What happened

Shares of discount-retailer Five Below (NASDAQ:FIVE) dropped 16.4% in the first half of 2020, according to data provided by S&P Global Market Intelligence. And shareholders are breathing a sigh of relief because it was much worse a couple of months ago. At one point, shares were down about 60%.

The COVID-19 pandemic hit Five Below hard, but don't chalk up all of the stock's underperformance to the coronavirus. The company started the year by reporting a slip in sales during the crucial holiday season.

FIVE Chart

FIVE data by YCharts.

So what

Five Below considers the holiday shopping season as Nov. 3 through Jan. 4. Net sales during this time period were up 13% to $597 million, when compared to the year before. But this was entirely due to new stores. Comparable-store sales actually dipped 2.6%, which is troubling for any retail chain at that time of year. The stock sold off as a result.

Five Below stock started to bounce back, but then the coronavirus broke out. As the company closed all locations and furloughed workers, it was in a particularly difficult position. Its e-commerce sales to date are so insignificant that the company doesn't even bother breaking them out.

First-quarter net sales fell 45% for Five Below. For context, consider its fiscal quarter ran from Feb. 2 to May 2. All of its stores were closed from March 20 to the end of April. So Five Below's stores were closed about half the quarter, and sales were cut about in half. It generates very little revenue with stores closed.

While Five Below's business isn't equipped to operate during a pandemic, its balance sheet provided the means to endure it. Going into the crisis, it had around $260 million in liquid assets and zero debt. Cash, cash equivalents, and short-term investments are down to $139 million, but the company didn't take on any debt while it waited for stores to be allowed to reopen. 

A closed sign hangs on a door.

Five Below generates little revenue when stores are closed. Image source: Getty Images.

Now what

Five Below has reopened 90% of its stores, and sales are coming back strong. At reopened stores, comparable sales in the second quarter have increased 8% from last year. That's an encouraging sign for shareholders. Furthermore, the company still intends to open between 100 and 120 net new stores this year. That's a slower pace than years past, but still robust growth.

That said, Five Below isn't a strong retail chain when stores are closed. If a second wave of the coronavirus forces stores to shut their doors again, it could be a rough second half of 2020 for shareholders.