Five Below (FIVE -22%) is experiencing significant pressure after lowering its Q2 guidance and announcing the immediate resignation of its CEO. Several analysts downgraded the stock this morning. The value retailer adjusted its EPS to $0.53-0.56 from $0.57-0.69 and revenue to $820-826 million from $830-850 million.
- Five Below has been struggling with weakening sales. The company had already guided Q2 revenues below consensus in early June, and now it has lowered guidance again. Our guidance calendar archive shows multiple instances of recent guidance reductions by FIVE.
- Comparable sales (comps) are also a concern. Comps quarter-to-date are down -5%. FIVE now expects Q2 comps to be -7% to -6%, a slight worsening from prior guidance of a "mid-single digit decrease." Negative comps were driven by a decline in transactions, with consumers focusing more on essential purchases rather than discretionary items.
- This trend has continued into Q2, with customers prioritizing consumables like candy, food, beverage, and beauty products. While higher-income customers showed positive comps in Q1, lower-income demographics underperformed, offsetting these gains.
- Margins have been impacted by rising retail theft. FIVE has attempted to mitigate shrink by reducing self-checkout lanes, stationing employees at the front door, and implementing receipt-checking at some stores. However, the downside EPS guidance suggests these efforts may not have been entirely successful in Q2.
- CEO Joel Anderson has stepped down, likely due to the board's frustration with consecutive poor quarters and guidance. The company is now searching for a permanent replacement.
We have had concerns about FIVE for several quarters. While it does sell some consumable items, the majority of its sales are discretionary, making it vulnerable to inflationary pressures affecting lower-income consumers. Replacing the long-time CEO could bring a fresh perspective, which might be beneficial.
Additionally, we question whether FIVE's aggressive expansion pace will slow down amid these struggles. The company currently operates 1,600+ stores, adding 150 new stores in FY22, 204 in FY23, and planning for 230 in FY24. Reducing new store openings could help conserve cash, especially under new leadership.
