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Five Below May Become $5 and Above as it Looks to Price Increases to Mitigate Tariff Impact

While most items will still be $5 and below at Five Below Inc., the extreme value retailer said it sees the need to raise prices on select items to help mitigate the impact on profits thanks to higher tariffs on goods from China.

Some retailers and vendors have been able to find ways to mitigate the tariff impact and haven’t yet had to resort to price increases, but that may be changing.

The recent increase in tariffs on certain Chinese imports last month from 10 percent to 25 percent has made things harder, with many retail executives, including Walmart, indicating plans to potentially pass cost increases along to the consumer.

Some on Wall Street believe off-pricers, like The TJX Cos. Inc., might be beneficiaries of a tariff increase, as they expect consumers to move down channel from the department store sector as they instead seek out retailers with a better value proposition.

But the dollar stores are in a difficult position. With prices already low within the $1 range, there’s not much room to maneuver in terms of maintaining margins and still providing the low price points that consumers are used to paying.

In a recent company conference call to Wall Street executives after reporting first-quarter results, Dollar General executives said prices will go up due to the tariff hikes and the trade war with China, even as it continues to work on deals with vendors to hold costs down. And executives at Dollar Tree, a competitor, also said prices would be rising, even though its key marketing concept is that “Everything’s a Dollar.”

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On Wednesday, Five Below became the latest extreme value retailer to indicate that its customers will also see prices go up on certain items.

During a company conference call following its first quarter report, l results release Five Below president and CEO Joel Anderson said the company may need to raise prices on certain goods already priced at $5.

Anderson set the landscape for Five Below’s concerns by telling analysts, “With the current $250 billion of products imported from China subject to tariffs, about 15 percent of our total receipts for 2019 are impacted, including both directly and indirectly imported products.”

The CEO explained that the company has been able to “fully mitigate” both the dollar and the margin rate impact of the 10 percent tariff. The company also expects to mitigate the jump to 25 percent through negotiations with vendors, increasing prices on its $1 to $4 items, and moving production to other countries.

But even pursuing a combination of options will necessitate a price hike.

“Increasing prices beyond the $5 price point is a decision we do not take lightly,” the CEO said. “We have put a lot of thought behind this decision and we’ll proceed with pace and diligence.”

According to Anderson, Five Below will be testing higher pricing on “select products” in a group of stores before rolling out increases to the entire chain. Goods that are $5 will see incremental increases.

“Where there’re some items that are priced at $5, $5.25 or $5.55, we remain firmly committed to providing extreme value to our customers on fresh, high quality, trend-right products in a fun differentiated shopping experience,” he said. The roll-out to the chain would likely be before the end of the summer.

The CEO also told analysts that the “vast majority of its products will still be priced under $5.” The company’s currently focused on tranches one through three, as the final tranche four–the next group to see a 25 percent tariff that includes apparel, footwear and some textiles–is still speculative and there may yet be exceptions.

Anderson noted that about 40 percent of items sold are between $1 and $4, with the planned testing to impact about 5 to 10 percent of its store base. In response to an analyst’s question, the CEO said the company did consider instead a surcharge on customer receipts in lieu of raising prices, but chose not to go that route.

“It’s something restaurants specifically in California have done, largely around wages. But at this point in time, we’ve chosen the other route largely because we think it’s more transparent to the customer…,” Anderson said.

Joseph Feldman, analyst at Telsey Advisory Group, estimated that Five Below imports 70 percent of its products from China, and “now pays higher tariffs of 25 percent on 22 percent of Chinese imports, or 15 percent of total products.”

For the quarter ended May 4, Five Below posted a 17.7 percent increase in net income to $25.7 million, or 46 cents a diluted share, on a net sales gain of 23.1 percent to $364.8 million.