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.”