Five Below (FIVE, Financial) experienced a significant drop after unveiling its fourth-quarter results, which included the crucial holiday season. Although sales met expectations and same-store sales slightly exceeded forecasts, the stock faced downward pressure due to a notable earnings per share (EPS) shortfall and pessimistic guidance for future earnings and revenue. A key issue highlighted was an unexpected increase in shrinkage, primarily due to retail theft.
The Q4 same-store sales growth of +3.1% surpassed the anticipated +2-3%, driven by strong performance in Candy, Style, Sports, and Seasonal categories. This growth was supported by a +3.9% rise in transactions, despite a -0.8% drop in average ticket size, continuing a recent trend where necessity-based items like candy and beauty products excel.
For the first quarter, Five Below forecasts a +0-2% growth in same-store sales, with a full-year expectation of +0-3%. The slow start in February, attributed to delayed tax refunds, saw improvement in March, potentially aided by an earlier Easter. However, concerns about shrinkage were significant, with the company implementing measures such as limiting self-checkout registers and aiming for 75% of transactions to be associate-assisted, with a goal of 100% in high-risk stores.
Additional steps in high-risk stores include receipt checking and security guards, with progress evaluations expected by the second quarter. Despite these efforts, Five Below's guidance assumes no shrink reduction in 2024, though it aims to return to pre-pandemic shrink levels in the coming years.
Store openings remain a growth catalyst for Five Below, with a record 205 new stores launched in 2023, including 64 in the fourth quarter, bringing the total to 1,544 stores across 43 states. After pandemic-related disruptions, the company is back on track with its expansion, planning to open 225-235 stores in 2024.
Despite ending the fiscal year on a disappointing note, Five Below's resilience in sales, particularly in discretionary items, was notable. The primary concern remains the increased shrinkage, a trend that may unsettle investors. The company hopes for improvement in this area later in the year.
