By Neil Saunders
The spinner craze continues to benefit Five Below, which has produced a stunning set of second quarter numbers, beating even its own high expectations. Total sales rose by almost 29% over the prior year, supported by a 9.3% uplift in comparables. Meanwhile, a substantial expansion of margins fueled bottom line growth where net income was up by 71.4%.
Spinners have helped to drive footfall and increase customer numbers, but several other factors have boosted growth this quarter. Foremost among these are improvements to the assortment. Categories like technology include far more ‘must have’ lines. The refreshed format, which makes product display across several categories more compelling and engaging, has also been beneficial.
As helpful as spinners have been, and as successful as Five Below has been in capitalizing on the craze, it would be unfair to attribute all of the group’s success to this one trend. Certainly, spinners have helped to drive footfall and increase customer numbers, but we also believe that several other factors have boosted growth this quarter.
Foremost among these are improvements to the assortment. Categories like technology now have more authority, include far more ‘must have’ lines, and deliver some very compelling prices. These ‘wow’ products have proved popular among existing shoppers, and there is some early evidence that they are helping to draw in new customers. Fortunately, the process of range enhancement seems to be an ongoing process and, as such, we believe it will provide buoyancy to future quarters.
The refreshed format, which makes product display across several categories more compelling and engaging, has also been beneficial. This is helping to improve the return on investment from new stores and is aiding productivity at older stores where it has been applied. Again, there is much more runway here, so Five Below will likely accrue further benefits as the year progresses.
A smaller, but still important, contribution came from the later than usual tax refunds. This acted both as a slight drag on first quarter numbers and also provided a small but measurable boost at the start of the second quarter.
On top of these favorable dynamics, Five Below continues to expand at pace. Over the past year, store numbers have risen by 18.9%, and the company now has 584 stores across 32 states. That new shops quickly become profitable is allowing Five Below to drive this kind of fleet expansion while still posting good gains on the bottom line. Ultimately Five Below has set itself a target of 2,000 U.S. stores — a figure that we still see as reasonable.
One of the more encouraging aspects of Five Below’s store expansion program is its ability to flex across different types of market. The company now comfortably operates stores in rural, suburban, and urban locations. This allows much more headroom for growth and puts it ahead of other discount operators, many of which are still experimenting with urban shops.
Looking ahead we are optimistic about the prospects for Five Below. Its assortment and the way in which it sells remains distinct from other discounters and has captured the attention and spending of younger demographics. This should insulate it from some of the competitive pressures in the market and ensure that it maximizes share in the new locations it enters. Meanwhile, more embryonic projects — like the push into e-commerce— will augment an already strong growth story.
Neil Saunders is managing director of GlobalData Retail.