Investors have been cautious about Five Below (FIVE 0.30%) this year, given its limited merchandise offering at a time when many shoppers are avoiding trips to malls and specialty retailers. Peers have been reporting sluggish demand and pricing pressures, too.

But the youth-focused discount retailer revealed this week that it overcame those challenges to post a quick return to sales gains for the fiscal 2020 second quarter. Five Below's results also indicate that it has an attractive runway for growth ahead as it works to establish itself in new markets around the country.

Getting back on track

Investors were expecting a sharp improvement over the prior-quarter's 50% sales decline as stores reopened following COVID-19 shutdowns. But Five Below outpaced those optimistic forecasts as revenue rose 2%.

Three young women shopping together.

Image source: Getty Images.

In June, CEO Joel Anderson and his team said that initial demand trends were looking strong as stores started to reopen. And in contrast to retailers like TJX Companies, that demand held up through the quarter. Five Below saw comparable-store sales rise 6% in reopened locations, with gains stretching into August.

Executives also credited e-commerce strength for helping push revenue back into positive territory.

Record store growth

The chain's record level of new-store expansion was an even bigger contributor to growth. Five Below added 63 new locations in Q2, compared to 44 a year ago. These launches happened at a tough time in the broader industry and came with restrictions that wouldn't normally impact an opening. Five Below couldn't hold large "grand opening" parties like it has done in the past, for example.

Yet the new locations performed well as a class. Launches in the Denver and Las Vegas metro areas even cracked into its top openings. This success has management feeling confident that they can hit their goal of more than doubling the current store base over time. "The universal appeal of Five Below," Anderson said in a conference call with investors, "lies in our unique, special, flexible and edited assortment of products at incredible values delivered in a neat, clean and fun store environment."

Sailing into the holidays

Anderson said the third quarter is off to a "strong start," which again contrasts with more cautious outlooks from TJX Companies and other mall-based retailers. Five Below is heading into the holiday shopping season with a slim inventory position, no debt, and plenty of cash on hand. These assets should help it gain market share -- and keep growing the store base -- even as many industry peers are shrinking.

Five Below still plans to end the year with as many as 1,020 locations, representing a 13% increase in its selling footprint. But its successful new launches and continued positive traffic trends imply that its long-term growth goals haven't been harmed by the COVID-19 pandemic.

The chain still appears on track to eventually have as many as 2,500 locations across the country. And that expansion might become a bit more cost-effective as commercial rents are pressured by consumer-shopping challenges and the ongoing recession.