Twenty years ago, Five Below (FIVE) started just outside of Philadelphia to make shopping fun for young people with a limited allowance.
It works because the company sells products all under $5 except for a section called Five Beyond. It helps that its stores have a chilled-out vibe that makes children want to spend more time in it.
Conceptually it's like a dollar store, but more fun.
Its products change often and you never know what you might get when you visit. In many ways, visiting a Five Below is similar to a treasure hunt. The chain sells everything from yoga mats to sensory toys, Bluetooth headsets, and even bedroom decor.
The items Five Below sells typically have no packaging, there's no air.
They ship their products in creative ways but without using packaging like bubble wrap, cardboard boxes etc. Like for instance they deflate basketballs to save on space when they ship it to their stores.
All of that saves the company a lot on freight costs which have been rising as importers look to manage risks after two years of supply chain disruptions.
The company's founders, Tom Vellios and David Schlessinger, made a point of talking to every customer in the original store in Wayne, Pennsylvania, solidifying the chain's reputation as a friendly business.
Today, some of its top-performing stores are in smaller, semi-rural markets, including towns like Ashland, Kentucky, Charleston, West Virginia, and Hammond, Louisiana.
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Five Below's Triple Double Plan
The specialty retail chain, which went public ten years ago, is so popular that it can't seem to open stores fast enough.
"We've nearly quadrupled the number of stores since I joined," said Five Below President and Chief Executive Joel Anderson, who joined the company in February 2015, during the latest earnings call this week.
Five Below opened 170 new stores last year to take its total to 1200.
But the Philadelphia company has seen its free cash flow drop to $27 million at the end of January 29, a considerable fall from $164 million last fiscal, FactSet data showed.
Five Below's CapEx grew 44% to $288 million from $200 million driven by new distribution centers in Arizona and Indiana.
"Our goal is simply to break the paradigms of retail," Anderson added.
Net sales have nearly tripled from $1 billion at the end of fiscal year 2017 to $2.84 billion at the end of fiscal year 2022 ending Jan. 29, according to data from FactSet.
"We now believe we have the opportunity to triple our U.S. store base to 3,500 by 2030, and we'll double sales and will more than double earnings by 2025. That's our triple-double. We are still a strong growth retailer," said Anderson.
How Will Five Below Achieve These Lofty Targets?
This year, the company is piloting ear piercing in 150 stores, expanding its balloons section in 250 stores, and adding more pet products.
The company is also looking to attract more social media savvy customers, including gamers. It recently launched a gaming brand with "Fortnite" champion Kyle Giersdorf, popularly known as "Bugha" in online gaming circles.
"It is exclusive relationships that really allow us to create and bring our own direct to retail items. I love to say it. We're about cool stuff, an amazing product and all that innovation which keeps us going," said Chief Merchandising Officer Michael Romanko.
It's also expanding on features like assisted self-checkout across all stores. The discount retailer will open 15 new stores in urban markets this year. A majority of those will be right inside New York City, while the chain also plans to grow in states like Texas, California, and Florida.
Five Below has invested $400 million in supply chain over the last four years. The company said it added a new million-square-foot distribution center each year since 2019. Each of these can support over 2000 stores.
"Our shared inventory model, where we have inventory for all channels under the same roof, gives us flexibility to manage inventory at stores and to support our omni channel initiatives, including e-commerce fulfillment, focus, and ship from store," said Chief Administrative Officer Eric Specter.
Five Below has also developed important relationships in countries like India and Vietnam, Specter added.
What About Online Sales for Five Below
E-commerce, or digital sales, have been growing, but Five Below has been a late bloomer in this department.
It launched its mobile app two years ago and started same-day delivery last year. The company is slowly expanding on that too. Before that, the company used its website for online transactions.
Five Below's online sales are in the low single digits, a company spokesperson said.
"E-commerce for us is icing on the cake. Our focus is on our amazing, treasure hunt in-store shopping experience that is difficult to replicate online." a Five Below spokesperson said.
"That being said, we are making it even easier for our customers to ship from store this year. Last year we began offering same-day delivery service through Instacart," the company said in an emailed response.
Like many other retailers during the pandemic, the company will now let customers buy online and and pickup in-store. Five Below also allows customers to purchase items online and have them shipped to a store at some locations.
"We'll roll out ship-from-store in select locations, and buy online pick up in-store across the entire chain," said Five Below Senior Vice President for Digital Felipe Zardo.
Five Below is not the only retailer to come to the e-commerce boom later than the rest. Competitors such as Dollar General (DG) and Dollar Tree (DLTR) also started to make similar improvements only three to four years ago.
