Five Below (FIVE, Financial) is experiencing a significant decline today, with shares dropping 12% after its Q1 (April) earnings report. The value retailer missed expectations on EPS, revenue, and comps. It also issued Q2 (July) guidance that fell short of analyst predictions and lowered its full-year guidance for EPS, revenue, and comps. The challenging macroeconomic environment impacted sales more than FIVE had anticipated.
- Q1 Comps: Comps were -2.3%, significantly below the prior guidance of +0-2%. The first half of the quarter benefited from tax refunds and an earlier Easter, but sales slowed considerably in the latter half. Negative comps were driven by a decline in transactions, with consumers focusing more on essential purchases.
- Consumer Behavior: Customers prioritized consumable categories like candy, food and beverage, and beauty products. Higher-income cohorts reported positive comps, indicating some trade-down behavior. However, underperformance in the lower-income demographic offset these gains.
- Inflation Impact: Consumers are feeling the effects of multiple years of inflation and are now more deliberate with their discretionary spending. This trend was consistent across all geographies. As a result, FIVE expects a mid-single-digit comp decline in Q2 and has lowered its full-year comp guidance to -5% to -3%, down from +0-3%.
- Shrink Mitigation: Retail theft was a significant concern in the last call, but FIVE made progress in Q1 with its shrink mitigation efforts. The company completed approximately 200 physical inventories and is optimistic about its new strategies, including associate-led checkouts and fewer self-checkouts.
- Store Expansion: Despite short-term sales challenges, FIVE is committed to its store expansion plans. With 1,605 stores currently and a target of 3,500 by the end of 2030, the company sees significant opportunities in new and existing markets. In Q1, it opened 61 new stores compared to 27 in the same period last year.
Overall, this was a challenging quarter for Five Below, as anticipated. The company has now reported back-to-back EPS misses after five consecutive quarters of EPS upside. Additionally, FIVE has guided EPS below consensus in five of the past six quarters. Given the cautious outlook from Dollar Tree (DLTR, Financial) and Dollar General (DG, Financial) regarding discretionary spending among lower-income consumers, concerns heading into FIVE's report were justified. Hopefully, the results will improve later this year.
