What happened

Shares of Five Below (NASDAQ:FIVE) were heading lower today as the discount retailer fell alongside the broader market in a sweeping sell-off. As the coronavirus outbreak becomes more dire and the response to the virus gets more extreme, investors believe that consumers will avoid shopping malls and other "gathering places," which is a problem for mall-based retailers like Five Below.

Shares of the chain were down 14.9% as of 12:20 p.m. EDT, while the S&P 500 had given up 8.3% at the same time. The SPDR S&P Retail ETF (NYSEMKT:XRT) was off 11%, indicating that retailers were underperforming the broader market.

The entrance to a Five Below store

Image source: Five Below.

So what

Last night, in an Oval Office address on the coronavirus epidemic, President Trump said that the U.S. would suspend most travel from Europe for 30 days as part of wider response to the virus, which sent markets spiraling in Europe this morning. Also last night, the NBA said it would suspend the rest of its season indefinitely after a player tested positive for the coronavirus.

That news, which accompanies reports of colleges sending students home to take classes online and offices mandating work-from-home, shows how serious the outbreak has become. Italy, meanwhile, tightened its national lockdown, barring all but essential businesses from staying open.

As a retailer of whimsical items like games, tech accessories, toys, and candy, all of which cost $5 or less, Five Below seems particularly at risk if consumer pull back on discretionary purchases, especially the kind of add-on items they wouldn't buy if they weren't already in a mall.

Ironically, the advantage that had led Five Below to outperform the market in recent years, which is that its model is difficult to do online, now appears to be a weakness.

Now what

No one knows how long or how severe the coronavirus epidemic will be, but it's beginning to look like it could have a devastating impact on the economy and drive the country into a recession as Americans cancel plans to travel and dine out, and daily life in general is disrupted. As a retailer that depends on mall traffic, Five Below is likely to suffer as long as consumers are practicing "social distancing." 

The company is set to report fourth-quarter earnings after hours on March 18. Investors will want to pay close attention to the company's outlook and to comments about customer traffic and how the coronavirus is affecting business.