Categories Analysis, Retail

Five Below (FIVE): Ecommerce growth not enough to light up a bleak quarter

The company expects to open 100-120 stores this year

Five Below (NASDAQ: FIVE) had a dismal quarter in the three months ended May 2, 2020. The company witnessed a nearly 45% drop in net sales for the first quarter of 2020 while net loss widened to $0.91 per share from $0.46 per share last year.

The quarterly results were hurt by store closures due to the coronavirus pandemic and despite the strength in ecommerce, this channel made up only a small slice of the revenue pie. The company has not given guidance for the second quarter or the full year due to the uncertainty surrounding the outbreak.

Despite this lacklustre performance, the stock gained nicely on Wednesday, fueled by optimism surrounding the store re-openings. Several analyst firms raised their price targets on the stock but voiced concerns that this rally might be short-lived.

At a time when several retailers are struggling with managing their brick-and-mortar stores, Five Below sees a meaningful growth opportunity in new stores. However, even as other retailers are seeing strong ecommerce growth and are investing significantly in building their online platforms, this channel makes up only a small part of Five Below’s business.

Stores

Five Below’s stores remained closed for most of the back half of the quarter and through the important Easter selling season with only a few stores reopening in late April. The store closures and the loss of the Easter selling days led to a reduction in comp store operating days of approx. 47% which in turn caused a drop of 51.8% in comparable sales. Through March 11, the comps were up 2.9% for the quarter-to-date period.

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Currently, about 90% of the company’s stores have re-opened, which has sparked bullishness among investors. During the quarter, Five Below opened 20 new stores versus 39 last year. At the end of the quarter, the store count increased over 16% to 920 stores.

The company expects to open 100-120 stores this year, which would reflect a unit growth of 11-13% versus last year. The earlier plan was to open around 180 new stores. This would amount to a total of 1,000-1,020 stores at the end of 2020.

“Several projects were delayed given the environment, including the openings of our Texas and Midwest distribution centers and our new store opening plans. We now expect our Texas DC to open late in the second quarter and to begin the building of our Midwest DC in 2021 with the expectation for it to open in 2022. The West DC remains on track to open in the second half of 2021.” – Joel Anderson, President and CEO  

Five Below sees the potential for 2,500 plus stores in the US and the company plans to enter new markets like Colorado and Nevada in the second quarter. While the pandemic caused Five Below to delay its expansions and store openings, the company expects its growth path and its store opening plans to normalize by 2021.

Ecommerce

During the period of store closures, Five Below saw a four-fold increase in its ecommerce sales versus the year-ago quarter but this increase was not sufficient enough to offset the quarterly decline in sales. This growth in ecommerce has seen a moderation since the re-opening of the stores. The company expects ecommerce penetration to stay in the low single digits in 2020.

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Looking ahead, comparable sales for reopened stores and ecommerce are tracking up around 8% for the second quarter with ecommerce contributing about half of the comp increase. As the stores reopen, ecommerce is not expected to perform in this range.

Click here to read the full transcript of Five Below Q1 2020 earnings call

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