group of national co-tenants that drive customer traffic. We select store sites for new store openings based upon certain criteria including minimum population density requirements, availability of attractive lease terms, sufficient space and strong positioning within a center. Employees on our real estate team spend considerable time evaluating prospective sites before bringing a proposal to our real estate committee. Our real estate committee, which is composed of senior management including our executive officers, approves all of our locations before a lease is signed. 11 We believe there is a significant opportunity to expand our store base in the United States. We opened 170 net new stores in fiscal 2021 and we plan to open approximately 375 to 400 new stores over the next two fiscal years including approximately 160 new stores in fiscal 2022 through expansion in existing markets and by entering new markets. We maintain a pipeline of real estate sites that have been approved by our real estate committee and have executed 89 leases as of January 29, 2022 for new stores in fiscal 2022. The actual number, location and timing of new store openings in 2022 will depend on a number of factors, such as retail trends, competition, the general economic environment and our ability to hire and retain new store managers and employees. Our recent store growth is summarized in the following table: Period Stores at Start of Period Stores Opened Stores Closed Net Store Increase Stores at End of Period Fiscal 2019 750 150 — 150 900 Fiscal 2020 900 122 2 120 1,020 Fiscal 2021 1020 171 1 170 1,190 Opening stores within existing markets enables Five Below to benefit from enhanced brand awareness and to achieve advertising, operating and distribution efficiencies. Our targeted new store openings include additional locations in existing markets as well as expansion into new markets. In existing markets, we use a store densification strategy that promotes brand awareness and leverages marketing, operating and distribution costs. When entering new markets, we employ a store clustering strategy, opening multiple stores in a single market on the same day, enabling us to leverage marketing and pre-opening expenses and generate initial new market brand awareness. Our store growth is supported by our new store economics, which we believe to be compelling. Our new store model assumes a store size of approximate ly 9,000 sq uare feet that achieves sales of approximately $2.0 million in the first full year of operation and an average new store cash investment of approximate ly $0.4 million, including our store build-out (net of tenant allowances), inventory (net of payables) and cash pre-opening expenses. Our new store model targets an average payback period of less than one year on our initial investment. Store Operations Each of our stores is managed by a store manager and one or two assistant managers who oversee full-time and part-time employees within each store. Each store manager is responsible for the day-to-day operations of his or her store, including the unit’s operating results, maintaining a clean and appealing store environment and the hiring, training and development of employees. We also employ district managers who are responsible for overseeing the operations of 10 to 15 stores, on average, and regional directors who are responsible for overseeing the operations of our district managers. We are guided by a philosophy that recognizes strong sales performance and customer service, allowing us to identify and reward employees who meet our high performance standards. Store managers participate in a rewarding bonus incentive program. We also recognize individual performance through internal promotions and provide extensive opportunities for advancement. Our employees are critical to achieving our goals, and we strive to hire talented people with high energy levels and motivation. We have well-established store operating policies and procedures and an in-store training program for new store managers, assistant managers and store associates. In addition, we have a dedicated group of training and new store opening managers who are focused on ensuring a consistent new store opening and remodel process and who leverage their extensive experience and knowledge of Five Below to train new store managers. Our customer service and store procedure training programs are designed to enable employees to assist customers in a friendly manner and to help create a positive sales-driven environment as well as teach successful operating practices and procedures. Merchandising, Sourcing and Distribution We have developed a disciplined approach to buying and a dynamic inventory planning and allocation process to support our merchandising strategy. 12 Merchandising Our merchandising team consists of a Chief Merchandising Officer, who reports directly to our Chief Executive Officer, and is supported by general merchandising managers and an extensive team of merchandising employees. Our merchandising team works directly with our product development team and our central planning and allocation group to ensure a consistent delivery of products across our store base. Our Chief Merchandising Officer has over 30 years of experience within the retail sector. Our product development team works directly with our merchandising group to identify new and improved products through international sourcing and has significant experience within the retail sector. Sourcing We believe we have strong sourcing capabilities developed through a dynamic and collaborative relationship with our vendor partners that provide us with favorable access to quality merchandise at attractive prices. We regularly purchase core merchandise in accordance with our key categories. We also have the ability to employ an opportunistic buying strategy, when appropriate, capitalizing on selected excess inventory opportunities, to purchase complementary merchandise based on consumer trends, product availability and favorable economic terms. We work with approximately 1,000 vendors, with no single vendor representing more than 5% of our purchases in fiscal 2021. We sourced approximately 60% of our purchases from domestic vendors in fiscal 2021. We typically have no long-term supply agreements or exclusive arrangements with our vendors. Distribution and Fulfillment We distribute over 85% of our merchandise for our retail stores from our approximately 1,000,000 square foot distribution center in Pedricktown, New Jersey, our approximately 860,000 square foot distribution center in Conroe, Texas, our approximately 860,000 square foot distribution center in Buckeye, Arizona, our approximately 700,000 square foot distribution center in Forsyth, Georgia and our approximately 600,000 square foot distribution center in Olive Branch, Mississippi, with the remaining merchandise shipped directly from the vendor to our stores. We realize cost savings by working with our vendors to streamline and reduce packaging to diminish shipping costs. For our direct-to-customer e-commerce business, we commenced fulfillment operations in Pedricktown, New Jersey in fiscal 2018, Cincinnati, Ohio in fiscal 2019 and Buckeye, Arizona in fiscal 2021. We generally ship merchandise from our distribution centers to our stores between two and four times a week, depending on the season and the volume of a specific store. We use contract carriers to ship merchandise to our stores. We continuously assess ways to maximize the productivity and efficiency of our existing distribution facilities and evaluate opportunities for additional distribution centers. In March 2019, we completed the purchase of an approximately 700,000 square foot distribution center in Forsyth, Georgia. The total amount paid for the land and building was approximately $42 million. We began operating the distribution center in April 2019. In August 2019, we acquired land in Conroe, Texas, to build an approximately 860,000 square foot distribution center. The total amount paid for the land and building was approximately $56 million. We began operating the distribution center in July 2020. In July 2020, we acquired land in Buckeye, Arizona, to build an approximately 860,000 square foot distribution center. The total amount paid for the land and building was approximately $65 million. We began operating the distribution center in August 2021. In March 2021, we acquired land in Indianapolis, Indiana, to build an approximately 1,030,000 square foot distribution center. The total cost of the land and building is expected to be approximately $61 million, of which approximate ly $43 million has been paid thro ugh January 29, 2022. We expect to occupy the distribution center in the first half of fiscal 2022. As a result of the significant expansion of our network of distribution facilities over the last several years, including the planned opening in the first half of fiscal 2022 of our Indianapolis, Indiana distribution center, we expect to cease operations at our distribution centers in Olive Branch, Mississippi and Cincinnati, Ohio in the first half of fiscal 2022, and expect the costs incurred to be immaterial to our consolidated statements of operations. 13 Marketing and Advertising Our cost-effective marketing strategy is designed to promote brand awareness and drive store and website traffic with our target demographic, as well as other value-oriented customers. Our strategy includes highlighting our brand, exceptional value and quality proposition predominantly through the use of digital advertising, commercials (on television and through streaming), syndicated talk show integrations and local marketing, with a focus on peak selling seasons. Additionally, we rely on the strong visibility and the presence of our store locations, email messaging and philanthropic community fundraising to promote and further our brand image and drive traffic. Our digital experience, anchored by our mobile e-commerce website, app and social media presence is growing rapidly as we utilize TikTok, Instagram, Facebook, YouTube and Snapchat to engage our customers with compelling digital content on a frequent basis. Our marketing team works with our merchandising team to develop novel and dynamic techniques to display our products, including distinctive merchandise fixtures and colorful and stimulating signage, which attract customers, encourage hands-on interaction with our quality products and convey our value pricing. For new store openings, we seek to create community awareness and consumer excitement predominantly through digital advertising, public relations and community outreach promoting the grand opening and by creating an engaging grand opening event that includes contests, and giveaways. We also aim to execute multiple store openings in a given new market on the same day in order to leverage marketing efforts to produce maximum impact. In addition to our marketing and advertising efforts described above, we also maintain an e-commerce website ( www.fivebelow.com ) and, over the last few years, our online following has grown substantially. We use both our website and social media channels to highlight our featured products, value/quality proposition, store locations, employment opportunities, and grand openings. Competition We compete with a broad range of retailers including discount, mass merchandise, grocery, drug, convenience, variety and other specialty stores with both physical locations and online stores. Many of these retail companies operate stores in many of the areas where we operate, and many of them engage in extensive advertising and marketing efforts. We also compete with online retailers who do not have traditional brick and mortar locations. The principal basis upon which we compete is by offering a dynamic, edited assortment of trend-right products, with most priced at $5 and below and also inclusive of select brands and licensed merchandise, targeted at the tweens, teens and beyond. We believe we are transforming the shopping experience of our target demographic with a unique merchandising strategy and high-energy retail concept that our customers consider fun and exciting. Our success also depends in substantial part on our ability to respond quickly to trends so that we can meet the changing demands of our customers. We believe that we compare favorably relative to many of our competitors based on our merchandising strategy, edited product assortment targeted at tweens and teens, store environment, flexible real estate strategy and company culture. Nonetheless, certain of our competitors have greater financial, distribution, marketing and other resources than we do. Trademarks and Other Intellectual Property We own several trademarks that have been registered with the U.S. Patent and Trademark Office, including Five Below ® , Five Beyond ® and Five Below Hot Stuff. Cool Prices ® . We also own domain names, including www.fivebelow.com , and unregistered copyrights in our website content. We attempt to obtain registration of our trademarks whenever practicable and pursue any infringement of those marks. Solely for convenience, trademarks and trade names referred to in this document may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We also refer to product names, trademarks, trade names and service marks that are the property of other companies. Management Information Systems Our management information systems provide a full range of business process assistance and timely information to support our merchandising strategy, warehouse management, stores and operating and financial teams. We believe our current systems provide us with operational efficiencies, scalability, management control and timely reporting that allow us to identify and respond to merchandising and operating trends in our business. We use a combination of internal and external resources to support store point-of-sale, merchandise planning and buying, inventory management, financial reporting, real estate, human resource and administrative functions. We continuously assess ways to maximize productivity and efficiency, and evaluate opportunities to further enhance our existing systems. 14 Government Regulation We are subject to labor and employment laws, laws governing advertising, privacy laws, safety regulations and other laws, including consumer protection regulations that regulate retailers and/or govern the promotion and sale of merchandise and the operation of stores and distribution centers. We monitor changes in these laws and believe that we are in material compliance with applicable laws. As a result of the COVID-19 pandemic, federal, state and local governments and private entities mandated various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories, and quarantining of people who may have been exposed to the virus. 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 our customers and employees, we temporarily closed all of our stores as of March 20, 2020. We began reopening our stores at the end of April 2020 and continued in operation throughout fiscal 2020 and fiscal 2021 in compliance with federal, state and local requirements. While we were able to quickly reopen our stores and maintain operations throughout the remainder of fiscal 2020 and fiscal 2021, there can be no guarantee that federal, state and local governments will not adopt restrictions that further serve to restrict our ability to operate in the event of future COVID-19 surges. Insurance We maintain third-party insurance for a number of risk management activities including but not limited to workers’ compensation, cyber, directors & officers, general liability, property and employee-related health care benefits. We evaluate our insurance requirements on an ongoing basis to ensure we maintain adequate levels of coverage. Human Capital Our Purpose, Beliefs and Core Values The success and growth of Five Below is the direct result of our employees (whom we call "crew members") who embrace our purpose, our beliefs and our core values. Why We Exist - Our Purpose - What We Believe - The Five Below Way - How We Behave - Our Five Core Values - Five Below knows life is way better when you're free to Let Go and Have Fun in an amazing experience filled with unlimited possibilities priced so low we make it easy to say YES! to the newest, coolest stuff! We are an Adopted Family. One who actively participates and leans in to support each other and our business. In this family, we value every individual for their uniqueness and potential. We know Five Below is strongest when our teams reflect the diversity of the communities we serve and our crew members can bring their whole authentic self to work, do what they do best, feel that they truly belong and grow every single day. We live our purpose through five core values. These values guide all of our decisions and actions. • Wow Our Customers • Unleash Your Passion • Hold the Penny Hostage • Achieve the Impossible • Work Hard, Have Fun and Build a Career Employees As of January 29, 2022, we employed approximately 6,100 full-time and 14,100 part-time employees. Of our total employees, approximately 600 were corporate, approximately 1,100 were based at our distribution centers in Pedricktown, New Jersey, Olive Branch, Mississippi, Forsyth, Georgia, Conroe, Texas, Cincinnati, Ohio and Buckeye, Arizona and approximately 18,500 were store employees located in 40 states throughout the United States. The number of part-time employees fluctuates depending on seasonal needs. None of our employees belong to a union or are party to any collective bargaining or similar agreement. 15 COVID-19 Response As a result of the COVID-19 pandemic, we responded quickly to put the safety of our employees first. For the health and safety of our corporate employees, we implemented a work from home policy in March 2020. In our distribution centers, we remained operational as we quickly adopted safety protocols. As for the stores, as a result of federal, state and local restrictions and out of concern for our customers and employees, we temporarily closed all of our stores as of March 20, 2020. We began reopening our stores at the end of April 2020 only after extensive safety protocols were introduced. We established robust safety protocols at all of our workplaces, including offices, stores, and distribution centers, summarized below (all in accordance with applicable federal, state and local standards): Mitigation Measure Corporate Stores Distribution Centers Mandatory face coverings for all employees and customers, where required by law X X X Daily health checks, where required by law X X X Additional signage, floor decals and reminder messaging regarding social distancing X X X Increased sanitization of high touch surfaces X X X Established policies for COVID-19 exposure, contact tracing and remediation X X X Implemented COVID-19 sick pay policy for impacted employees X X X Restricted non-essential employee travel X X X Implemented work from home policy and limited mandatory in-person meetings X Installation of plexiglass barriers at workstations / point-of-sale, where required by law X X Adopted occupancy limitations (employees and customers as applicable) X X Further roll out of employee self-assisted check-out in stores X Established COVID-19 hotline for employees X X X 16 Total Rewards We provide a comprehensive suite of benefits designed to help employees and their families stay healthy, meet their financial goals, protect their income and help them balance their work and personal lives. We provide competitive pay and significant career growth opportunities all within a culture that values diverse viewpoints and contributions at every level. Our available benefits also include the following: Health and Wellness Medical (with a choice of two high deductible plans and a traditional plan) Prescription drug coverage included with every medical plan Dental (with a choice of three plans) Vision plan (with a choice of two plans) Health savings account with Company match Pre-tax flexible spending account for qualified medical and dependent care expenses Mental health support with medical benefits coverage Employee assistance program with supplemental mental health support Medical option for part-time employees Life and Disability No cost life and disability coverage provided for all full-time employees Supplemental life plan at option and cost of employees 401(k) 401(k) retirement savings option with safe harbor Company match Other In-store employee discount Employee Stock Purchase Plan Paid time off provided to all full-time employees Paid parental leave provided to all full-time employees Identification theft, pet insurance, legal services access, term life, as well as supplemental accident, hospital indemnity, and critical illness coverage Employment Practices We aim to provide challenging, meaningful and rewarding opportunities for personal and professional growth of all employees and encourage all employees to bring their unique backgrounds and experiences to the table to work together. In order to promote the desired work environment, we have adopted policies which describe the standards of respect, inclusivity and professionalism expected of all employees. As an equal opportunity employer, we comply with all federal, state and local laws. This means that we make all employment decisions (such as who to recruit, hire, train, promote, transfer, and terminate, as well as compensation decisions) without considering an employee’s or applicant’s sex, race, religion, color, gender (including gender identity and gender expression), national origin, ancestry, physical or mental disability, medical condition, genetic information, marital status, registered domestic partner status, age, sexual orientation, military and veteran status or any other characteristic protected by federal, state or local law. We do not and will not tolerate harassment, discrimination, retaliation, and disrespectful or other unprofessional conduct against employees or any other covered persons based on any protected characteristic. We also prohibit discrimination, harassment, disrespectful or unprofessional conduct based on the perception that anyone has any of those characteristics or is associated with a person who has or is perceived as having any of those characteristics. In addition, we will not retaliate against individuals who raise complaints of discrimination or harassment or who participate in workplace investigations or other protected activities. Furthermore, we are committed to maintaining a workplace free from sexual harassment and unwelcome conduct and recognizes sexual harassment as a form of workplace discrimination. We promote and strive to maintain a safe and healthy work environment and conduct our business in ways that protect our employees’ safety and are sensitive to the environment. We are committed to maintaining a drug-free workplace and prohibit the manufacture, distribution, sale, purchase, transfer, possession, or use of illegal substances in the workplace, while representing us outside the workplace or if such activity affects work performance or the work environment of the Company. 17 We encourage open, timely communications that help us achieve organizational goals, share information, increase understanding, participate in the decision-making process, enhance our pride in the organization and provide recognition for our work-related successes. We believe our policies and practices are in compliance with all applicable laws and have been designed with significant inputs from the employees themselves. Turnover Retention of our talented employees is an important focus for us. We, therefore, monitor employee turnover, particularly at the store management level and employ various strategies to strive to improve our turnover rate. Employee Engagement We engage our employees in a variety of ways, including: conducting an annual employee survey to directly engage with, and collect feedback from our employees, maintaining an open-door policy for employees to report concerns, and providing an anonymous reporting hotline, available in multiple languages and managed by an independent company not affiliated with us, to allow employees to voice concerns freely. We conduct an annual employee survey to measure employee engagement. The survey results help us understand the employee experience, evaluate our performance, identify our strengths, and pinpoint opportunities for improvement. Starting in fiscal 2020, we partnered with Gallup, Inc., a global analytics and advisory firm, to monitor and improve the engagement of our workforce. We utilize the survey results to identify strengths and weaknesses and create action plans to improve engagement and, ultimately, team performance. In 2021 a high percentage of our employees participated in the survey, and the results demonstrated that our overall engagement levels exceed Gallup’s averages in retail, in the United States and worldwide. The results also reflected that we are a mission-driven company with employees’ response on our strength of purpose far exceeding Gallup’s measurement for world class. Seasonality Our business is seasonal in nature with the highest level of net sales and net income generated in the fourth fiscal quarter due to the year-end holiday season and, therefore, operating results for any fiscal quarter are not necessarily indicative of results for the full fiscal year. To prepare for the holiday season, we must order and keep in stock more merchandise than we carry during other parts of the year. We expect inventory levels, along with an increase in accounts payable and accrued expenses, generally to reach their highest levels in the third and fourth fiscal quarters in anticipation of the increased net sales during the year-end holiday season. As a result of this seasonality, and generally because of variation in consumer spending habits, we experience fluctuations in net sales, net income and working capital requirements during the year. Available Information For more information about us, visit our website at www.fivebelow.com . The contents of our website are not part of this Annual Report on Form 10-K. Our electronic filings with the Securities and Exchange Commission (including all annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and any amendments to these reports), including the exhibits, are available, free of charge, through our website as soon as reasonably practicable after we electronically file them with, or furnish them to, the Securities and Exchange Commission. 18