Investors have some good reasons to take a cautious view of Five Below (FIVE +1.35%). The retailer hasn't established a fully national sales presence yet, and its core demographic -- young shoppers -- often sparks wild shifts in demand as fads go in and out of style.
Yet the company this week closed out a fiscal year that continued its healthy streak of sales and profit growth. These wins suggest Five Below could have what it takes to grow far beyond its current $1.6 billion annual revenue perch.
Here are a few standout metrics from the year.
Image source: Getty images.
1. Rising above the fads
Sales rose 4% at existing locations and increased 24% after accounting for the new stores management added. That growth came on top of a record result in 2017 that was lifted by the fidget spinner craze. It also marked Five Below's 13th straight year of comparable-store sales growth. That track record isn't something you'd expect from a fad-driven business.
2. Balanced growth
Looking deeper into the growth figures, there were a few signs of strength in Five Below's results. The 4.4% comps increase over the holidays was balanced almost exactly between higher traffic and rising spending per visit, for example. The retailer notched gains in each of its core product categories including tech, sports, candy, and room furnishings. These staples combined with success in trend-focused niches and in toys to deliver its surprisingly strong growth.
3. Plenty of room to expand
Five Below added 125 stores to its base in the year, to end the year with 750 locations. These latest shops included a few brand-new markets, and the early returns have exceeded management's hopes. Average annual sales volumes are trending over $2 million in the new stores, which would mark the second straight crop to reach that mark.
Check out the latest earnings call transcript for Five Below.
4. Steady profitability
The company's profitability slipped in the holiday quarter, in part because Five Below aggressively attacked the lower-margin toys and games niche in a bid to soak up market share in the wake of the liquidation of Toys R Us. The retailer also spent freely on the business by bulking up the supply chain. Overall, though, operating margin fell by less than half a percentage point in 2018 as income rose to $187 million from $157 million.
5. Racing toward 1,000 stores
CEO Joel Anderson and his team are targeting sales growth of around 3% at existing locations, which would mark a second straight year of slowing gains. The company also sees operating margin falling slightly this year, mostly thanks to spending on new distribution centers.
Still, the broader outlook is decidedly positive. Five Below just entered Iowa and Nebraska and will add Arizona to its sales footprint in the coming weeks. These launches are part of an expected 145 store openings in 2019, which would leave the retailer with nearly 900 locations a year from now.
That's a far cry from the 2,500 stores Five Below believes the U.S. market could support over time. But it's no small feat to have reached one-third of that goal while protecting profitability and extending its core sales-growth streak to 13 years, and it puts the retailer in sight of hitting the 1,000 mark by 2020. Its retailing approach has held up through a wide range of economic conditions and seems capable of winning share in both new and established markets.
