Investors had some significant worries heading into Five Below's (NASDAQ: FIVE) first-quarter earnings report. Costs are rising on a large portion of the value products it imports from China, for one. The retailer is also sensitive to swinging consumer demand as trends quickly shift in its core youth demographic.
Yet Five Below recently revealed that it easily navigated those challenges over the last few months. The company also had positive things to say in its earnings call with investors about its ability to withstand soaring tariff rates through the rest of the fiscal year.
Let's dive right in and look at a few highlights from that conference call presentation.
Image source: Getty Images.
Slime is popular
Trends like slime and squishy and newer trends such as gaming and unicorn drove customers into our stores.
Whether it was fidget spinners in 2017 or slime products this past year, trends move quickly in the youth-focused retailing world. Five Below, though, has put together an impressive track record of 13 straight years of positive comparable-store sales -- and that trend continued into early 2019.
The chain announced a 3% comps increase for the quarter to reach the high end of management's guidance. Executives said the gains were balanced between higher customer traffic and increased spending per visit.
Welcome to Iowa
We opened 39 new stores in diverse markets from the East Coast to the West Coast, including three new states Iowa, Nebraska and Arizona, bringing our total to 36 states.
Five Below added three new states to its selling footprint this quarter: Iowa, Nebraska, and Arizona. Its newest crop of stores continues to generate strong early returns, and in fact the recent launch in Cedar Rapids, Iowa, constituted its best Q1 opening to date, management said.
This success puts the retailer on track to open as many as 150 stores in 2019 to reach 900 locations across 36 states. Five Below hopes to eventually reach 2,500 stores to almost its count from 2018.
Breaking the $5 barrier
Increasing prices beyond the $5 price point is a decision we do not take lightly.
The company reported no negative impact from the recent 10% tariff hike that applied to many of its imported products from China. Five Below navigated that challenge by working with its suppliers to lower costs, by shifting purchasing to other countries, and by raising prices in some instances. Gross profit margin held steady at 33% of sales.
Looking forward, the new 25% tariffs present bigger challenges, but executives plan to use the same strategies to mitigate any profit pinches. These include carefully raising prices above $5 on some products. "We have put a lot of thought behind this decision," Anderson said, "and will proceed with pace and diligence."
Staying the course
We are not changing our guidance for the year.
-- CFO Kenneth Bull
Five Below affirmed all the key parts of its 2019 outlook. Management still expects sales to reach $1.8 billion this year, up 20% thanks to the addition of 150 new stores and a 3% comps increase in existing locations. Operating profit margin remains on track to drop slightly as the company spends cash on new distribution centers to support its growing geographic footprint.
Overall, hitting these predictions would translate into robust growth and support management's bullish reading on Five Below's long-term market opportunity.
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