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Five Below Explains How It Could Triple Its Store Count

Demitrios Kalogeropoulos, The Motley Fool

Five Below (NASDAQ: FIVE) isn't growing especially fast at its existing locations. In fact, the youth-focused retailer's sales expansion pace slowed in 2018 to less than 4% compared to over 6% in the prior year. Target (NYSE: TGT) did nearly as well.

But Five Below's growth thesis relies much more on boosting its sales base by adding to its network of retailing locations. That expansion allowed sales to rise 22% this past year compared to Target's 3.7% uptick.

Following the release of the holiday-quarter results, CEO Joel Anderson and his team held a conference call with Wall Street analysts to put the latest operating figures into context for investors. Executives also explained why 2018's achievements, and their goals for 2019, keep the chain on track to eventually triple its store count to 2,500. Below, we'll look at a few highlights from that presentation.

A girl and a boy loading bulk candy into plastic bags at a candy store.

Image source: Getty Images.

New store economics

Like the 2017 class, the 2018 class is diverse geographically, is generating very strong productivity, and is on track to be a record class.

-- Anderson

Five Below added just five locations during the quarter, but its trailing-12-month launch pace was 125. These locations added many new markets to its retailing footprint, especially in the southeastern U.S.

Management said the latest openings are contributing strong results right at the start. They're on track to set a second straight record for early financial returns, with average annual sales volumes set to cross $2 million.

Navigating the fads

Customers shopped a broad selection of products across the store and across our worlds. Our overall assortment continues to get better and better, reflecting the benefits from our growing scale and our philosophy of reinvesting in merchandise to consistently deliver our customers the promised wow factor.

-- Anderson

Specialty retailers are always in danger of stumbling by missing a big shift in consumer demand, and Five Below's focus on young shoppers amplifies that risk. Yet these results suggest that the company is having little trouble anticipating -- and adjusting to -- changing style trends.

Sales grew 4% at existing locations on top of a prior-year period that was lifted by the spinner craze. Five Below took advantage of extra toy demand this season, and also capitalized on newer trends. Overall, by closing its 13th consecutive year of positive comparable-store sales, the chain demonstrated that there's plenty of flexibility built into its selling model.

Building out

For 2019, sales are expected to be in the range of $1.865-1.885 billion, an increase of 19.6% to 20.9%. The comparable sales increase is expected to be approximately 3%. We plan to open 145-150 new stores and expect to end the year to 895-900 stores.

-- CFO Kenneth Bull

Five Below is predicting a second straight year of decelerating sales gains at existing locations as comps fall to 3% from 3.9% in 2018 and 6.5% in 2017. The company predicts a slight decrease in profitability, too, as it allocates cash toward new distribution centers to support its broader geographic footprint.

Investors are more excited about plans to add as many as 150 stores to the network. Five Below will enter three more states in 2019 so that, by the end of the year, it will operate in 36 states plus Washington, D.C.

That's an expansion pace that few other retailers could reasonably target, but it is well supported by Five Below's healthy customer traffic trends, steady profitability, and track record of growth through a wide range of selling conditions.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.