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3 Ways Five Below Is Playing Offense

By John Ballard – Jun 18, 2020 at 12:37PM

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The value store operator remains nimble in the face of a challenging sales environment.

Before the COVID-19 outbreak shut down retailers in the U.S., Five Below (FIVE -1.77%) was on pace to deliver another quarter of strong growth. But the store closures took a heavy toll, with sales down 45% during the fiscal first quarter (which ended May 2). 

While management was forced to play defense for part of the quarter to deal with the crisis, Five Below "quickly got back to playing offense" to position for a return to growth, as CEO Joel Anderson discussed on the conference call.

Here are three ways Five Below is positioning for long-term growth during this crisis.

Five Below store exterior

Image source: Five Below.

1. Entering two new states

A key part of the investment thesis for Five Below is the expanding store footprint. Five Below has increased the store base by approximately 20% annually over the last five years. It ended the recent quarter with 920 stores in 36 states, but management still sees the potential for more than 2,500 stores in the U.S. over time. 

Five Below was originally planning to open about 180 new stores this year, but COVID-19 has disrupted those plans. Still, the updated guidance calls for between 100 to 120 new stores in 2020, showing that Five Below is continuing to invest in its future.

"New stores remain our most significant growth opportunity and we continue to see a 2,500 plus store potential in the United States," Anderson said. "We hope to return to a more normalized growth trajectory and new store opening program in 2021."

While most of these new stores will be in existing markets, Five Below will be entering new markets, such as Sacramento, California, and two new states, Colorado and Nevada, this year.  

2. Delivering value in relevant categories for COVID-19

Five Below stock is up 335% since the IPO in 2012. A key reason for its success is rooted in its merchandise strategy. Five Below says that many of the products it sells can be found at other stores, but customers come to Five Below because of the easy shopping environment and its ability to sell products at cheap price points. Its value proposition certainly stands out during recessionary environments like we're seeing now.

Five Below takes extra steps to lower costs and prices for customers, such as reducing packaging to minimize shipping costs. Additionally, the merchandise team is opportunistic with its buying strategy. 

During the call, Anderson said, "Overall, we continue to source amazing value products and are taking advantage of opportunity buys in the market across several major product brands." 

Five Below has adjusted its assortment to remain relevant to what customers need now, including allocating more space to hand sanitizers, wipes, masks, home essentials, and even new tech items for people working at home. 

"With the inherent flexibility of the Five Below model with its eight worlds that span over 15 departments, we have the unique ability and organizational agility to make quick assortment changes in order to stay relevant and consistently deliver wow and incredible value to our customers," Anderson said. 

3. Drawing new customers

The shelter-in-place period forced Five Below to quickly adapt to the new environment by shifting its marketing from TV commercials to digital advertising, which it is ramping up for the fiscal second quarter. 

"The benefit of digital advertising is it allows us far more flexibility and localization to target at the store level using zip code data and it can be turned on and off very quickly," Anderson said.

With digital marketing, Five Below can target its marketing budget at specific areas where it is seeing the best customer response, which could attract new customers that are out there looking for value during tough economic times. 

Staying the course

We entered the pandemic in an extremely healthy position with a resilient business model, robust sales growth, no debt, and substantial cash reserves and 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 

Five Below has reopened about 90% of its stores as of June 9, and those stores are performing well so far. Comp sales growth for stores and e-commerce are tracking up approximately 8% for the current quarter to date. The growth has been balanced equally between physical stores and online, but management is not providing guidance due to uncertainty about the pace of recovery. 

With a healthy financial position entering this crisis, Five Below can invest in the right areas, maintaining flexibility with its inventory assortment to meet customer needs and continue opening new stores to stay on course for long-term growth. Not every retailer is in this position right now.

John Ballard 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.

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