By Carter Harrison
The new fiscal year has started well for Five Below, with both total and underlying sales growth coming in above expectations. After a couple of quarters of more subdued comparable growth, same-store sales are now accelerating despite being up against tough comparatives from the prior year. Interestingly, part of the same-store success is down to the spinner craze, on which Five Below has very successfully capitalized.
The refreshed format, which makes product display across several categories more compelling and engaging … should improve the already robust return on investment from new stores, and gives the company some scope to improve productivity from a select number of existing shops where it can easily make layout adjustments. Continued store expansion will help to drive up total sales and provide Five Below with better economies of scale. The company remains on track to open 100 new stores this year.
While some value players — most notably the dollar stores — have seen growth slow because of tougher competition and some disposable income pressure on more constrained households, we do not see these trends impacting Five Below nearly as much.
One reason for this is the difference in propositions. Whereas dollar stores are focused on essentials with an add-on of impulse and treat products, Five Below is focused on treats and impulse buys with an add-on of essentials. To a degree, this insulates it from more functional retailers like Walmart even as they sharpen prices. It also helps in driving regular traffic to stores and online.
The nature of its offer also means Five Below attracts a younger demographic than many traditional value players. As these consumers are somewhat more spendthrift, it is relatively easy to get them to open their wallets if products and prices are right.
Looking ahead, Five Below expects the buoyancy in comparable growth to continue and has penciled in a 5-8% uplift for the second quarter. While reaching the top end of this will be a stretch, we do not believe that the company’s optimism is without foundation. Continued high demand for spinners should help the quarter’s numbers, but outside of this benefit, other initiatives are also paying dividends.
A better line up of products in areas like technology and homewares are stimulating visits to Five Below and helping to increase conversion rates and average transaction values. We believe that there is much more runway here and that further improvements to assortments — including the introduction of more ‘wow’ products — will aid forward growth.
The refreshed format, which makes product display across several categories more compelling and engaging, will also be beneficial to Five Below across the remainder of this year. In our view, this should improve the already robust return on investment from new stores, and gives the company some scope to improve productivity from a select number of existing shops where it can easily make layout adjustments.
On top of all of this, continued store expansion will help to drive up total sales and provide Five Below with better economies of scale. The company remains on track to open 100 new stores this year — and will expand further in California after a successful initial entry into the market in April.
Digital is another area of future potential. At present this remains a small part of the business, mainly because the online operation is less than a year old and is still being developed. However, early results are encouraging and suggest that online could be the icing on the cake for Five Below in the years ahead.
Carter Harrison is an analyst at GlobalData Retail.