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Five Below Expresses Confidence Despite Store Closures

The Motley Fool logo The Motley Fool 3/23/2020 Demitrios Kalogeropoulos
a person standing in front of a building: Five Below Expresses Confidence Despite Store Closures © Provided by The Motley Fool Five Below Expresses Confidence Despite Store Closures

Five Below (NASDAQ: FIVE) recently closed out a solid fiscal year marked by an aggressive 150 new store openings and the chain's 14th consecutive year of sales gains at existing locations. And while the holiday season shopping trends weren't as strong as management had initially hoped, the youth-focused retailer still notched key wins, including the introduction of a new merchandise section of higher-priced products.

In a fourth-quarter conference call last week with Wall Street analysts, CEO Joel Anderson and his team discussed the main factors behind the strong operating performance this past quarter, including during the initial period of social distancing efforts around the country related to the coronavirus pandemic. Executives also listed some reasons for cautious optimism about the business quickly rebounding once its 900 stores eventually resume normal retail operations.

Let's look at some highlights.

a person standing in front of a building: A man and a woman holding shopping bags inside a mall © Getty Images A man and a woman holding shopping bags inside a mall

Growth achievements

Our results were driven by strong performance from new stores, which remain our most significant growth opportunity. We opened 150 new stores in 2019, of which six opened in the fourth quarter. We ended the year with 900 stores, which represents a little over a third of the 2,500-plus potential we see in the United States.

-- Anderson

Five Below announced a modest sales decline in its existing store network, with comps falling 2% compared to a 3% increase in the fiscal third quarter. The drop was right within the updated outlook that management issued in January and was driven by an almost 4% decline in customer traffic. Executives blamed a compressed holiday selling period this year that made it more difficult to add to last year's 4% comps increase.

On the bright side, the addition of 150 new stores helped overall revenue rise 18%. The company also managed its 14th consecutive year of positive comps on an annual basis even though the expansion rate fell to below 1%. Given the major tariff rate challenges, those count as solid wins. "2019 was a transformative year for Five Below," Anderson explained.

A new growth avenue

We finished 2019 with 25 "Ten Below" test stores and learned a lot from the Holiday Ten Below Gift Shop that was displayed throughout the chain.

-- Anderson

The company's first move above the $5 price point was a success, and investors saw evidence of that win in a few areas. Average spending rose 1.4% last quarter, for example, and gross profit margin jumped to 42.1% of sales compared to 40.5% a year ago. Most importantly, executives said the rollout was executed without harming the brand or turning shoppers off from the concept.

Five Below now expects to build in a section of $10 to $6 products in all of its new and remodeled stores while keeping the rest of the square footage dedicated to products priced at or below $5.

A strong balance sheet

To say this is a once-in-a-lifetime event would be an understatement. I remind you that we are an extremely healthy company with no debt and strong cash reserves.

-- Anderson

The call was held one day before Five Below was scheduled to close its entire store base in response to the COVID-19 outbreak, meaning management's prior 2020 outlook is now scrapped. The company highlighted its strong financial position, though, with no debt and over $200 million of cash on the books. The company had expected to ramp up store openings to 180 this fiscal year while marking a return to over 20% sales growth.

Both those goals are at risk thanks to the novel coronavirus spread, but executives believe their stores will attract plenty of traffic once normal operations resume. "Our extreme value offering will be even more important to our customers when we reopen as they seek ways to spend even more wisely," Anderson said.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Five Below and recommends the following options: long January 2022 $115 calls on Five Below and short January 2022 $120 calls on Five Below. The Motley Fool has a disclosure policy.

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