Investors reacted harshly to Five Below's (FIVE 2.26%) holiday-season sales update, sending shares down as much as 20% on Monday before the stock settled at an 11% decline for the day. The announcement contained some bad news, to be sure, on both the revenue and profit fronts during the critical peak shopping season around Thanksgiving and Christmas.
The youth-focused retailer's wider growth prospects aren't dented by this weak holiday outing. However, the performance raises questions about the chain's ability to keep sales marching higher at existing locations without the benefit of a robust multi-channel selling model.
Let's take a closer look.
Sales and profit updates
The company revealed a 13% revenue increase for the two-month period ranging from early November to early January. All of that boost came from its expanding store base, though, as comparable-store sales fell 2.6% and put the company on pace for a similar decline for the wider fourth quarter.
By contrast, comps rose 2.9% in the fiscal third quarter and were projected to expand at a modest pace through the holidays. "While our comparable sales during key holiday selling periods were positive," CEO Joel Anderson said in a press release, "they were not strong enough to overcome the headwind of six fewer shopping days between Thanksgiving and Christmas, and overall sales did not meet our expectations ."
Management didn't detail exactly what knocked the company off its prior growth pace, but they did provide some hints that might answer that question. The chain's move toward higher-priced products apparently wasn't the issue, since executives are ramping up the rollout of their "$10 or below" shopping sections across the store base.
Instead, Five Below may have struggled to compete with multi-channel retailing rivals who offer comprehensive online ordering and in-store pickup options. That issue hurt Bed Bath & Beyond (BBBY -28.27%) over the holidays, after all. Five Below announced the acquisition of a new e-commerce platform and fulfillment operation in conjunction with the holiday results, which suggests this might have been a sticking point during the peak selling period.
The good news is that the chain held the line on expenses and pricing so that gross profit margin and operating margin were protected. However, the weaker results will hurt Five Below's annual numbers. Specifically, management now expects sales to land at around $1.85 billion rather than the $1.89 billion they predicted back in early December. That means the chain's 18% sales boost for the year will mark investors' first time seeing annual sales growth of less than 20%.
Management's comments on Five Below's strategy suggest that there's no reason for shareholders to be overly worried. The company still sees plenty of room to expand into new and established markets, for example, with 180 store launches planned for 2020 compared to 150 last year. That attractive opportunity is a key reason why the chain is in a much better position than the floundering Bed Bath & Beyond.
Still, Five Below's expected flat comps for 2019 would mark its worst showing on that score in years, and if the slowdown is due to a weakness around e-commerce, then it might take some time and resources to fix. That's why shareholders should keep a close eye on comps in 2020 to see whether they are responding to management's tweaks to the selling model.