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Why Five Below Isn't Worried About a Growth Slowdown

By Demitri Kalogeropoulos – Sep 9, 2021 at 8:45AM

Key Points

  • Costs will likely spike over the second half of the year.
  • But Five Below is targeting a much bigger sales base, including through higher-priced merchandise.
  • The holiday period will depend in part on the chain's success at stocking enough of the right kind of inventory.

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The retailer is targeting its best year ever for new store openings.

Wall Street wasn't impressed with the latest earnings update from Five Below (FIVE -1.77%). While the youth-focused retailer beat sales expectations and issued an aggressive short-term outlook, investors were concerned about rising costs and disruptions to the global supply chain that could affect the holiday season.

In a conference call with analysts, CEO Joel Anderson and his team detailed those challenges while expressing optimism that Five Below will navigate through them in stride this year. Let's look at some highlights from that presentation.

Three young women shopping at an outdoor mall.

Image source: Getty Images.

The wider outlook is bright

Five Below gave no hint of an impending growth slowdown. In fact, executives described robust demand across its retailing niches, which drove sales up 55% compared to two years earlier, before the pandemic.

A big chunk of that growth comes from its record expansion pace. "We now are on track to open 170 to 175 new stores this year," Anderson said, "and end fiscal 2021 with nearly 1,200 stores, leaving us a long runway ahead to reach the 2,500-plus total store potential we believe exists in the United States."

The margin pinch

The company is succeeding so far at dealing with supply chain challenges like rising transportation costs and shipping delays. But these issues will start to impact the business in the second half of the year and potentially into 2022. Margins will fall next quarter, management said, in part thanks to rising freight costs. Five Below is also accelerating its orders for the holiday period, which raises its inventory risk if an economic slowdown hits.

That's a risk worth taking given the strong demand today and relative scarcity of shipping capacity. "We feel well positioned from an inventory standpoint to deliver on our Q3 outlook," CFO Ken Bull said.

About that slowdown

Five Below's third-quarter outlook implies comparable-store sales gains of less than 10% compared to the 13% spike a year earlier. A few Wall Street analysts seemed disappointed with that projection, as it might imply a general trend of slowing growth.

Management took a different view by pointing out that most of the apparent slowdown is due to temporary factors like federal stimulus in early 2021 and an unusually high growth period a year ago. The bigger-picture trend is more consistently positive, it argued. "I don't know how you're seeing deceleration," Anderson said in response to a question. "We're pretty consistent and feeling really good about the business."

The company is backing up those words with aggressive business investments, not only through expanding the store base but also in boosting the in-store shopping experience. The chain is also scaling up its digital fulfillment platform including by opening a new shipping center in Arizona.

These moves, together with management's decision to bulk up on inventory ahead of the crucial holiday shopping period, suggest that Five Below sees some big opportunities over the short term and the long term. That's true even though Wall Street is more concerned about a potential growth slowdown over the next few months.

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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