FIVE Q1 Earnings Call: Margin Headwinds Amid Strong Comp Sales and Store Growth

Discount retailer Five Below (NASDAQ:FIVE) exceeded Wall Street’s revenue expectations in Q1 CY2025, but sales rose 19.5% year on year to $970.5 million. Its non-GAAP EPS of $0.86 per share was 3.3% above analysts’ consensus estimates.

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StockStory’s Take

Five Below’s first quarter results reflected meaningful gains in both comparable sales and store productivity, as management credited a disciplined approach to product assortment, improved inventory flow, and investments in the in-store experience. CEO Winnie Park cited broad-based outperformance across product categories, with notable wins in seasonal items, beauty, novelty food, and collectibles. The company also emphasized improved operational alignment between merchandising, supply chain, and store teams, which contributed to strong transaction growth. Park noted that, “our crew is now in a much better position to assist customers while also ensuring our shelves are stocked with trend-right products our customers want and need.” The company’s focus on targeted marketing, particularly through social media and creator content, was highlighted as helping drive traffic and conversion.

Looking ahead, Five Below’s guidance is shaped by ongoing efforts to mitigate tariff-related margin pressures while maintaining momentum in sales and store expansion. Management expects continued strength in customer transactions and trend-right merchandising, but acknowledged macroeconomic uncertainty and higher operating costs. CFO Ken Bull explained that tariff mitigation strategies, including vendor diversification and selective price adjustments, are embedded in forward guidance. Park outlined that, “we will act quickly and remain nimble and flexible in our approach as we react to macro news, and find solutions to a changing environment.” The company is also prioritizing a simplified pricing structure and further investments in the customer experience as it enters new markets and pursues additional store openings.

Key Insights from Management’s Remarks

Management attributed the quarter’s results to execution on merchandising, operational improvements in stores, and targeted marketing, while outlining margin pressures from tariffs and labor investments.

• Merchandising and product mix: Leadership highlighted success with trend-driven assortments, especially in beauty, novelty food, and collectibles, noting that both category and trend-led products contributed to comp sales growth.
• Operational improvements: Investments in labor hours and streamlined store processes improved customer engagement and shelf stocking, allowing store associates to focus more on the customer experience and in-stock positions.
• Inventory management: The company improved inventory flow and health, reducing reserves for aged stock and leveraging accelerated receipts to support key selling periods. Management expects inventory levels to remain elevated as they adapt to supply chain shifts and tariff-related sourcing changes.
• Marketing and customer acquisition: Five Below increased its focus on digital marketing and social media content, using storytelling to connect in-store and online experiences, which management believes contributed to higher traffic and transaction growth.
• Tariff and cost mitigation: Management responded to tariff increases by diversifying vendors, expanding sourcing outside China, and implementing a simplified pricing structure, with approximately 15% of SKUs seeing price adjustments (both up and down) to maintain value perception while managing cost pressures.

Drivers of Future Performance

Five Below’s outlook is driven by sales momentum, initiatives to offset tariffs, and continued investment in stores and marketing, balanced against persistent margin headwinds.

• Tariff mitigation strategies: Management is accelerating efforts to diversify global sourcing, reduce reliance on China, and negotiate with vendors, aiming to limit the impact of tariffs on gross margin. The company expects about 150 basis points of annual operating margin pressure from tariffs, partially offset by cost-saving initiatives and price optimization.
• Store expansion and productivity: Five Below plans to continue opening new stores, particularly in underpenetrated markets such as the Pacific Northwest, leveraging improved productivity and execution consistency. The company maintains its long-term target of reaching 3,000 stores in the U.S., supported by a disciplined approach to expansion.
• Customer experience and marketing investments: Ongoing enhancements in labor allocation, process efficiency, and digital marketing are expected to sustain transaction growth and brand engagement. Management is cautious about macroeconomic uncertainty and plans to remain flexible with investments to protect profitability and drive long-term growth.

Catalysts in Upcoming Quarters

In upcoming quarters, the StockStory team will monitor (1) the effectiveness of tariff mitigation and sourcing diversification on gross margin, (2) sustained strength in transaction growth and same-store sales trends, and (3) the pace and productivity of new store openings, especially in untapped regions. Progress on pricing adjustments and inventory management will also serve as key indicators of execution.

Five Below currently trades at a forward P/E ratio of 25.9×. Is the company at an inflection point that warrants a buy or sell? Find out in our full research report (it’s free).

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