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Will Five Below Keep Its Growth Streak Alive?

By Demitri Kalogeropoulos - Mar 15, 2020 at 10:00AM

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The retailer announces its holiday-quarter earnings results in just a few days.

Investors have turned more cautious about Five Below (FIVE -0.39%) stock in recent months. The youth-focused retailer has been caught up in the general market drawdown in response to coronavirus fears, but there are also company-specific issues to worry about. Five Below said in mid-January that sales took a surprising turn lower during the holiday shopping season.

In its full fourth-quarter earnings report on Wednesday, March 18, the chain will answer key questions about that slowdown, including the impact it had on profit trends. Investors will also be watching closely for signs that the business can return to growth in 2020. Let's take a closer look.

Three young women seated on an outdoor bench while happily looking inside a blue shopping bag.

Image source: Getty Images.

Holiday competition

Five Below's holiday update included a 13% revenue boost for November and December, but all of those gains came from a rising store base. Sales at existing locations, meanwhile, fell 2.6%. They had risen by about the same rate in the third quarter, and so the holiday decline was a surprise. "Overall sales did not meet our expectations," CEO Joel Anderson said in a Jan. 13 press release.

We'll find out this week whether trends improved much over the next few weeks. Management's updated outlook calls for comparable-store sales to decline by between 2% and 2.5% for the full quarter, which would translate into comps of less than 1% for the full 2019 year.

What went wrong?

Five Below didn't provide any explanation for the sales shortfall, and so investors will be eager to hear from the management team this week. It's possible that pricing pressure played a role. The retailer had to break past the $5 price barrier on many products in recent months thanks to rising tariffs, after all. However, all indications to date are that shoppers have been fine with paying a bit more.

The more likely scenario is that weak e-commerce sales held back results. Consumers have been tilting their spending toward retailers that have robust multichannel sales offerings that allow for conveniences like same-day delivery or in-store order pickups. Five Below just acquired a new e-commerce platform, which means shareholders will hear about management's plan to make better use of that sales channel this week.

Looking ahead

A lot is riding on management's official 2020 outlook that will be a part of this earnings report. Assuming no major surprises in the past few weeks, comps will have edged higher by about 1% in 2019 as the growing store base pushed sales up to about $1.85 billion. That would translate into 18% higher sales, but it would mark the first time in several years that gains didn't reach at least 20%. Five Below's 13-year streak of positive comps, in the meantime, is potentially at risk now that this metric has slipped to near zero.

Management has already suggested that they are looking to lean more on store growth as a key source for higher sales in 2020. The chain appears to have plenty of room to expand deeper into established markets and new metropolitan areas. Anderson and his team are aiming to launch 180 new stores in 2020, up from about 150 last year.

The chain should pass its 1,000th location this year, which is still less than half the total that executives have targeted over the long term. That's a bright outlook, even if investors might have to endure slower sales growth in 2020 than they've been used to seeing from this business.

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