Five Below (FIVE) Q4 2024: 7.8% Sales Growth Highlights Reset Progress Amid Tariff Headwinds

March 20, 2025 | By EarningsIQ Research

Five Below's fourth quarter sales growth reflects early success from strategic reset efforts focused on product and value, despite ongoing tariff pressures and negative comps. The company emphasizes sharpening its core customer focus and simplifying pricing to sustain momentum. Guidance signals cautious optimism with investments in labor and marketing to drive future growth.

Summary

• Strategic Reset Momentum: Early positive results from product and value initiatives are encouraging but incomplete.
• Tariff Impact Management: Mitigation efforts underway to offset a significant margin headwind from tariffs on imported goods.
• Growth and Investment Focus: Expansion plans paired with labor and marketing investments aim to enhance store productivity and customer engagement.

Business Overview

Five Below operates a high-growth value retail model targeting tweens, teens, and young adults with trend-right products priced mostly under $5. The company generates revenue through its 1,771 stores across 44 U.S. states, organized into product categories such as Style, Room, Sports, Tech, Create, Party, Candy, and New & Now. Its business model emphasizes delivering a "treasure hunt" shopping experience with consistent newness and value.

Performance Analysis

In the fourth quarter of fiscal 2024, Five Below reported net sales of approximately $1.39 billion, representing a 7.8% increase excluding the prior year’s 53rd week. However, comparable store sales declined 3.0%, driven by fewer holiday shopping days and a decrease in transactions and average ticket size. Adjusted gross profit rose 6.2%, but gross margin contracted by roughly 60 basis points due to fixed cost deleverage amid negative comps and product cost timing. Adjusted operating income decreased 1.5% on a comparable basis, reflecting SG&A deleverage from higher store wages, labor investments, and fixed costs.

For the full fiscal year, sales grew 10.4% excluding the extra week, but comps declined 2.7%. Operating margin contracted 150 basis points to 9.2%, pressured by fixed costs and labor investments despite some freight and shrink improvements. Inventory increased to $659.5 million, though average per-store inventory decreased slightly, with ongoing efforts to correct category imbalances. The company ended the year with $529 million in liquidity and no debt, supporting its aggressive store expansion of 227 net new locations.

• Sales Growth with Negative Comps: New and non-comp stores drove revenue gains despite weaker comparable store performance.
• Margin Pressure from Fixed Costs and Tariffs: Tariffs and labor investments contributed to margin compression, partially offset by cost management.
• Inventory and Shrink Improvement Efforts: Inventory health is improving with better shrink rates, though some category depth challenges remain.

The financial results underscore a business in transition, balancing growth investments and operational resets against macroeconomic and cost headwinds.

Executive Commentary

Strategic Positioning

1. Sharpened Customer Focus and Assortment Curation

Five Below is intensifying its focus on its core customer — kids and the kid in all of us — by delivering a curated assortment emphasizing fresh, trend-right products primarily priced $5 and below. Management is targeting fewer, bigger, and better key items to drive relevance and repeat visits, while simplifying pricing to enhance the shopping experience and operational efficiency.

2. Tariff Mitigation and Pricing Strategy

With approximately 60% of goods imported from China, tariffs pose a material margin headwind estimated at 100 basis points for the full year. The company is employing vendor collaboration, selective price adjustments, sourcing diversification (including a global sourcing office in India), and product newness to mitigate these impacts while maintaining its value promise. Pricing changes are focused on both upward and downward adjustments within the $5 and below price points to balance value and margin.

3. Store Fleet Expansion and Market Penetration

Five Below opened a record 227 new stores in fiscal 2024 and plans to open approximately 150 new stores in 2025, including expansion into new regions such as the Pacific Northwest. The company aims to densify existing markets and capitalize on retail dislocations to accelerate growth while maintaining disciplined return thresholds.

4. Operational Excellence and Labor Investments

Investments in store labor and operational execution have improved shrink rates and customer experience, with labor levels optimized to balance throughput and cost. These investments have driven better inventory flow and in-stock positions, supporting sales gains despite negative comps. The company plans continued focus on operational efficiency to drive margin recovery post-2025.

5. Enhanced Marketing and Digital Engagement

After a prolonged absence of a chief marketing officer, Five Below has hired a new CMO to deepen brand awareness and customer engagement through targeted omnichannel marketing and social media. The goal is to increase customer acquisition and retention by connecting digital discovery with in-store experiences, leveraging content creators and app notifications to highlight newness and value.

Key Considerations

Five Below’s Q4 results reflect a business cautiously navigating post-reset momentum amid macroeconomic challenges and tariff pressures. Key considerations for investors include:

• Reset Execution Trajectory: Early signs of improved sales and operational execution are promising but incomplete, requiring sustained focus on assortment and customer engagement.
• Tariff and Cost Headwinds: Margins face significant pressure from tariffs and wage inflation, with mitigation efforts critical to maintaining profitability.
• Store Growth Discipline: Expansion plans remain aggressive but disciplined, with selective market entries and densification aimed at long-term returns.
• Inventory and Shrink Management: Improved shrink rates and inventory health are vital to margin recovery but require ongoing operational rigor.
• Marketing Investment Timing: Marketing spend is being optimized with a new leadership focus, balancing efficiency with the need to build brand awareness and traffic.

Risks

Five Below faces risks from ongoing tariff escalations, which could further compress margins if mitigation fails. Negative comparable sales and inventory imbalances present operational challenges. Consumer spending shifts, particularly among lower-income demographics, and rising wage costs could pressure profitability. Execution risk remains in assortment curation and marketing effectiveness as the company evolves its brand and product offering.

Forward Outlook

For Q1 2025, Five Below guides to:

• Net sales between $905 million and $925 million, reflecting 12.7% growth at midpoint with flat to 2% comp sales.
• Adjusted operating margin around 4.0%, down from 4.7% last year, due primarily to SG&A leverage from labor and depreciation investments.
• Adjusted diluted EPS in the range of $0.50 to $0.61.

For full-year 2025, management expects:

• Sales between $4.21 billion and $4.33 billion, up approximately 10.1% at midpoint with flat to 3% comp sales.
• Adjusted operating margin near 7.3%, down approximately 180 basis points year-over-year, with over half the deleverage attributed to tariffs net of mitigation.
• Adjusted diluted EPS between $4.10 and $4.72.
• Capital expenditures of $210 million to $230 million, reflecting 150 new store openings and systems investments.

Takeaways

Five Below’s Q4 results confirm progress on a strategic reset centered on product, value, and customer experience, but also highlight the margin pressures from tariffs and fixed costs. The company’s broad vendor base, sourcing diversification, and pricing discipline are key levers to mitigate cost headwinds. Aggressive store growth and renewed marketing efforts position Five Below for long-term expansion, though execution risks remain in assortment optimization and consumer demand trends.

• Reset Momentum with Margin Pressure: Sales growth and operational improvements are promising, but tariffs and labor costs weigh on profitability.
• Strategic Focus on Core Customer and Value: Simplified pricing and curated assortments aim to reinforce Five Below’s differentiated value proposition.
• Watch for Execution on Expansion and Marketing: Successful store openings and enhanced brand awareness will be critical to driving comps and leveraging fixed costs.

Conclusion

Five Below’s fourth quarter reflects a company in transition, balancing growth investments and strategic resets against macroeconomic and tariff-related challenges. While early signs of improvement are encouraging, investors should monitor execution on assortment curation, tariff mitigation, and marketing effectiveness to assess the sustainability of the recovery and margin trajectory.

Industry Read-Through

Five Below’s experience underscores the broader retail sector’s challenges with tariff-driven cost inflation and shifting consumer spending patterns. Its focus on value, assortment agility, and omnichannel engagement offers a template for other value-oriented retailers navigating similar headwinds. The company’s approach to pricing simplification and vendor collaboration may inform peers’ strategies for balancing margin protection with customer affordability. Additionally, Five Below’s expansion strategy highlights ongoing opportunities in retail real estate dislocations and market densification.

FIVE Consumer Discretionary Specialty Retail Value Retail Tariffs Assortment Optimization Store Expansion Marketing