July 29, 2024
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Are Five Below’s Problems Self-Inflicted?
Shares of Five Below crashed recently as the sudden deterioration in sales trends and abrupt exit of its CEO Joel Anderson led some analysts to believe the chain’s challenges were related more to internal missteps than external pressures.
In a press release issued July 16, Five Below appointed COO Ken Bull interim president and CEO to support the exit of Anderson, who joined Petco as CEO. Anderson, who formerly led Walmart.com, grew the discount chain from 366 locations to over 1,600 stores.
Five Below, which offers a wide range of merchandise for teens and pre-teens with about 85% priced at or below $5, also lowered its comp guidance for the second quarter, now expecting a decline in the range of 6% to 7%. The reduced outlook comes after Five Below reported that first-quarter same-store sales fell 2.3%, below expectations, and cut its full-year guidance after citing a pullback in discretionary spending. The chain’s fourth-quarter results also missed analysts’ targets, with the company blaming elevated shrink levels.
The softening came after Five Below had outperformed the retail sector for several quarters despite inflationary pressures and set a goal in March 2022 to triple its store count to 3,500 by 2030.
Five Below’s shares fell 25.1% on the latest news, bringing the stock’s year-to-date decline to 64.1%.
In reaction to the news of Anderson’s departure and the reduced second-quarter guidance, Scot Ciccarelli, an analyst at Truist Securities, in a note to clients attained by Philadelphia Business Journal said that conversations with Five Below “suggested that they have incurred a lot of self-inflicted wounds and needed to refocus their product on ‘trend right’ goods and strong value.”
“This admission suggests that company-specific issues have been far more prevalent than we would have anticipated,” Ciccarelli stated.
Joseph Feldman, an analyst at Telsey Advisory Group, said in a note attained by RetailWire that beyond weak consumer spending, the soft topline growth by Five Below reflects increased competition from mass merchants like Walmart and online retailers like Temu, as well as a lack of hot trends and product newness. He added, “Five Below also has raised prices on core products and introduced higher priced items — losing track of the value proposition and making the store feel expensive.”
On its first-quarter analyst call in early June, Anderson blamed Five Below’s sales weakness in large part on poor sales of once-hot products, particularly Squishmallows. However, he also said the tax refund timing and an earlier Easter “masked” the pullback in discretionary spending, particularly among lower-income households, in the first months of the year.
He said, “The quarter solidified that consumers are feeling the impact of multiple years of inflation across many key categories such as food, fuel, and rent and are, therefore, far more deliberate with their discretionary dollars.”
Anderson likened Five Below’s performance to the pressures Dollar General and Dollar Tree are seeing in discretionary categories.
In response to the underperformance, Five Below is testing price reductions at about 100 stores and launched a marketing test in late May to help drive conversion and traffic. Self-checkout is being removed to tackle shrink, and cost optimization efforts have been implemented. Five Below’s merchants are “definitely looking at new trends, chasing trends, finding new ways to drive footsteps,” he added.
In the near term, Five Below’s core customers “are clearly prioritizing needs over wants,” but improvement is expected as the retailer’s offering becomes more “needs-based” in the back half. Anderson said, “Back-to-school is a reason they have to come in our stores. And certainly, holiday, our entire store becomes a need store.”
BrainTrust
Richard J. George, Ph.D.
Professor of Food Marketing, Haub School of Business, Saint Joseph's University
David Biernbaum
Founder & President, David Biernbaum & Associates LLC
Brian Delp
CEO, New Sega Home
Recent Discussions
Discussion Questions
Can Five Below’s recent softness be largely chalked up to the downturn in discretionary spending or is it somewhat self-inflicted?
Do you agree Five Below should be trending similar to Dollar General and Dollar Tree?
Are you still bullish on the growth potential of Five Below?
Poll
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In terms of total sales, Five Below is performing very well, with an 11.8% increase in revenue in the latest quarter. The problem is that comparable sales are in negative territory. A lot of this is down to a much more cost-conscious consumer cutting back – something that hits Five Below hard as much of its offer is discretionary, especially compared to the likes to Dollar Tree and Dollar General. In essentials categories, Five Below is still in growth. This suggests that the deterioration is mostly down to external factors. Still, Five Below needs to work harder to drive footfall and impulse buys, including chasing trends harder. This is especially important as our data shows a growing erosion of trade from Temu – and that’s a looming threat even as the economy recovers.
Thank you for the insight here, While Temu is nipping at their heels, they are still suffering from footfall because of lack of disposable income from the parentals and compressed margins. They need to stay relevant and definitely drive more sported promotions. I think they possibly grew too fast too soon.
Yes, this is true. The impact of Temu (for a lot of retailers, not just Five Below) is being masked / clouded by general churn in the consumer economy. However, the impact is there and it is growing.
And what exactly are these “self-inflicted wounds”? Fans of Columbo might remember he was once presented with a ‘minimum information’ puzzle, and I fear we are being presented with the same. Self-jabbing may be legion here – there? – but the only clear sin I can pick up is that they’re a retailer that appeals largely on price, and are in stiff competion with a multitude of retailers who do pretty much the same. Not exacly a core strength, but wasn’t, or really shouldn’t that have been apparent all along.? Perhaps the earlier bullishness is the problem
Though Five Below has grown tremendously, it does not guarantee smooth sailing. The biggest factor is competition. Still, I’m bullish on Five Below.
A broader product range could help Five Below stay competitive. In addition to retaining existing customers, loyalty programs can attract new ones.
Vibrant store designs and interactive displays can help Five Below differentiate itself from its competitors.
Dollar Tree and Dollar General compete on price and convenience, but Five Below offers a unique shopping experience centered around fun and discovery.
The inventory at Five Below is often rotated to keep the shopping experience fresh and exciting, unlike its competitors. Five Below differentiates itself in a crowded market by appealing to a younger demographic and encouraging repeat visits.
Five Below has continued to grow rapidly and more-so than other retailers in the same channel. A vibrant and interactive store design enhances the shopping experience. Customer engagement is enhanced by bright colors, creative layouts, and thematic sections. Customer loyalty and satisfaction can rise with this thoughtful design.
Five Below’s management team focuses on aggressive store growth. Leadership aims to open 3,500 stores by 2030. Over twofold increase over current footprint. States like California, Texas, and Florida offer meaningful opportunities. Rapid expansion can, however, present challenges. Stock shortages and quality control issues can occur when scaling so quickly. Still, I’m bullish on Five Below.
Five Below is executing all of this growth with no debt on its balance sheet. Financial risk reduction increases the business’s resilience. I’m still bullish on Five Below for that reason.
Without debt, Five Below can reinvest more of its profits back into the business, fueling further growth. As a result, the company is able to navigate economic uncertainties more effectively. A debt-free company also saves on interest expenses, which boosts profitability. Db
Low-cost retailers (and others) will ignore Temu at their peril. Their jaw-droppingly low prices will impact everyone in their space. I don’t know if this is material to Five Below’s issues, but if it is, new strategies will be necessary.
Amen, Cathy. This is a growing threat. Impacting retailers like Dollar General in consumables too.
Five Below same stores sales should not be compared to Dollar General or Dollar Tree. Mixing purely discretionary spending (Five Below), against retailers like Dollar Tree and Dollar General which have a mix of staples and discretionary spending would be an uneven comparison. As the economy gets tight it is a mixed blessing for Iive below. a tight economy drives some consumers into their stores. However, Five below has a little more difficult challenge in that they are a destination for mostly discretionary spending. This combined with consumers trying to drive down their number of trips adds an additional challenge.
Yes, it is an unfair comparison. For the latest quarter, Dollar General’s non-consumable sales were down by about 6.4% on a comparable basis. Five Below’s 2.3% decline in comparables compares very favorably.
I would liken Five Below more to a TJMaxx than a Dollar General. They’re move focused on treasure hunt and discovery of trend items than low priced basics. The challenge is their consumer target is much younger than TJX, and parents are feeling the crunch. Discretionary spending is down as they prioritize necessities, including anticipating higher costs for back to school necessities. I do expect continued growth out of Five Below, albeit likely lower than their 3,500 targeted stores. However, in order to regain momentum a refocusing is needed.
Maybe the off-price guys benefited from people trading down during the pandemic and are now trading up to where they shopped previously.
I’m confident that Five Below will navigate thru these challenging waters. A return to value & a sharper focus on trends are its ante to compete in an active value driven market.
You name your store Five Below. You sell goods that are $5 and below. Then, you realize the folly of trying to create profits on slim margins, because, come on, that’s a lot of merch that you have to move to make money on items that can’t be priced above $5. You start to carry items that are much, much higher than $5. You can’t change your name to Five and More or Twenty Below, so now you’ve just invalidated your supposed reason for being. Missteps, bah.
I actually really like how Five Below stores are set up, and I see this struggle as temporary. It would help if the brand had a bit more focus- it’s tough to compete when you technically compete with everybody, but overall, this is just a snapshot in time.
This is an obvious call to exit a stock. Declining performance from the previous quarters into last year, and a declining revenue forecast, along with the exit of a key executive, causes shareholders to pause, wonder what is happening, and run for the exits. It is hard to build a positive in an environment like this so the stock declines as there is a run on the company. Ouch!
Low price, wrong trend will lose every time with this demographic especially given how much choice they have on-line and in physical stores.
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In terms of total sales, Five Below is performing very well, with an 11.8% increase in revenue in the latest quarter. The problem is that comparable sales are in negative territory. A lot of this is down to a much more cost-conscious consumer cutting back – something that hits Five Below hard as much of its offer is discretionary, especially compared to the likes to Dollar Tree and Dollar General. In essentials categories, Five Below is still in growth. This suggests that the deterioration is mostly down to external factors. Still, Five Below needs to work harder to drive footfall and impulse buys, including chasing trends harder. This is especially important as our data shows a growing erosion of trade from Temu – and that’s a looming threat even as the economy recovers.
Thank you for the insight here, While Temu is nipping at their heels, they are still suffering from footfall because of lack of disposable income from the parentals and compressed margins. They need to stay relevant and definitely drive more sported promotions. I think they possibly grew too fast too soon.
Yes, this is true. The impact of Temu (for a lot of retailers, not just Five Below) is being masked / clouded by general churn in the consumer economy. However, the impact is there and it is growing.
And what exactly are these “self-inflicted wounds”? Fans of Columbo might remember he was once presented with a ‘minimum information’ puzzle, and I fear we are being presented with the same. Self-jabbing may be legion here – there? – but the only clear sin I can pick up is that they’re a retailer that appeals largely on price, and are in stiff competion with a multitude of retailers who do pretty much the same. Not exacly a core strength, but wasn’t, or really shouldn’t that have been apparent all along.? Perhaps the earlier bullishness is the problem
Though Five Below has grown tremendously, it does not guarantee smooth sailing. The biggest factor is competition. Still, I’m bullish on Five Below.
A broader product range could help Five Below stay competitive. In addition to retaining existing customers, loyalty programs can attract new ones.
Vibrant store designs and interactive displays can help Five Below differentiate itself from its competitors.
Dollar Tree and Dollar General compete on price and convenience, but Five Below offers a unique shopping experience centered around fun and discovery.
The inventory at Five Below is often rotated to keep the shopping experience fresh and exciting, unlike its competitors. Five Below differentiates itself in a crowded market by appealing to a younger demographic and encouraging repeat visits.
Five Below has continued to grow rapidly and more-so than other retailers in the same channel. A vibrant and interactive store design enhances the shopping experience. Customer engagement is enhanced by bright colors, creative layouts, and thematic sections. Customer loyalty and satisfaction can rise with this thoughtful design.
Five Below’s management team focuses on aggressive store growth. Leadership aims to open 3,500 stores by 2030. Over twofold increase over current footprint. States like California, Texas, and Florida offer meaningful opportunities. Rapid expansion can, however, present challenges. Stock shortages and quality control issues can occur when scaling so quickly. Still, I’m bullish on Five Below.
Five Below is executing all of this growth with no debt on its balance sheet. Financial risk reduction increases the business’s resilience. I’m still bullish on Five Below for that reason.
Without debt, Five Below can reinvest more of its profits back into the business, fueling further growth. As a result, the company is able to navigate economic uncertainties more effectively. A debt-free company also saves on interest expenses, which boosts profitability. Db
Low-cost retailers (and others) will ignore Temu at their peril. Their jaw-droppingly low prices will impact everyone in their space. I don’t know if this is material to Five Below’s issues, but if it is, new strategies will be necessary.
Amen, Cathy. This is a growing threat. Impacting retailers like Dollar General in consumables too.
Yes, it is an unfair comparison. For the latest quarter, Dollar General’s non-consumable sales were down by about 6.4% on a comparable basis. Five Below’s 2.3% decline in comparables compares very favorably.
I would liken Five Below more to a TJMaxx than a Dollar General. They’re move focused on treasure hunt and discovery of trend items than low priced basics. The challenge is their consumer target is much younger than TJX, and parents are feeling the crunch. Discretionary spending is down as they prioritize necessities, including anticipating higher costs for back to school necessities. I do expect continued growth out of Five Below, albeit likely lower than their 3,500 targeted stores. However, in order to regain momentum a refocusing is needed.
Maybe the off-price guys benefited from people trading down during the pandemic and are now trading up to where they shopped previously.
I’m confident that Five Below will navigate thru these challenging waters. A return to value & a sharper focus on trends are its ante to compete in an active value driven market.
You name your store Five Below. You sell goods that are $5 and below. Then, you realize the folly of trying to create profits on slim margins, because, come on, that’s a lot of merch that you have to move to make money on items that can’t be priced above $5. You start to carry items that are much, much higher than $5. You can’t change your name to Five and More or Twenty Below, so now you’ve just invalidated your supposed reason for being. Missteps, bah.
I actually really like how Five Below stores are set up, and I see this struggle as temporary. It would help if the brand had a bit more focus- it’s tough to compete when you technically compete with everybody, but overall, this is just a snapshot in time.
This is an obvious call to exit a stock. Declining performance from the previous quarters into last year, and a declining revenue forecast, along with the exit of a key executive, causes shareholders to pause, wonder what is happening, and run for the exits. It is hard to build a positive in an environment like this so the stock declines as there is a run on the company. Ouch!
Low price, wrong trend will lose every time with this demographic especially given how much choice they have on-line and in physical stores.