Five Below’s Q2 sales performance raises questions, but store expansion remains on track

Philadelphia -- Teen and tween fave Five Below Inc. may not be meeting sales projections, but it remains on track for store expansion, with plans to open a total of 70 net new stores during fiscal 2015, including 16 net new stores in the third quarter.



The company, where every item costs no more than $5, is achieving its profitability targets, but doing so with productivity improvement in its selling space that is surprisingly weak given the newness of its store base.



A strong pace of expansion is helping Five Below grow the top line. Sales increased 19.5% to $182.2 million in the second quarter, ended Aug. 1. But net income declined to $7 million, or 13 cents a share, from $8.3 million, or 15 cents a share, the prior year.



Same-store sales increased 3% for the quarter, missing the company’s forecast for a 4% to 5% increase that was issued after reporting a 1.7% comp increase in the first quarter. Last year, comps grew 3.4%.



Five Below CEO Joel Anderson, the former president and CEO of Walmart.com, assumed his current role in February after joining Five Below as president and COO last summer. He said the company’s performance was negatively affected by a couple of non-recurring factors.



“First, as part of our ongoing test and learn approach around our marketing strategy, we eliminated a summer circular,” Anderson said. “Second, we experienced temporary store receipt delays as we moved out of our existing east coast distribution center. We believe the combination of the two accounted for total sales coming in at the low end of our guidance range and the comp shortfall for the second quarter."



The company transitioned out of an existing distribution center to a new one million square foot facility in New Jersey and began shipping goods out of the new location in July.



"These one-time factors are behind us, and we believe we are well positioned from a merchandising, marketing and distribution standpoint to deliver on our plans for the second half of the year with compelling merchandise and ample newness to further solidify Five Below as a holiday shopping destination," Anderson said.



Five below opened 32 stores in the second quarter on top of 19 openings in the first quarter as part of a plan to open 70 new stores this year. Last year, it opened 62 stores, and in 2013 it opened 60 stores. If the company hits it growth target, by year end it will have 436 stores and more than 40% of those locations will have opened during the past three years.



Full year sales are expected to range from $820 million to $828 million, an approximately 21% increase from 2014 sales of $680 million. Profits are expected to grow at a comparable pace with net income expected to range from, $56.4 million to $58.2 million, or $1.03 to $1.06 a share.



That level of profit improvement and store productivity is sufficient for Five Below to maintain its 2016 expansion outlook of 85 stores as part of a longer term vision that foresees 2,000 locations.