Please ensure Javascript is enabled for purposes of website accessibility

Five Below's Expansion Strategy Goes Into Overdrive

By Demitri Kalogeropoulos - Mar 19, 2021 at 9:30AM

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

Store growth is spiking after an unusually slow year for new launches.

Investors had high expectations heading into Five Below's (FIVE -3.41%) earnings report this past week. Despite COVID-19 challenges, the retailer entered the holiday shopping period with growth momentum that implied a great finish to a turbulent year.

Its actual results gave investors more reasons to feel optimistic about the business, whether it's the potential for rising profitability or dramatically higher sales over the long term. Let's take a closer look.

A young woman holding shopping bags on a mall escalator.

Image source: Getty Images.

Beating expectations

Five Below surpassed even the updated outlook that management issued in its mid-quarter announcement. Revenue rose 25% through the holiday period and comparable-store sales, or sales at existing stores, jumped 13%. That result matched the company's prior-quarter uptick and outperformed the 11% target that executives issued back on Jan. 12.

The boost ensured that sales rose 6.2% for the full year, or about a full percentage point higher than management predicted. "We closed out an unprecedented year with fourth quarter results that were even strong than we expected," CEO Joel Anderson said in a press release.

Annual sales growth slowed considerably when compared to 2019's near-20% increase, but the results have to be considered a win considering that stores were closed for several weeks and retailing traffic was pressured by social distancing for most of the year.

Rising prices

Profitability dropped slightly but remained strong through the competitive holiday shopping season. Five Below has been expanding its offerings to higher-priced products like consumer electronics, toys, and games. The strategy resonated with its younger shopping demographic so that gross profit margin only declined to 33% of sales for the full year from 36% in 2019.

Management said that demand was strong across all of Five Below's retailing niches. Earnings were $2.20 per share for full-year 2020, surpassing the high end of the guidance range the company issued in mid-January.

Looking forward

All of this success apparently convinced management to push its expansion strategy up to a higher level. The company is planning to open 60 new locations in the fiscal first quarter compared to just 38 in the past two quarters.

Five Below launched 120 new stores through all of 2020 but is predicting a quick return to a faster growth pace, perhaps outstripping the 150 openings it achieved in fiscal 2019. Many of those new stores will include a wider selection of higher-priced offerings (above $5 each), which management calls its "Five Beyond" approach.

The retailer will soon be operating in 40 states around the country after adding Utah and New Mexico in early 2021. Yet today it is running less than half of the 2,500 locations that management sees as a reasonable long-term goal.

A major investor concern about that ambitious target has been the potentially risky, trend-chasing aspect of Five Below's merchandising approach. But the retailer has found ways to use that model to boost customer traffic for several years now, including through the wild selling conditions that characterized most of 2020.

After a strong finish to that year, shareholders have to be feeling more confident that Five Below has a good shot at building a larger sales footprint in 2021 and beyond.

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
$141.00 (-3.41%) $-4.98

*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 service.

Stock Advisor Returns
345%
 
S&P 500 Returns
119%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/17/2022.

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.