Company Overview
Five Below, Inc. (NASDAQ:FIVE) is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the tween and teen customer. The company's unique business model and relentless focus on delivering extreme value have solidified its position as a leading player in the discount retail landscape.
History and Growth
Founded in 2002 by retail veterans Tom Vellios and David Schlessinger in Philadelphia, Pennsylvania, Five Below has experienced remarkable growth over the past two decades. The founders identified an opportunity to offer a compelling assortment of trendy, high-quality merchandise targeted at the tween and teen customer demographic, with most items priced at $5 or less. The company opened its first store in Wayne, Pennsylvania in 2002 and quickly expanded across the East Coast. By 2010, Five Below had grown to 200 stores across 18 states, demonstrating the appeal of its unique merchandising strategy and focus on providing an exciting shopping experience.
Five Below's expansion continued at a rapid pace, leveraging its flexible real estate strategy to open stores in power, community, and lifestyle centers. The company also invested in its infrastructure, including the opening of new distribution centers to support its growing store base. By 2018, Five Below operated over 750 stores across 36 states. In 2018-2019, the company faced challenges as the U.S. imposed tariffs on imports from China, which impacted a significant portion of Five Below's merchandise. However, the company successfully navigated this period by working closely with its vendors, reengineering products, and adjusting its pricing strategy, allowing it to maintain its value proposition.
Financials and Liquidity
Five Below's financial performance has been impressive, with the company reporting net sales of $843.71 million in the most recent quarter, representing a 14.6% increase compared to the prior year period. This growth was primarily driven by a non-comparable sales increase of $103.4 million and a comparable sales increase of $3.9 million. The comparable sales increase of 0.6% was driven by an increase in average ticket of 1.2%, partially offset by a decrease in transactions of 0.6%.
For the thirty-nine weeks ended November 2, 2024, Five Below reported annual revenue of $2.49 billion and net income of $66.2 million. In the most recent quarter, the company's net income was $1.69 million, with operating cash flow of -$30.58 million and free cash flow of -$110.96 million.
The company's strong cash position, with $169.7 million in cash and cash equivalents as of the end of the third quarter of fiscal 2024, provides ample flexibility to fund its growth initiatives and navigate potential economic headwinds. Additionally, Five Below had no direct borrowings under its Revolving Credit Facility and had approximately $225 million available, further strengthening its liquidity position.
Five Below's current ratio stands at 1.38, while its quick ratio is 0.45, indicating a solid short-term liquidity position. The company's lack of debt and strong cash reserves position it well to weather potential economic challenges and continue its expansion plans.
Product Segments
Five Below operates in three main product segments: Leisure, Fashion and Home, and Snack and Seasonal.
The Leisure segment, which includes sporting goods, games, toys, tech, books, electronic accessories, and arts and crafts, made up 42.9% of net sales in the thirteen weeks ended November 2, 2024, and 44.7% of net sales in the thirty-nine weeks ended November 2, 2024. This segment saw a 9.8% increase in net sales in the thirteen-week period and a 6.7% increase in the thirty-nine-week period compared to the prior year.
The Fashion and Home segment, encompassing women's and men's accessories, beauty, jewelry, home goods, and inconspicuous branded apparel, accounted for 32.0% of net sales in the thirteen weeks ended November 2, 2024 and 30.1% of net sales in the thirty-nine weeks ended November 2, 2024. This segment experienced a 16.3% increase in net sales in the thirteen-week period.
The Snack and Seasonal segment, which includes party goods, specialty candy and snacks, and seasonal items, made up 25.1% of net sales in the thirteen weeks ended November 2, 2024 and 25.2% of net sales in the thirty-nine weeks ended November 2, 2024. This category saw the highest growth rate among the three segments, with a 21.1% increase in net sales in the thirteen-week period and a 17.4% increase in the thirty-nine-week period compared to the prior year.
Guidance and Outlook
For Q4 2024, Five Below expects total sales to increase 5-7% year-over-year, with a comparable sales decline of -5% to -3%. The company anticipates an adjusted gross margin decrease of approximately 90 basis points and an adjusted SG&A as a percentage of sales to be approximately 120 basis points higher than the prior year. This results in an expected adjusted operating margin decline of approximately 210 basis points in Q4 2024 compared to the prior year.
For the full year 2024, Five Below projects total sales to increase 9-10%, with a comparable sales decline of approximately 3%. Adjusted gross margin for the full year 2024 is expected to decrease by approximately 20 basis points, while adjusted SG&A as a percentage of sales is anticipated to be approximately 150 basis points higher than the prior year. As a result, adjusted operating margin for the full year 2024 is expected to be approximately 9%, which is 170 basis points lower than the prior year.
Key Success Factors
Trend Identification and Capitalization
One of the key drivers of Five Below's success has been its ability to quickly identify and capitalize on emerging trends. The company's merchandising teams are focused on sourcing truly amazing trend-right items that deliver quality, value, and "wow" for its customers. This agility and responsiveness to evolving consumer preferences have allowed Five Below to maintain its relevance and appeal in the highly competitive discount retail space.
Enhanced In-Store Experience
In addition to its product strategy, Five Below has placed a strong emphasis on enhancing the in-store experience for its customers. The company has invested in increasing labor hours and streamlining operations to improve service levels and create a more engaging shopping environment. These efforts have reenergized the store teams and enabled them to focus on delivering a better customer experience.
Adaptability and Resilience
Despite the challenges posed by the COVID-19 pandemic and ongoing supply chain disruptions, Five Below has demonstrated its resilience and ability to adapt. The company has leveraged its global sourcing capabilities, including its India-based office, to mitigate the impact of potential tariffs and optimize its vendor base. Additionally, the successful implementation of its Five Beyond format, which offers a highly edited assortment of trend-right products at exceptional value, has diversified Five Below's product offering and bolstered its competitiveness.
Future Outlook
Looking ahead, Five Below remains focused on its strategic priorities of improving product assortment, enhancing the store experience, and optimizing its cost structure. The company's newly appointed CEO, Winnie Park, brings a wealth of experience in specialty and value retail, and her leadership is expected to further strengthen Five Below's position in the market.
Despite facing some near-term headwinds, such as a compressed holiday season and the potential impact of tariffs, Five Below's long-term growth prospects remain bright. The company's vast white space for expansion, coupled with its ability to quickly adapt to changing consumer trends, positions it well to capitalize on the growing demand for affordable, trend-right products in the discount retail sector.
Conclusion
In conclusion, Five Below's unique business model, focus on customer engagement, and strategic initiatives have enabled the company to navigate challenges and deliver consistent growth. As the discount retail landscape continues to evolve, Five Below's commitment to providing an exceptional shopping experience and delivering extreme value to its target customer base positions the company as a compelling investment opportunity in the years to come.