What’s wrong with Five Below?

A rapidly expanding retailer led by a former top Walmart executive is supposed to produce strong same store sales growth, leverage expenses and increase profits. So why isn’t Five Below?

Joel Anderson’s tenure as CEO of value priced retailer Five Below (where everything cost less than $5) is off to an uneven start. The company 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.

The company’s second quarter same store sales increased 3% for the period ended Aug. 1, missing the company’s forecast for a 4% to 5% increase that was issued after reporting a tepid 1.7% comp increase in the first quarter. Last year, comps grew 3.4%, a figure that seems respectable until considering Five Below’s store base is very young.

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 the company 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.

Typically, a rapidly expanding retailer operating a concept that resonates with shoppers will record robust same store sales grow as locations mature. On the surface, Five Below’s comps aren’t terrible, but they significantly lag a fast grower like Ulta, which had a 9.9% increase last year and even a mature retailer like Kroger, which had a 4.2% increase including the negative impact of declining gas prices. Even Walmart had a 1.5% second quarter comp on some of the most product real estate in the retail industry.

Five Below CEO Joel Anderson, the former president and CEO of Walmart.com who assumed his current role in February after joining Five Below as president and COO last summer, 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 good 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.

The strong pace of expansion is helping the company grow the top line. Sales increased 19.5% to $182.2 million in the second quarter, but net income declined to $7 million, or 13 cents a share, from $8.3 million, or 15 cents a share, the prior year. 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.