Investors have high expectations for Five Below's (FIVE -1.12%) upcoming earnings report. Not only did the specialty retailer notch strong sales growth through the pandemic, its expansion outlook improved too. Management can conservatively target more than doubling the chain's footprint over the next few years.

It's a highly competitive industry niche, though, and Five Below faces a few challenges around merchandising, inventory management, and pricing that might affect Thursday's report. So let's look at a few trends that will show whether the business is still on track in 2021.

A couple shopping together at a mall.

Image source: Getty Images.

New store launches

Five Below ended last year on a positive note with comparable-store sales growth accelerating to 14% in the fiscal 2020 fourth quarter. And overall revenue jumped a blistering 25% thanks to an aggressive store reopening schedule.

The chain will need contributions from both arenas to reach the 140% sales increase most investors are expecting to see this week. Much of that spike is due to the temporary retailing shutdowns that affected the fiscal first quarter a year ago. Look for Five Below to reveal solid market share gains thanks to customer traffic growth at existing locations and the launch of new stores. The company added just 38 locations in the second half of 2020 but targeted 60 openings last quarter on the way to 180 store launches for full-year fiscal 2021.

Pricing challenges

The bullish investment thesis relies on Five Below raising its profitability as it grows sales and branches out into more selling categories. That attractive prospect got a boost from the chain's successful push into products priced above $5 in recent quarters.

Investors haven't seen this strategy tested against challenges like rising costs for everything from video games to room decorations. Success through those issues would show up in healthy gross profit margin and continued spiking average spending per shopper visit. Still, Five Below's bottom-line earnings result might stay pressured in 2021 thanks to elevated labor and selling costs.

The new outlook

CEO Joel Anderson and his team have decided to issue short-term sales outlooks while declining to offer a full-year prediction. That means investors are likely to get only a detailed forecast for the fiscal second quarter.

Heading into the report, most Wall Street analysts are expecting sales in the current quarter to jump to around $580 million compared to the pandemic-depressed $426 million a year ago. Risks to that outlook include slowing consumer spending, shifts in shopper priorities, and trouble maintaining the right inventory through wild demand swings.

We'll know if Five Below was hurt by any of those hang-ups if the chain issues a conservative outlook for the summer months. The more likely scenario is that Five Below predicts more solid growth at its stores even as it targets opening a record 170 (or more) locations this year. Its previous record sat at 150 store launches in 2019 before the pandemic temporarily scrambled its expansion plans.

Five Below's March earnings report implied that the business has put that disruptive period behind it. Barring a surprise stumble, Thursday's announcement should support that quick rebound narrative.