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Five Below Could Easily Double Its Store Footprint

By Demitri Kalogeropoulos - Updated Apr 12, 2021 at 11:14AM

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The trend toward more stores, selling higher-priced products, bodes well for this youth-focused retailer.

Five Below (FIVE -2.66%) declined to issue guidance for the year ahead after its recent fourth-quarter earnings report. But the discount retailer did give investors plenty of reasons to be optimistic about 2021, given that sales and profits have completely rebounded from the COVID-19 closures.

CEO Joel Anderson and his team outlined a few of those encouraging metrics in a conference call with Wall Street analysts while detailing their accelerating expansion strategy. Below, we'll look at the highlights from that presentation.

Taking advantage of favorable selling conditions

"Five Below has a long history of successfully navigating difficult times, whether economic or other, and we believe that value never goes out of style," Anderson said.

The retailer ended a surprisingly good sales year on a surprisingly high upswing. Revenue growth hit a fourth-quarter record of 24.9%, with comparable-store sales up 13.8%, accelerating over the prior quarter's spike and sailing past the upgraded outlook that management had issued in mid-December. (The company's fiscal year ended Jan. 30.)

A woman holding shopping bags at a mall.

Image source: Getty Images.

Management said the second round of fiscal stimulus payments helped spur demand, but Five Below also had a strategy to capitalize on the positive selling environment. Its merchandising and supply chain teams stacked shelves with popular, in-demand products covering trendy niches like home furnishing and entertainment. Marketing spending shifted toward digital channels. And Five Below made it easier to shop safely in its streamlined stores. "We are very pleased with the overall execution and operations during the holiday [season]," Anderson said.

Growing beyond the $5 barrier

"The customer has responded positively to our new Five Beyond assortment, which is filled with fresh amazing value items in new categories to wow our customers," Anderson said.

It's a major risk when a company tinkers with a core part of its brand, and so Five Below has been cautious about expanding its product offerings to include items priced at more than $5 each. But the trial process has been a big success, opening up new growth categories like video gaming and consumer electronics and allowing wider assortments in the work- and play-at-home niches.

This shift combined with the consumer trend favoring fewer shopping trips to push average spending up 16% in the quarter. Five Below faced higher costs, though, especially on labor, and so operating margin dipped to 20% of sales from 21% a year ago.

Adding more stores

"We expect to open approximately 60 stores in the first quarter [and] we are already over halfway there," CFO Ken Bull said. 

Sales trends will be extremely volatile over the next few months as the company rolls over the period of maximum store closures from a year ago. But investors can follow the pace of new-store launches as a better indicator of Five Below's growth potential.

After opening just 38 locations in the past six months, the chain's launch rate has hit overdrive, with more than 30 opened in just the last few weeks. Five Below is predicting 60 openings in the fiscal first quarter on the way to as many as 180 in fiscal 2021. The 2020 level of 120 new launches should be considered an outlier, but the company is still planning a sharp escalation from the 150 store openings it achieved in 2019.

Overall, executives are excited about being less than halfway to their goal of having at least 2,500 stores operating around the country. "We are excited to continue to play offense, execute with discipline, and make progress in furthering our strategic initiatives," Anderson said.

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