Five Below, Inc.: A Cautious Outlook on FY 2025 and Beyond
Five Below, Inc. (FIVE), a leading retailer of value-priced merchandise, recently reported its fourth-quarter and full-year 2021 earnings, revealing mixed results that have left investors with a hold rating. While the company reported an adjusted earnings per share (EPS) of $3.48, surpassing guidance, and a 4% year-over-year (y/y) revenue growth, there were concerning signs of a 3% y/y decline in same-store sales (SSS) and a 74 basis points (bps) decrease in gross margins.
Financial Performance
Five Below’s financial performance in 2021 showed a resilience in the face of ongoing macroeconomic challenges. The company’s net sales for the full year reached $1.7 billion, up from $1.6 billion in 2020. However, the decline in SSS and the decrease in gross margins suggest that the retailer may be experiencing some underlying operational challenges.
Same-Store Sales (SSS)
The 3% y/y decline in SSS can be attributed to a few factors. First, the ongoing impact of the COVID-19 pandemic on consumer behavior, particularly in the areas of discretionary spending and in-store shopping. Second, the company’s ongoing SKU rationalization strategy, which involves reducing the number of stock-keeping units (SKUs) in its stores to focus on the most popular and profitable items. While this strategy could potentially lead to SSS growth and margin expansion in the long term, it may negatively impact sales in the short term as customers adjust to the changes.
Gross Margins
The 74 bps decrease in gross margins was primarily due to higher cost of goods sold (COGS) as a percentage of net sales. This increase in COGS was driven by a combination of factors, including higher freight and logistics costs, increased labor costs, and the impact of tariffs. These costs are expected to continue to be a challenge for Five Below in the coming years.
Impact on Consumers
For consumers, the cautious outlook on Five Below’s FY 2025 and beyond may not have a significant impact. The value-priced merchandise offered by the retailer continues to be popular among budget-conscious shoppers, and the ongoing macroeconomic conditions favoring value retailers could lead to continued growth in the sector. However, consumers may notice changes in the availability of certain items in Five Below stores as the company continues its SKU rationalization strategy.
Impact on the World
On a larger scale, the cautious outlook on Five Below’s FY 2025 and beyond could have implications for the retail industry as a whole. The ongoing trend toward value retailing and the challenges faced by traditional brick-and-mortar retailers are expected to continue in the coming years. Additionally, the ongoing impact of the COVID-19 pandemic on consumer behavior and the supply chain could lead to continued volatility in the retail sector.
Conclusion
Five Below’s mixed financial performance in 2021, along with cautious FY 2025 guidance and weak core operating metrics, has left investors with a hold rating on the stock. While the company’s value-priced merchandise and ongoing macroeconomic conditions favoring value retailers could lead to SSS growth and margin expansion, hard data is needed to confirm this. Consumers may notice changes in the availability of certain items in Five Below stores as the company continues its SKU rationalization strategy, while the retail industry as a whole could continue to face challenges in the coming years.
- Five Below reports mixed financial results for 2021
- Decline in SSS and decrease in gross margins raise concerns
- SKU rationalization strategy could lead to long-term growth
- Macroeconomic conditions favoring value retailers
- Hard data needed to confirm potential for SSS growth and margin expansion
- Consumers may notice changes in store offerings
- Retail industry expected to face continued challenges
