FIVE Below Q1 2015 Notes

Hi all,

Below are my notes for FIVE Below (FIVE) Q1 2015.



Earnings release:…

What is Five Below?

FIVE Below is a discount chain that sells products targeted at teen and pre-teens with products priced $5 or less. They currently have less than 400 stores in the US, but will be going past the 400 store count this year. Management estimates that there’s room for about 1200 stores in the US. The first FIVE Below store opened in 2002.

FIVE Below was founded by David Schlessinger (founder of Encore Books and Zany Brainy) and Tom Vellios (former CEO of Zany Brainy). The founders are not running the business anymore.

Joel Anderson is the CEO of FIVE Below; he’s been at the helm for about a year, and is doing things a bit differently compared to Tom Vellios. Joel came from where he was President & CEO for about 3 years. See more here:

I have a tiny position in FIVE and it has been a good put writing candidate so far. The volatility has been good for premium harvesting. Like most of my positions, this one also came via TMF newsletters (Hidden Gems & Rule Breakers).

That’s probably enough high-level information to grasp the quarterly report below.

High-level points

o Net sales increased by 22.0% to $153.7 million from $126.0 million in the first quarter of fiscal 2014; comparable store sales increased by 1.7%. They beat their sales guidance.
o Comparable store sales increased by 1.7% compared to a 6.2% comp increase in Q1 14. Q1 15 was impacted by bad weather in Jan & mid-Feb. This was noted in Q4 14 call. By the way, its worth noting that this was the 36th consecutive quarter of positive comps.
o The Company opened 19 new stores and ended the quarter with 385 stores in 23 states. So they are back to opening stores at a healthy clip. Recall that Q4 2014 saw only one store opening. They entered Kentucky and Alabama.
o GAAP EPS came in at $0.08 versus $0.06 in Q1 14; non-GAAP EPS was $0.08 versus $0.07. They beat their EPS guidance.
o Cash and equivalents at $52.4m plus have $20m revolving credit available.
o They look to open 70 stores in 2015 and 85 in 2016. So FIVE’s looking at around 19% store base growth versus the store base at end of Q4 2014.
o Outlook was raised. Yay!

  • Q2 15 net sales are expected to be in the range of $182 million to $185 million based on opening 25 new stores and assuming a 4% to 5% increase in comparable store sales.
  • Q2 15 EPS b/w $0.12 and $0.13
  • FY 15 net sales b/w $820m and $828m with EPS b/w $1.03 and $1.06.
  • CapEx of $56m for FY 15.

Management Commentary

Joel Anderson (CEO) started with some chest beating citing the sales and eps beats (exceeding the upper end of their guidance). He noted that new stores continue to perform strongly, and with each new store addition they are seeing strength in their brand. He believes that their ability to source trendy merchandise at attractive prices, coupled with their store experience, is a big differentiator and it appeals to their core base of teen and pre-teen customers, while enjoying broad appeal. He talked a fair bit about how their merchandising strategy really sets them apart, and their store setup allows them to quickly reconfigure (i.e., for pre-Easter to post-Easter etc).

In addition, the merchant team has done a great job infusing the assortment with the right amount of newness and freshness like selfie sticks and shopkins just to name a few.
Overall, from a merchandising standpoint in Q1, we saw strong performance at certain categories in our style, sports and candy worlds and we are well positioned for the summer selling season.

Joel noted that Q2 will see some significant new markets being entered, including Florida with about 9 new store openings there. They have already opened a store in Kansas City. Overall, they seem to well on track to achieve 70 store openings this year, which would include new market entries and densification in existing markets. They will also be crossing the 400 store mark very soon.

Joel touched upon the strategic priorities highlighted in the Q4 2014 conference call. I will leave the text from Q4 call as is and then include some commentary on how things have progressed, as noted by management. The Q4 call highlighted the following strategic priorities:

  1. Push the new store model. FIVE ended 2014 with 366 stores. They ultimately see having as many as 2000 stores. They expect to open 70 stores in 2015. Joel said the following about the stores opened in 2014:
    “Our new stores have consistently delivered first year four-wall EBITDA margins in the low 20% range driving a payback on our investment of less than one year, which honestly is among the best I’ve ever seen for any retailer. And the class of 2014 is on track to be another strong class in terms of year one sales and EBITDA performance.”
  • Class of 2014 performed exceptionally well, across both new and old markets
  • They plan to open take on at least one new state in 2015 (Florida was noted) and expand existing markets such as Texas and Alabama.
  • They seem to focus on having a 20% store addition rate, and declared intention of opening 85 stores in 2016.

Comment in Q1 15: This seems to be going as per plan. They are moving ahead with their new store plan as it is doing well.

  1. Merchandising, in-store, and web experience. One of the USPs of FIVE is the “new and cool” feel. They have a merchant team in place, led by Michael Romanko, and have made organisational changes to streamline the buying and placement of merchandise. E.g., there is a new Easter layout and merchandising plan. They also continue to focus on making their stores a fun and customer friendly place.

Comment in Q1 15: This also seems to be going well. They seem to be getting good traction with cross-selling things.

  1. Marketing improvements. They are going to start targeting their customers via mediums that best reach them, i.e, they plan to do more with digital and social media advertising. Anderson also said that their TV testing has yielded results (with comp improvements compared to the average) in the markets they have tried it out and they plan to expand on it in 2015. Anderson noted that while FIVE caters to the teen and preteens it is a concept that can cater to other types of customers (e.g., parents etc), and their demographic is increasingly looking to interact digitally.

Comment in Q1 15: It appears they are shifting their marketing to online channels (YouTube, Facebook, Instagram) and their tests seem to suggest its working. This makes sense given the audience profile FIVE’s targeting. They are also leveraging their growing email db of clients.
There is also the opportunity to reduce our historical reliance on newspaper circulars and increase our digital mix. We made progress on this front in the first quarter testing multi-page digital ads via email and Facebook and we like what we are seeing.

  1. Investing in infrastructure, systems, and processes. Anderson described 2015 as an investment year. He highlighted the following:
    o Construction of new East Coast distribution facility in NJ is on track. This facility along with the Olive Branch Mississippi facility can support 750 stores in the Northeast, Mid-Atlantic and South Central regions of the United States.
    o They are looking at overseas containers consolidation (i.e., looking at other aspects of the supply chain)
    o They are also making process and systems improvements such as new merchandising planning and financial systems

Comment in Q1 15: The NJ distribution centre is expected to be live in July. The overseas container consolidation is starting in June and they expected to start seeing some benefits later this year.

Interestingly, it was noted that Q1 comps were helped by an increase in average ticket, which essentially helped them combat the weather effects.

Gross profit margin came at 30.7%, which is 20 basis points down compared to Q1 14. The down tick was blamed on increased freight costs. They expect margins to tick down a bit in 2015 because of investments in distribution centre and leadership/talent hires. Both points were noted earlier as well in Q4 2014 conference call.

Additional Pointers from the Question & Answer Session

There was a question regarding the 4-5% comps suggested for Q2 15. In response, Joel noted that they are off to a solid start in Q2, that they are seeing some positive traction from the TV & online advertising campaigns, and that weather has been helpful.

There was a question regarding their ongoing marketing campaign, and some details were shared. Their advert mix is 75% TV and 25% digital . They are testing some 9 markets covering some 13-15% of the store base during Q2.

There was a question regarding the margin compression but Ken Bull (CFO) noted that margin on merchandise has remained flat YoY, so it was just the freight issue.

There was more talk about merchandising and their leadership team. I found the following interesting:
We are always going to be sharp on the price point. And the team is really focused on newness while value for our customers. Examples in the now area, is you might – you will see now in there apparel and tech items in the now area as well as the traditional items like inflatables, boogie boards, beach dolls. So it’s really bringing that holistic approach to everything somebody is going to need to have a great summer experience. And we’ll pull from what whatever world’s necessary they are kind of cross-merchandise and bring a more holistic approach together.

Concluding Remarks and Valuation

FIVE seems to be on track. Stores don’t cost a lot to open, and the team seems to be doing a good job in identifying real-estate opportunities for new stores. They seem to be tracking a 20% store opening rate and they appear to have saturated only a small number of markets. There’s a lot of room to run here. Comps seem to be moving in the right direction with expectation for FY 15 being 3% (they might be lowballing here).

Let’s look at the current valuation. I ‘m using closing price of $35.10 (6/3/2015 close).
TTM EPS (GAAP): $0.90 [Note non-GAAP eps is also $0.90]
TTM Sales: $708m
PE (TTM): 39
PS (TTM): 2.6

For FY 15, we are looking at about 20% earnings growth at the mid-point. Anderson, in Q4 2014, had set expectations for revenue growth of low 20% in 2016, while noting that there should be some operating leverage kicking in FY 2016. I like how Anderson and team are executing. They seem to be a nimble team, they are finding ways to optimise their cost structure, and they seem to be getting the job done. I wouldn’t be surprised to start seeing 25% eps growth in the later half of the year and beyond. So, while the stock might look expensive on a trailing basis, if one believes that they can keep growing for a while, then the stock is actually quite decently priced.

I have a small stock position in FIVE at about 0.9% of my portfolio. I have been looking to add some more around a trailing PE of 35 using puts. So I have been selling puts around the $32 to $35 range. So far, no luck with being assigned but I have eked out some decent premium. The FIVE stock continues to be volatile, making this a good candidate for selling puts for income. The valuation seems to be good enough for put sales.


Thanks Anirban. I got into this stock not because of the <$5 price point but the “tween” market positioning. Their growth seems pretty incredible. The market lift post these results puts me in the money and I have good expectations for this to continue given its LFL and new store expansion growth.

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