Five Below (NASDAQ:FIVE) has carved out a cozy living over the years by having a good read on what its young shoppers crave. From fidget spinners to selfie sticks, the cheap-chic retailer -- which, true to its name, stocks mostly items selling for $5 or less -- cashes in on trends with low price points that its teen and tween shoppers can afford. Unfortunately for the rapidly expanding chain, though, it doesn't have a response for the coronavirus trend.
Five Below will close all 900 of its stores on Thursday night in an effort to contain the percolating pandemic. The stores will remain closed through the end of the month, but no one should be surprised if they remain shuttered for a bit longer than that. The temporary closures were announced shortly before Wednesday's market close, just ahead of Five Below's posting mixed financial results for its seasonally potent fiscal fourth quarter.
Into the great unknown
Five Below's fiscal fourth quarter, which ended on Feb. 1, is a lot like an inverted Oreo. It's creamy on the top, descending to a grainy middle before wrapping up creamy again in the end.
We can start at the top, with net sales rising 14% to $687.1 million. Most brick-and-mortar retailers would love to grow their top lines at a double-digit clip, but here's where we get to the chalky center of the reports. The only reason that net sales were positive at Five Below was because it has grown its store count by 20% over the past year. Comparable sales for the quarter actually declined 2.2%.
Store-level sales going the wrong way is problematic, but here's where we work our way down to the creamy bottom. Five Below took a hit mid-January when it announced disappointing holiday sales. Comps declined 2.6% through the two-month peak shopping period ending Jan. 4, so results actually improved -- relatively speaking -- in the final month of the fiscal year. Net income also rose 24% to $1.97 a share for the quarter, ahead of analyst profit targets.
The current quarter was off to a strong start until last week. Comps were up 2.9% for the first few weeks of the fiscal first quarter through March 11, but in the past week -- after the World Health Organization declared coronavirus a global pandemic -- the store-level sales trend had deteriorated to a mere 0.4% advance.
Momentum at this point flies out the window. Five Below's stores will be closing later tonight, and whether they reopen in two weeks or two months, even the retailer doesn't know what its growth prospects will be at the time. Five Below is not offering up guidance for the new fiscal year or even the current quarter, and that's understandable for a concept that in a few hours will be shuttered for an indefinite amount of time.
Five Below was making progress on many of its goals as fiscal 2019 played out. It was able to close out the fiscal year with positive comps -- up 0.6% despite the final quarter's decline -- stretching its streak of comps to an impressive 14 years. Five Below was able to diversify its inventory sourcing to the point where tariff concerns have been fully mitigated at this point. The 25 Ten Below prototype stores it opened earlier in the fiscal year, as zones within stores where it can sell tech and room decor products at price points up to $10, are a hit. Five Below expects to add Ten Below zones to all new and remodeled locations from here on out.
Things will be rough in the near term. Online sales continue to be a "very, very small piece of the business," as Five Below pointed out during Wednesday afternoon's earnings call, so it's not as if e-commerce can save the day during the lull. Five Below did recently invest in the Hollar.com e-tailing platform, and it will shift its online operations that way as it offers better tech and fulfillment costs. For now, Five Below remains primarily a bricks-and-mortar discounter, and that's bad news with all 900 stores closing down.
No one knows where the young-shopper mindset will be at the other end of this coronavirus disruption. Five Below's deep discounts make it somewhat recession-resistant, but we don't know how deep a funk the country will be in at that point. The stock has already shed nearly two-thirds of its value since peaking in the spring of last year, so the current malaise has been discounted. The stock's recovery now rests on how soon it can safely reopen its stores and how long it will take to resume its historically winning ways.