Five Below, a prominent discount retailer, is undergoing a strategic overhaul to address challenges in the market and reinvigorate its core customer base of preteens and teens. Founded in 2002 by David Schlessinger and Thomas Vellios, the company initially thrived by offering low-cost products. However, recent financial outcomes and evolving market conditions have necessitated a reevaluation of their approach.
Five Below had previously embarked on an aggressive expansion plan, opening over 450 new stores and remodeling more than 750 locations since 2022. While these efforts aimed to broaden the product assortment, they inadvertently diluted the company’s core value proposition. This misalignment became evident when second-quarter sales rose by 9.4% to $830 million, yet comparable store sales dropped by 5.7%, indicating issues with transaction volumes despite positive store traffic. Similar financial recalibrations have been observed across other discount retailers, reflecting a broader industry trend towards strategic realignment in response to customer behavior shifts and competitive pressures.
Company Leadership Responds
Thomas Vellios, co-founder of Five Below, acknowledged the company’s recent struggles during a second-quarter earnings call. He emphasized the need to return focus to the company’s core customers, noting that the previous expansion diluted their unique value proposition. Vellios assured stakeholders that efforts to rectify these issues are already in progress.
“Over the past few years, we lost some of that sharp focus on our core customers,” Vellios stated.
Operational and Strategic Adjustments
Ken Bull, interim CEO, president, and COO, outlined the company’s plan to address these challenges. The strategy involves simplifying the product lineup, emphasizing lower price points, and streamlining store operations. Bull emphasized a return to pre-pandemic price points and a focus on the $5 and below range to enhance value and improve the shopping experience. He explained the factors contributing to their current situation, including macroeconomic pressures and an overly ambitious expansion plan.
“To manage inflation’s impact, we raised prices and expanded price points,” Bull noted, highlighting the complexities introduced by these decisions.
Five Below’s focus now shifts to maintaining a fun and engaging store environment that aligns with their brand image. This involves optimizing the store operating model to reduce complexity and improve labor efficiency. Similar strategies have been adopted by discount retailer Dollar Tree, which is also revamping its product range to enhance value for core customers without raising prices on existing products. Dollar Tree’s success with this approach highlights the potential benefits for Five Below as they aim to boost customer engagement and store performance.
The realignment of Five Below’s strategy intends to reintroduce excitement and discovery into the shopping experience, which they believe will attract customers and drive sales. This shift aims to address the core issues of transaction volume and conversion rates while reinforcing the company’s original appeal. The company’s leadership is committed to ensuring that Five Below stores remain vibrant and appealing to their target demographic, emphasizing the importance of delivering both value and an enjoyable shopping experience.
Moving forward, Five Below’s priority will be on initiatives that resonate with their core customers. This includes streamlining operations, optimizing product assortments, and enhancing the overall shopping experience. The company’s management remains optimistic that these changes will help regain the brand’s original appeal and drive sustained growth.
