How Should Five Below Move Forward As Caution Reigns, Despite Recent Success Stories?

Five Below’s chain of success stories, including its most recent quarterly report which saw net sales growth of 32.5% (helped along by a standout performance with the squishy trend it had been stocking) and net income triple to $123.1 million from $41.1 million the year prior, were recently documented by Retail Touchpoints’ Kate Robertson.

In the same breath, however, notes of caution could be heard regarding the near future. Share prices have fallen about 14% over the past five days despite the blockbuster quarterly report card, with Retail Dive’s Dani James quoting GlobalData managing director and RetailWire BrainTrust member Neil Saunders on the subject.

“Looking ahead, the outlook remains very positive but is tempered by a dose of caution. Comparable growth is projected to be around 7% to 9% for the second quarter. This is market beating, but obviously a step down from current levels. While some investors are disappointed, we believe it to be a standout performance – especially as the chain is lapping tougher prior year numbers and the consumer environment may soften a little,” Saunders said.

With the squishy craze and tax refunds perhaps bolstering the retailer’s bottom line, and persistent inflation, high gas prices, and an uncertain job market tempering enthusiasm, it may be worthwhile to take a brief look at what’s working, what could work, and other factors when asking the question of how Five Below might best move forward.

Some info points worth considering:

• The squishy trend, and Five Below’s capitalization upon it, is part of a broader social listening and social media marketing position taken onboard: Five Below CEO Winnie Park noted that while the company had been holding the dumpling squishies for years, only by picking up on the rumblings of a new trend, pivoting to make sure the trend was amplified within the brand, and then running with the proceeds was emblematic of what Five Below is currently doing. But that’s just one part of a much larger story, according to CFO Dan Sullivan.
• Marketing spend is up, and so are new forms of creator content in storytelling: Five Below on recently started a move into social media marketing, and overall marketing spend is about 20-25 basis points up YoY. AI-generated marketing materials, social listening tools on TikTok, Instagram, and YouTube, and creator content is paying off. “The beauty of that is we’re seeing terrific returns, and if we get to a place, in whatever circumstance hypothetically, where we are in a more challenging environment, we would obviously be able to pull that back as well,” Sullivan said, per Robertson.
• Merchandising and store footprints are becoming more selective: Location, location, location seems to be the adage in play, with Five Below’s carefully curated new store openings (49 net new stores in Q1) outperforming existing locations. Further, assortment merchandising — rather than wrangling up a bunch of individual SKUs, building broader product “stories” to suit shopper desires — appears to be paying off.

Five Below also made a bit of a bold play in axing its “Five Beyond” section in its stores, instead folding the inventory into the relevant categories. That section had been in place for about five years, kicking off after a 2021 pilot. Park believed that this price point, despite going against the name of the store, wasn’t harmful to the retailer’s bottom line.

“We have not seen resistance on prices above $5 if we can pack enough relative value. The customers have definitely voted for it,” Park stated.

And despite all Five Below expecting significant slowdown for the rest of the year, its “squishy dumpling playbook” is being used as a top-down strategy to leverage success on what’s coming next.

“We are constantly looking for the next new, both from the vendor community but also with the customers. What are they talking about, what’s going viral today and how do we engage with them? Lots in our toolkit that we’re developing this year, and that we can apply to the future,” Park said.