Five Below (FIVE -0.07%) has been a thriving retailer, growing its store count, sales, and net income at a rapid clip over the past decade. Even more impressive is the fact that this remarkable success, summed up by a stock price that has soared over 500% since the business went public in July 2012, has been achieved without offering a customer loyalty program.
But things are about to change. That's because during Five Below's recent investor day, management finally made public its plan to introduce a loyalty program by 2025. Let's take a closer look at why this incredibly simple strategic move could bolster the company's prospects over the long term.
Image source: Getty Images.
Driving customer loyalty
What separates Five Below from a direct competitor like Dollar General is its focus on trendy products and a younger demographic. The business wants to wow its customers with its broad assortment of items that mainly sell under $5. It's all about providing an exciting shopping experience.
This strategy has worked wonders thus far. The store footprint has increased sixfold from the end of fiscal 2011 to today. Sales jumped 16% year over year in fiscal 2021. And management has set a target of 3,500 stores by 2030, roughly triple the current count.
As we look ahead, however, Five Below wants to better position itself for continued success. A loyalty program can do just that. Leaning on investments in data and analytics, the leadership team wants to better understand its customers, their shopping habits, and how they interact with the brand. Leveraging digital capabilities and building out an omnichannel shopping experience are part of this strategy.
Five Below already has a mobile app. Integrating a rewards feature seems like the next logical step. It can help to reduce customer friction by making it an easier decision to shop the company's merchandise. What's more, it creates a valuable channel to drive higher engagement with consumers (think of personalized offers or targeted marketing emails). Ultimately, this can lead to greater sales, which totaled $2.8 billion last fiscal year.
Improving the financial picture
Letting customers earn rewards should boost Five Below's already stellar store-level economics. The average location generates $2.2 million in annual revenue, a figure that can increase substantially with a loyalty program.
Customers who, on average, already shop at Five Below 10 times per year, would be encouraged to visit more often and spend more. In turn, this would help to drive down the company's marketing costs because customers would already be familiar with the brand. And this can expand the operating margin, which was 13.3% in fiscal 2021, and profitability over time. The resulting effect is that Five Below's valuation and stock price rise.
I scratch my head at why management waited so long to initiate this move. "On the loyalty program, I know it's a topic that's come up for many years here, and I'll take accountability for that one," CEO Joel Anderson mentioned on the Q4 2021 earnings call. Perhaps Five Below just didn't have the technological infrastructure in place for it. Nonetheless, it's a low-risk feature that has tremendous upside.
For a brick-and-mortar retailer, it's all about driving repeat business. Therefore, from a purely strategic perspective, adding a loyalty program is probably the biggest no-brainer decision the people in charge can make. Five Below's historical success has been spectacular. Shareholders can expect more of the same in the decade ahead.
