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Five Below Is Moving Ahead With Its Ambitious Expansion Plans

By Demitri Kalogeropoulos - Sep 11, 2020 at 7:00AM

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The youth-focused retailer still sees plenty of room to double its store base over time.

Five Below (FIVE 0.58%) surprised investors last week by posting a quick return to sales growth following plummeting results during the various statewide COVID-19 shutdowns. The retailer enjoyed steady demand once its stores reopened, which allowed it to avoid slashing prices or taking inventory write-off charges.

Five Below also managed to open more new locations in its fiscal second quarter than it ever has, pushing its store base to just under 1,000 locations. In the earnings call, CEO Joel Anderson and his team broke down the latest results while explaining why they still see room to more than double the company's footprint over the next few years.

Let's look at some highlights from that presentation.

Changing with the times

We are very pleased that we generated a positive reopen comp of approximately 6% from our reopened stores and e-com[merce] combined.
-- Anderson

Investors had been expecting revenue to decline by about 2% year over year during the cquarter, but instead, the chain announced a 2% increase. The biggest factor in that rebound was its 63 new store launches. Yet Five Below also saw robust growth in reopened locations thanks to a combination of recovering foot traffic, bigger baskets, and e-commerce ordering.

Three young women sitting on a bench and looking in their shopping bags

Image source: Getty Images.

That result made Five Below stand out among specialty retailers, many of which are struggling with weak or highly volatile demand. In recent weeks, both TJX Companies and Foot Locker have noted challenges in matching inventory with demand, but Five Below's value-focused niche performed better, in part thanks to the supply chain's flexibility. "We swiftly responded to new and changing operating conditions," Anderson said, "ensuring the relevance of our merchandise assortment and marketing messages reflected the current environment."

Healthy store launches

Two stores still made our top 25 summer grand openings, and they were both in the brand-new markets of Denver, Colorado, and Las Vegas, Nevada, which demonstrates the universal appeal of Five Below and the growing awareness of our brand.
-- Anderson

Five Below's 63 store launches in the fiscal second quarter represented a record pace of expansion compared to 44 openings in the prior-year period. Executives were excited about their ability to hit this figure even as the supply chain was being stressed and the broader industry was dealing with major COVID-19 disruptions.

But the better news was that these new stores performed well even though their grand openings had restrictions on customer traffic. Five Below credits its low-cost appeal and improving brand strength for helping deliver those wins.

Thriving through adversity

History has taught us that tougher economic times serve to strengthen [our] appeal, and our commitment to our customer promise of delivering "wow" and value is stronger than ever.
-- Anderson

Executives weren't in a position to issue a detailed short-term outlook, given major pandemic-related disruptions still impacting the business, including with the traditional back-to-school season. However, quarter to date, management noted that comparable sales are still positive at about 6%, extending the momentum from the previous quarter.

Looking further out, it's possible that the industry could be dealing with tough, recession-level selling conditions. These challenges might pressure customer traffic for Five Below and its peers as the industry has already seen.

But management says the chain is well-positioned to navigate through even that tough environment. It has plenty of cash, fresh inventory, and no debt. And its latest sales results show how nimble its merchandise team can be in adjusting to shifting demand trends.

As a result, Five Below remains confident that it can more than double its store base over time to 2,500 locations, including the addition of at least 110 new stores in 2020 alone.

Demitri 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.

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