Please ensure Javascript is enabled for purposes of website accessibility

Five Below Still Sees Room to Almost Triple Its Store Base in the U.S.

By Demitri Kalogeropoulos – Jun 15, 2020 at 3:25PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The retailer isn't backing away from its growth plans after a tough start to fiscal 2020.

Investors suspected that Five Below (FIVE 2.94%) was going to report some brutal sales numbers in its fiscal first-quarter announcement. The period runs through early May and includes the widespread COVID-19 store closures that started on March 20.

That's why it was no surprise when the youth-focused retailer revealed that revenue collapsed and Five Below generated a rare quarterly loss. Yet management in a conference call with investors explained new details about how it preserved cash through the crisis while detailing the chain's latest operating trends as stores slowly reopen.

Let's look at three key highlights from that presentation.

Three young women shopping.

Image source: Getty Images.

1. Missed opportunities

With a reduction in store operating days of approximately 47% due to temporary store closures and the loss of the key Easter selling days, comparable-store sales decreased by 52% with the positive contribution of e-commerce [providing] only a small offset.
-- CFO Kenneth Bull

Store shutdowns cut the specialty retailer's available selling days in half and removed the Easter holiday, a dependable seasonal traffic draw, from its merchandising plan. The result was slumping sales and surging inventory. In fact, inventory per store jumped 17% in the first quarter despite early aggressive markdowns on seasonal products like candy.

Five Below raced to slash spending, but its fixed cost base couldn't adjust to the instant loss of revenue. Gross profit declined by $100 million as profitability dove to 10% of sales from 33% a year ago.

2. Healthy finances

We entered this period with a strong debt-free balance sheet and a business that self-funds its growth while generating cash.
-- CEO Joel Anderson

Five Below came into the crisis with a sparkling balance sheet, and that asset came in handy through the unprecedented financial pressure it endured. To be sure, the company burned through $65 million of cash compared to the generation of $21 million a year ago.

However, by early May it still counted $139 million on the books and did not need to tap its revolving credit line. Management even found room to allocate spending toward stock repurchases. "We believe we are emerging from these times in a strong, if not stronger, competitive position once again focused on growth and playing offense," Anderson explained.

3. The reboot so far

Comparable sales for our reopened stores including our e-commerce business are tracking up approximately 8% for the second quarter to date.
-- Anderson

Management revealed that sales growth has jumped to 8% in newly reopened stores, which is a sharp acceleration even from the 3% increase it was logging just before the pandemic hit in mid-March. Five Below was cautious to note that this metric might be artificially lifted by stimulus income and pent-up demand, though.

That volatile demand situation has management feeling unusually cautious about the short-term outlook in the context of unsteady economic growth and more localized outbreaks of the novel coronavirus. As a result, Five Below has a wide range of contingency plans for the next few quarters.

Looking further out, the company says it expects to return to its normal store expansion pace in 2021 as new store launches creep back toward 180 from an expected 110 this year. Five Below still sees room for at least 2,500 stores around the country. That target implies a long runway of growth ahead, considering the chain operates 920 locations today across 36 states.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Five Below and recommends the following options: long January 2022 $115 calls on Five Below and short January 2022 $120 calls on Five Below. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Five Below, Inc. Stock Quote
Five Below, Inc.
FIVE
$145.40 (2.94%) $4.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
331%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.