Squishmallows are creating a tougher bar to clear for Five Below

By Bill Peters

'The quarter solidified that consumers are feeling the impact of multiple years of inflation across many key categories,' CEO says

Shares of Five Below Inc. (FIVE) slid after hours on Wednesday after the teen-centric discount retailer cut its full-year sales forecast, citing weaker spending among its lower-income shoppers and bigger difficulties navigating life after last year's Squishmallow boom.

But amid the flight toward more basic purchases over the past two years, executives said more customers turned to what it said were its version of "needs-based" categories - like candy, food and beauty products - than expected.

"We achieved positive comps in our higher-income cohorts, suggesting some trade down of these customers seeking value at our stores," Chief Executive Joel Anderson said during Five Below's earnings call, referring to comparable-store sales, or sales at stores open for at least 15 months, as well as e-commerce sales.

"However, we saw underperformance in the lower-income demographic that more than offset these results," he continued. "The quarter solidified that consumers are feeling the impact of multiple years of inflation across many key categories, such as food, fuel, and rent, and are therefore far more deliberate with their discretionary dollars."

The company said it expected full-year revenue of $3.79 billion to $3.87 billion, with a potential 3% to 5% drop in same-store sales. That's worse than its forecast in March for full-year revenue of $3.97 billion to $4.07 billion and same-store sales landing between roughly flat and up 3%.

Five Below shares tumbled 15.5% after hours.

The retailer - which sells toys, home decor, stuffed figurines and some tech items, generally priced below $5 - offered the forecast after another discounter, Ross Stores Inc. (ROST), said last month that higher prices had continued to weigh on lower-income shoppers.

Five Below's fortunes also tend to hinge on the ever-changing tastes of the teens and tweens who it sells to. Management, during the call, said that it was having a tougher time growing off of last year's bigger toy trends - namely the popularity of squish toys like Squishmallows.

During the first quarter, Five Below reported net income of $31.5 million, or 57 cents a share. That was down from $37.5 million, or 67 cents a share, in the same quarter last year. Excluding the impact related to a settlement of "employment-related litigation," Five Below earned 60 cents a share.

Revenue increased 11.8% year over year to $811.9 million. Comparable sales fell 2.3%.

Analysts polled by FactSet expected adjusted earnings per share of 63 cents, with revenue of $834.3 million and a same-store sales gain of 1.2%.

-Bill Peters

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06-05-24 2016ET

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