Philly Deals: Five Below plans for an IPO

Five Below cofounders David Schlessinger (left) and Tom Vellios at one of their stores. The chain of 192 kid-oriented dollar stores has grown quickly. JOHN SLAVIN / Staff Photographer
Five Below cofounders David Schlessinger (left) and Tom Vellios at one of their stores. The chain of 192 kid-oriented dollar stores has grown quickly. JOHN SLAVIN / Staff Photographer
Posted: April 19, 2012

Five Below Inc., the Center City-based chain of 192 kid-oriented dollar stores in 16 Eastern and Midwestern states, has hired Goldman Sachs and other brokers to lure investors for a $150 million initial public stock offering.

The chain, founded in 2003 by former Zany Brainy toy-store owners David Schlessinger and Tom Vellios, has grown quickly, especially since investors led by Advent International Corp. of Boston pumped in $194 million in 2010.

Five Below more than doubled its sales of cheap sports gear, snacks, party goods, and other middle-school accessories to $297 million in the year ended Jan. 11, from $125 million two years earlier, according to its filing with the Securities and Exchange Commission. Its 2011 profit was $16 million, the chain’s third straight year in the black.

Four of the board’s six outside directors are affiliated with Advent, including ex-CVS Caremark boss Thomas M. Ryan; Howard Ross, a founding partner of LLR Partners, the Ira Lubert-backed Philadelphia investment group, which counts Pennsylvania state pension funds as clients; and Staples Inc. boss Ronald L. Sargent.

Early Zany Brainy shareholders included local Philly investors like the Cohn brothers (Sage Financial) and Josh Kopelman (formerly of Half.com, now co-head of busy First Round Capital of West Conshohocken, New York, and Silicon Valley).

Schlessinger collected $3.6 million in salary and bonus as “executive chairman” last year; Vellios collected $3.7 million as chief executive. Each controls more than 1 million Five Below share options.

In comparison, Richard Hayne, founder and boss at South Philly-based Urban Outfitters Inc., whose sales were almost 10 times Five Below’s and whose profits were more than 10 times greater, paid himself less than $100,000 last year; his three top lieutenants each collected under $2 million. But Urban Outfitters is public, and Hayne’s shares are now valued at nearly $900 million, which shows part of the appeal of taking a company public, especially if it’s able to boost profits as well as sales over the years.

The last company Vellios and Schlessinger took public, Zany Brainy, was later sold to the FAO Schwartz toy chain, went bankrupt, and closed. Schlessinger previously founded Encore Books.

More gear

A unit of Kynetic, the Conshohocken-based online-retail company formed by Michael Rubin to run the businesses he didn’t sell with his GSI Commerce Inc. to eBay last year, has agreed to pay $158 million, or $3.45 a share — a five-year high — and assume $25 million in debt to acquire Florida-based rival Dreams Inc.

Dreams, under chief executive Ross Tannenbaum and chairman Sam Battistone, has lately won clients such as Comcast SportsNet and Modell’s from Kynetic’s Fanatics division, says Michael Devlin, a broker at Long Island-based Henley & Co.

Sales of licensed NFL, NCAA, MLB, NBA, and NHL gear by Fanatics through Disney-ABC’s ESPN sports network, Fox, CBS, Rivals.com, and other sites, will total about $700 million this year, and in a meeting last week, Rubin told investors that the business enjoys “high profit margins,” according to Janney Capital Markets analyst Shawn Milne.

Dreams reported sales of $142 million last year, up from $111 million in 2010 and $86 million in 2009; after-tax profits were less than 1 percent of sales last year and under 2 percent in 2010.

Fanatics chief Alan Trager said the merger joins “two of the most passionate management teams in licensed sports products” to sell college and pro gear through mobile and e-commerce systems and regional distribution centers.

The sale price, a five-year high for Dreams shares, gives Dreams owners “meaningful value” for the stock, Phillip Frost, board chairman of Teva Pharmaceuticals, the Israeli drugmaker whose U.S. headquarters is in suburban Philadelphia, said in a statement. Frost is the third-largest Dreams shareholder after Tannenbaum and Battistone. Morgan Lewis & Bockius L.L.P. of Philadelphia advised Fanatics.

More loans

Pennsylvania Higher Education Assistance Agency, a state-related organization that services college loans, says it plans “a new economic-development initiative that will create nearly 150 new jobs in Chester.”

Delaware County State Rep. Bill Adolph, a Republican who chairs the PHEAA board (and the powerful state House Appropriations Committee), plans to join State Sen. Domenic Pileggi (R., Delaware) at Buccini/PollinGroup’s Wharf at Riverfront offices Thursday to announce the move.

Wharf anchors the riverfront-redevelopment zone that’s also home to the Philadelphia Union soccer stadium. The office complex is mostly occupied, the Buccinis say, though it lost some early tenants when Wells Fargo & Co. and software-maker Oracle cut staff.

PHEAA has resisted takeover offers from national lenders. Despite federal subsidy reforms that have made college loans less profitable, it’s still a growth industry: Americans now owe more for college loans than credit-card debt. Pileggi’s district can use all the jobs it can get, especially after the Sunoco-Marcus Hook refinery closing.

Contact columnist Joseph N. DiStefano at 215-854-5194, JoeD@phillynews.com, or @PhillyJoeD on Twitter.

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