Five Below Stock Surges on Q4 Sales Beat, Expansion Plans Amid Tariff Challenges

Five Below (NASDAQ:FIVE) shares surged over 6% on Thursday, March 21, 2025, as the discount retailer reported better-than-expected results for the fourth quarter and upbeat quarterly guidance. The company's stock traded up 6.1% at about $80 in the early afternoon, reflecting investor optimism despite ongoing tariff pressures and macroeconomic challenges.

Q4 Performance: A Strong Finish to 2024

For the quarter ending February 1, 2025, Five Below posted sales of $1.39 billion, up 4% from the year-ago quarter and ahead of estimates of $1.38 billion. Earnings per share (EPS) of $3.48 topped estimates of $3.38, showcasing the company's resilience in a challenging retail environment. The positive performance was driven by improved product assortment, a focus on value, and operational enhancements.

Expansion Plans: Triple Double Growth Strategy

Five Below's ambitious growth strategy, dubbed the "Triple Double" plan, aims to triple its store count to over 3,500 locations by the end of fiscal 2030 while at least doubling sales and growing operating margin by 14% by the end of fiscal 2025. The company plans to open 400 new stores in fiscal 2023, with that number accelerating to 550 to 600 new stores in fiscal 2024 and 2025. Additionally, Five Below will upgrade 400 existing locations to its higher-priced Five Beyond format in fiscal 2023, offering items above the company’s signature $5 price point.

Tariff Pressures and Mitigation Strategies

Despite the positive Q4 results, Five Below faces significant challenges from tariffs, which are expected to pressure margins. The company anticipates a margin headwind of 100 basis points from tariffs for the full year, net of mitigation efforts. Mitigation strategies include vendor collaboration, selective price adjustments, and diversification of sourcing. Five Below's strategy to "chase product trends and focus on newness" is expected to help mitigate tariff impacts. However, the company's sourcing exposure to China remains a key risk, with 60% of the cost of goods sold (COGS) coming from China either directly or through domestic vendors.

Marketing and Brand Awareness

To enhance brand awareness and drive customer engagement, Five Below has hired a new Chief Marketing Officer, Jacob Hawkins. The focus is on increasing brand awareness online and in-store, leveraging social media and omnichannel capabilities. Improving customer engagement is expected to boost sales and store traffic, which is crucial for the company's expansion plans.

Inventory and Shrink Management

Five Below's inventory at year-end was $659.5 million, with a per-store basis decrease of 2%. Shrink rates improved in the second half of the year, with expectations for continued improvement. Investment in store labor and front-end engagement has helped address shrink challenges, ensuring that the company can maintain operational efficiency as it expands.

Analyst Sentiment: Mixed Outlook

Analysts at Bank of America repeated their ‘Underperform’ rating and lowered their price target on Five Below to $75 from $88 following the release of its earnings. The analysts see positive comparable sales and stable store growth being offset by gross margin pressure from tariffs, which will result in a decline in earnings in fiscal 2025 and flat earnings in fiscal 2026. However, Simeon Gutman from Morgan Stanley maintained a Hold rating on Five Below with a price target of $110.00, citing positive momentum with improvements in new product introductions, value positioning, and merchandising.

Conclusion: Navigating Challenges and Opportunities

Five Below's stock surge on Thursday reflects investor optimism about the company's growth prospects despite ongoing challenges. The company's ambitious expansion plans, coupled with its strategies to mitigate tariff impacts and enhance brand awareness, position it well for future growth. However, investors should remain cautious about the risks associated with tariff pressures, margin pressure, sourcing risks, and operational challenges as they evaluate the company's growth strategy.