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Five Below, Inc. (NASDAQ:FIVE): Navigating Macro Headwinds with Resilience
Published on September 24, 2024 | Ticker: FIVE

Five Below, Inc. (NASDAQ:FIVE) is a leading specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the tween and teen customer demographic. The company has demonstrated impressive growth over the years, expanding its footprint to 1,605 stores across 43 states as of May 4, 2024. However, the retailer has recently faced challenges amidst a shifting macroeconomic landscape, requiring a strategic response to maintain its position in the market.

Financials

In the fiscal year 2023, Five Below reported annual net income of $301,106,000 and annual revenue of $3,559,369,000, showcasing the company's strong financial performance. The company's annual operating cash flow stood at $499,619,000, while its annual free cash flow reached $164,569,000, underscoring its ability to generate substantial cash flow to support its growth initiatives.

The first quarter of fiscal 2024, however, presented a more complex picture. The company reported total sales growth of 11.8% to $811.9 million, but a comparable sales decline of 2.3%. This performance fell short of the company's expectations, as it experienced a meaningful slowdown in sales during the back half of the quarter. Despite the sales shortfall, Five Below delivered adjusted earnings per share of $0.60, at the low end of its outlook range.

Challenges and Strategic Response

The company's management attributed the weaker-than-expected performance to a decline in customer transactions, as consumers became more discerning with their discretionary spending amid the impact of multiple years of inflation across key categories such as food, fuel, and rent. This trend was particularly pronounced in the lower-income demographic, which more than offset the positive performance in the higher-income cohorts.

In response to the changing consumer landscape, Five Below has taken a proactive approach to address the challenges. The company has initiated pricing tests in approximately 100 stores, focusing on the front-end of the store to maintain its value proposition. Additionally, the retailer has launched a marketing test in one of its major regions, aiming to drive sales and increase customer awareness of the Five Below brand.

Recognizing the need for cost optimization, Five Below has also been working to streamline its operations, including both operating expenses and capital spending. The company expects to realize significant savings over the next 18 to 24 months, with some of these benefits expected to materialize in fiscal 2024.

Notably, the company's shrink mitigation efforts have shown promising results. After implementing measures such as associate-led checkouts and conducting physical inventories in approximately 200 stores, Five Below has reported cautiously optimistic progress in reducing its shrink levels. The company plans to evaluate the effectiveness of these initiatives and quickly roll them out to the stores that can benefit the most.

Outlook

Looking ahead, Five Below has provided guidance for the second quarter and the full fiscal year 2024. For the second quarter, the company expects net sales in the range of $830 million to $850 million, representing an increase of 9.4% to 12% compared to the prior-year period. The company anticipates a mid-single-digit comparable sales decrease for the second quarter.

For the full fiscal year 2024, Five Below now expects sales to be in the range of $3.79 billion to $3.87 billion, an increase of 7.9% to 10.2% on a 52-week basis. The company's comparable sales are expected to decline in the range of 5% to 3%. Five Below plans to open approximately 230 new stores, ending the year with 1,774 locations, representing a unit growth of approximately 15%.

The company's adjusted operating margin for fiscal 2024 is expected to be 9.8% at the midpoint, a decline of 90 basis points on a 52-week basis. This deleverage is primarily due to the impact of lower sales on fixed costs, partially offset by benefits from lower inbound freight, lower incentive compensation, and the company's cost optimization initiatives.

Adjusted net income for fiscal 2024 is expected to be in the range of $277 million to $299 million, representing a decline of 1.7% at the midpoint compared to the prior year. Adjusted diluted earnings per share are projected to be in the range of $5.00 to $5.40, implying an approximate 1% decline versus the prior year at the midpoint.

Strategic Pillars

Despite the near-term challenges, Five Below remains committed to its strategic pillars, which include store expansion, store potential, product and brand strategy, inventory optimization, and crew development. The company believes it has a long runway of growth, with a roadmap to reach 3,500 locations nationwide by the end of 2030.

Store Expansion

In the store expansion pillar, Five Below opened 61 new stores in the first quarter and continues to see strong new store productivity, with openings in the mid-80s range. The company remains confident in its ability to achieve approximately 230 new store openings in fiscal 2024.

Store Potential

The store potential pillar has also been a focus, with the company's Five Beyond format now accounting for over 60% of its comparable store base, with more than half of these stores in their second year. Comps for converted stores in the Five Beyond format outperformed non-converted stores by mid-single digits in both sales and transactions, with stronger transactions being the primary driver of the outperformance.

Product and Brand Strategy

In the product and brand strategy pillar, Five Below's merchants remain committed to bringing trend-right, amazing value products to its customers. The company is also focused on enhancing its marketing and customer analytics efforts to ensure its message of value, fun, and trend resonates with both existing and new audiences.

Inventory Optimization

The inventory optimization pillar continues to be a key component of Five Below's strategy, with the company's focus on implementing capabilities to enable scale, driving optimal inventory levels and sell-throughs, while balancing operating costs and enabling simplification. The progress made in this area is exemplified by the company's inline inventory levels, despite the lower-than-planned comparable sales.

Crew Development

Finally, the crew pillar has been a critical area of focus, particularly in the company's shrink mitigation efforts. Five Below has been pleased with how its crew has embraced the changes made to self-checkout and other store processes, contributing to the improvement in the shrink rate.

Conclusion

While the near-term macroeconomic environment presents challenges, Five Below remains committed to its strategic initiatives and is taking proactive steps to navigate the current landscape. The company's focus on value, cost optimization, and operational excellence positions it well to weather the storm and emerge stronger in the long run. Investors will be closely watching the company's execution and its ability to adapt to the evolving consumer preferences in the coming quarters.

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