Five Below (FIVE 2.23%) is still finding ways to trounce Wall Street's rising expectations. This past week, the retailer reported a huge growth rebound compared to the year-ago period that was affected by temporary store closings. But the spike was better than expected thanks to soaring demand from its youth-focused demographic.
The management team didn't issue a wider outlook for 2021, but its short-term forecasts suggest another blockbuster year ahead for the business as it targets adding nearly 200 new stores to its selling base.
Image source: Getty Images.
Demand didn't slow
That store base sat at 1,100 locations as of early 2021. Revenue from these existing shops jumped 162%, mainly due to the fact that most of its stores were closed due to pandemic restrictions a year ago.
Yet Five Below still achieved greater sales gains than the 140% increase that management was predicting heading into the report. Gains came from every category but were especially high in the home decorating and furnishing segments. Notably, Five Below didn't suffer from inventory shortages despite global shipping and supply chain challenges. "We saw broad-based strength across our [categories]," CEO Joel Anderson said in a press release.
Five Below's growth was supercharged by 68 new stores added to the store base in the last quarter, representing a new record for the business. Six of these additions were among the chain's most successful store launches to date.
Charging higher prices
The retailer faced profitability challenges thanks to rising labor costs and much higher shipping expenses. A tight supply chain forced management to shell out more to transport inventory, and so gross profit margin only rose by less than 1 percentage point compared to two years ago. That earnings rebound looks much better versus last year's pandemic period, with Q1's $63 million operating income representing a sharp turnaround from 2020's $72 million loss.
Price inflation didn't harm the company, either. Five Below's strong demand trends allowed it to raise prices when needed, and its new Ten Below category, which includes products priced at $10 or less, was among its more popular offerings. "We do have the ability to go above the $5 price point," Anderson told investors in a conference call, "which is really a nice way to overcome the pressures of inflation."
The broader outlook
Management didn't reinstate a full-year outlook, but it did predict that sales would land between $640 million and $660 million in Q2, which would trounce Wall Street's projections. There's no question that Five Below is in expansion mode, either. The consumer discretionary company plans to launch a record 180 new stores this year.
Hitting that ambitious target would leave the chain with 1,200 stores open by the end of 2021. Management has been saying for years that the U.S. market would support more than double that amount, or 2,500 locations over time. Five Below just demonstrated that it remains a favorite shopping destination in its established markets, and that there's plenty of pent-up demand in new geographies.
It recently entered Utah, its 39th state, with seven stores in and around Salt Lake City. Investors can look for more good news on the sales and profit fronts as the chain adds more states to its footprint and deepens its coverage in established markets.
