Inflationary headwinds drove lower-than-expected second quarter sales at Five Below Inc., but that hasn’t impacted plans to open 1,000 new doors over the next several years as part of its “Triple-Double” strategy.
In a Nutshell: Five Below CEO Joel Anderson expects these inflationary pressures to hang around for a while.
The extreme value chain lowered guidance based on back-half estimates. But one big plus is the chain’s ability—through eight different key categories including home, travel, pet and beauty—to adapt to evolving customer preferences, Anderson told investors in a conference call Wednesday.
The chain’s back-to-school assortment has “amazing backpacks, cool tees and fun items for dorms and bedrooms,” products it featured on social media and in-store marketing campaigns, Anderson said. The retailer is easily getting ahold of special purchases, he added.
“We are seeing more closeout opportunities in one-time special buys in the marketplace, which we are choosing selectively to drive even more value of our customers,” Anderson said, which can “really showcase value even more than we had originally planned.”
The CEO believes holiday will get off to an earlier start this year.
“We deliberately accelerated receipts to ensure good in-stock positions for the key holiday season and to avoid the out-of-stocks we experienced earlier this year and last holiday season,” Anderson said, adding that “we become more of a go-to” for those seeking value.
Five Below has been preparing for recession-minded consumers since 2019 when it began testing items beyond the $5 price point to factor in the impact of Trump tariffs. Some prices went as high as $5.55 though items were still $5.
Five Below introduced Ten Below for goods between $5 to $10. That’s evolved to the Five Beyond store-within-a-store nameplate selling $1 to $5 items with a special section for higher-priced goods. Anderson said he hasn’t seen any sales slowdown of the higher-priced items. Because Five Beyond is still new, the combination of “newness and value [is] going to drive traffic,” he said.
Anderson said the moniker will be used by the 1,000 new stores planned through 2025. About 160 new locations are planned for the fiscal year, with a “record 200-plus stores next year.” The company opened 27 new stores in the quarter, bringing the year-to-date total to 62 locations and 1,252 total across 40 states.
The company is scooping up properties laying dormant when other retailers pull out or go out of business. Most of the existing store fleet will be converted to Five Beyond. He expects over 250 doors, including new locations and store conversions, to carry the banner this year.
“We are back to playing offense,” Anderson said, noting that the long-term plan is firmly intact. “We believe [Five Beyond] will be both the traffic and comp driver for the holidays and into 2023.”
Helping its holiday distribution infrastructure will be the newly opened Indiana shipping center, which completes its “five-node network” and will service about 90 percent of its stores within one day. Anderson said the chain is taking a break from opening new distribution centers for a “couple of years,” despite its store-opening timeline.
The company is focused on “delivering our ‘Triple-Double’ growth strategy: that is triple the number of stores by 2030 and approximately double the sales and earnings per share by 2025,” Anderson said.
The company is also investing in digital platforms like TikTok to build brand awareness. Currently, it has over 100 stores where e-commerce shoppers can go to pick up their online orders, with the service rolling out chain-wide by the end of September.
Net Sales: For the three months ended July 30, net sales rose 3 percent to $668.9 million from $646.6 million, while comparable sales fell by 5.8 percent.
Anderson declined comment about comps guidance for 2023 and whether they could turn positive, but said everything is pointing toward a “cleaner environment.”
For the six months, net sales rose 5.2 percent to $1.31 billion from $1.24 billion, while comparable sales fell 4.8 percent.
Earnings: Net income dropped 36 percent to $41.3 million, or 74 cents a diluted share, from $64.8 million, or $1.15, in the year-ago quarter.
“Overall, we are experiencing significant improvements in the supply chain environment versus the back half of last year,” chief financial officer and treasurer Ken Bull told investors.
Five Below expects third quarter net income between $4 million to $11 million on a net sales range of $600 million to $619 million, based on the opening of 45 new stores, and a presumption of a 7 percent to 9 percent decline in comparable sales.
For full year Fiscal 2022, net income was guided to between $238 million to $255 million, on a net sales projection between $2.97 billion to $3.02 billion.
For the six months, net income fell 35 percent to $74.1 million, or $1.33 a diluted share, from $114.4 million, or $2.03, in the year-ago period.
CEO’s Take: “We believe as this inflationary environment continues and we near the all-important holiday season, value will become even more relevant as customers rely on us for amazing, affordable gifts and stocking stuffers to celebrate the season,” Anderson told investors.