8-K: Five Below's Q1 Sales Disappoint, But Cost Controls Help Deliver Adjusted EPS Within Outlook

Five Below reported a 11.8% increase in net sales to $811.9 million for the first quarter of fiscal 2024, but comparable sales decreased by 2.3%.

Summary

• Five Below's net sales for the first quarter of fiscal 2024 increased by 11.8% to $811.9 million, up from $726.2 million in the same quarter of the previous year.
• However, comparable sales decreased by 2.3% compared to the first quarter of fiscal 2023.
• The company opened 61 new stores, bringing the total to 1,605 stores across 43 states, a 17.4% increase in store count year-over-year.
• Operating income was $36.2 million, down from $42.4 million in the first quarter of fiscal 2023, but adjusted operating income was $38.2 million after excluding a $2.0 million non-recurring legal expense.
• Net income decreased to $31.5 million from $37.5 million in the prior year's first quarter, with adjusted net income at $33.0 million after accounting for the legal expense.
• Diluted earnings per share (EPS) were $0.57, compared to $0.67 in the first quarter of fiscal 2023, with adjusted diluted EPS at $0.60.
• Five Below repurchased approximately 182,000 shares at a cost of approximately $30.0 million during the quarter.
• The company expects second-quarter net sales to be between $830 million and $850 million, with a mid-single-digit decrease in comparable sales.
• For the full fiscal year 2024, net sales are projected to be between $3.79 billion and $3.87 billion, with an approximate 3% to 5% decrease in comparable sales.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While the company showed growth in net sales and store count, the decrease in comparable sales and earnings indicates challenges. The company's outlook for the rest of the year is also cautious.

Positives

• Net sales increased by 11.8% year-over-year.
• The company successfully opened 61 new stores in the first quarter.
• Adjusted EPS was within the company's earnings outlook due to disciplined cost management.
• Needs-based items in the Candy, Food, and Beauty departments performed well.
• Higher-income customers showed positive comparable sales.
• The company repurchased 182,000 shares, indicating confidence in its value.
• The company plans to open approximately 230 new stores by the end of the year.

Negatives

• Comparable sales decreased by 2.3% in the first quarter.
• Operating income decreased to $36.2 million from $42.4 million in the prior year's first quarter.
• Net income decreased to $31.5 million from $37.5 million in the prior year's first quarter.
• Diluted EPS decreased to $0.57 from $0.67 in the prior year's first quarter.
• The company experienced a $2.0 million non-recurring expense related to a legal settlement.
• The macro environment disproportionately impacted core lower-income customers, leading to overall comparable sales declines.

Risks

• The company faces risks related to the global supply chain.
• There are risks associated with the company's expansion plans.
• Disruptions in information technology systems pose a risk.
• The company faces risks related to cyberattacks and other cyber incidents.
• There are risks related to the use of machine learning and artificial intelligence.
• The company is exposed to risks related to merchandise selection, sourcing, and marketing.
• Reliance on merchandise manufactured outside the United States is a risk.
• Changes in consumer preferences and economic conditions pose a risk.
• Increased operating costs, including wage rates, are a risk.
• Inflation and increasing commodity prices are a risk.
• Potential systematic failure of the banking system is a risk.
• Extreme weather, pandemic outbreaks, and global political events are risks.
• The company faces risks related to leasing, owning, or building distribution centers.
• There are risks related to inventory management and shrinkage.
• Quality or safety concerns about the company's merchandise are a risk.
• Increased competition from other retailers, including online retailers, is a risk.
• The seasonality of the business is a risk.
• The company faces risks related to protecting its brand name and intellectual property.
• Risks related to customers' payment methods exist.
• Domestic and foreign trade restrictions, including tariffs, are a risk.
• Restrictions imposed by indebtedness on current and future operations are a risk.
• Changes in tax legislation and accounting standards are a risk.
• The company faces risks associated with leasing substantial amounts of space.

Future Outlook

The company expects second-quarter net sales to be between $830 million and $850 million, with a mid-single-digit decrease in comparable sales. For the full fiscal year 2024, net sales are projected to be between $3.79 billion and $3.87 billion, with an approximate 3% to 5% decrease in comparable sales. Net income for the full year is expected to be in the range of $275 million to $297 million.

Management Comments

• While our first quarter sales were disappointing, disciplined cost management enabled us to deliver adjusted EPS within our earnings outlook.
• Needs-based items such as those in our Candy, Food and Beauty departments outperformed expectations and drove positive sales results.
• We also saw positive comparable sales from our higher income customers; however, the macro environment disproportionately impacted our core lower income customers, resulting in overall comparable sales declines.
• Five Below remains an extreme value, high growth retailer.
• We are excited to open approximately 230 new stores by the end of this year and bring Five Below to more neighborhoods, offering trend-right, WOW items at amazing value.

Industry Context

The results reflect a challenging retail environment, particularly for value-focused retailers, with macroeconomic pressures impacting lower-income consumers. The company's focus on cost management and expansion aligns with strategies seen in the broader retail sector to navigate economic uncertainty.

Comparison to Industry Standards

• Dollar General, a major competitor in the discount retail space, reported a 6.7% increase in net sales and a 2.4% decrease in same-store sales in their most recent quarter, indicating that Five Below's sales growth is stronger but comparable sales are weaker.
• Dollar Tree, another competitor, reported a 4.8% increase in net sales and a 0.4% increase in same-store sales, suggesting that Five Below's sales growth is higher but comparable sales are lower.
• Target, a larger retailer, reported a 3.7% decrease in comparable sales, highlighting the broader challenges in the retail sector.
• Five Below's store expansion strategy of opening 230 new stores is aggressive compared to the industry average, which is more conservative due to economic uncertainty.

Legal Proceedings

• The company incurred a $2.0 million non-recurring expense related to a settlement of employment-related litigation in the first quarter of fiscal 2024.

Stakeholder Impact

• Shareholders may be concerned about the decrease in comparable sales and earnings.
• Employees may be affected by the company's cost management efforts.
• Customers may benefit from the company's expansion and value offerings.
• Suppliers may be impacted by the company's sourcing and inventory management strategies.

Next Steps

• The company plans to open approximately 230 new stores by the end of fiscal year 2024.
• The company will continue to focus on cost management.
• The company will monitor the impact of the macro environment on its core customer base.

Key Dates

Keywords

retail, discount, value, sales, earnings, stores, expansion, comparable sales, EPS, Five Below