Five Below Inc (FIVE), Dollar Tree, Inc. (DLTR): This Specialty Retailer Might Be Growing Too Fast

“Hot Stuff. Cool Prices.” That’s Five Below Inc (NASDAQ:FIVE)’s catchy slogan, likely to appeal to its teen and pre-teen target market. But the slogan doesn’t seem to be the only appealing aspect of Five Below Inc (NASDAQ:FIVE). With net sales jumping 33.1% year over year to $95.6 million in the first quarter, it would seem as though this stock has all the potential in the world. But things aren’t always as they seem.

Substantial growth

From that 33.1% sales growth, you would likely assume that the company’s strategy of selling everything in the store for $5 or less was working exceptionally well. In truth, it’s a mixed bag.

While newer stores, not yet open 15 months, saw sales increase $20.8 million for the quarter, sales at existing stores only improved by a much less significant $3 million. The company opened 50 stores in 2012, but has 258 stores total, which means that the older stores carry a lot more weight. For many retailers, new stores tend to drive a lot of traffic at first, as consumers want to check them out. But over the long haul, only a percentage of those shoppers return.

This news isn’t truly bad — it’s just not as exciting as the numbers indicate. First-quarter comps still improved by 4.2% year over year, with transactions rising 2.7%, and average dollar volume moving 1.5% higher. These are definitely positive trends, as is net income, which swung from a $2.7 million loss last year to a gain of $1.6 million this time around. This turnaround stemmed from the aforementioned improvements in number of transactions and average dollar volume, coupled with increased sales thanks to new store openings.

The point here is that while Five Below Inc (NASDAQ:FIVE) is performing well, it’s important to keep in mind that a lot of the perceived success stems from its aggressive growth strategy. Five Below Inc (NASDAQ:FIVE) continues to open stores at a rapid rate. In fact, it plans on opening 60 stores this year. But what might really blow your mind is that Five Below Inc (NASDAQ:FIVE) wants its store base to grow at a rate of 20% annually over the next five years, and it ultimately plans on reaching a store count of 2,000. Remember, there are currently just 258 stores.