Five Below, Inc. (FIVE) Earnings

Management highlights

### Core Business Transformation & Strategy Traction - The company’s 3-part value proposition (curated product storytelling with consistent newness and strong value; omnichannel customer engagement via social and digital media; improved in-store shopping experiences with better in-stock levels and simplified pricing) is driving consistent customer traction, with the strategy focused on three core pillars: 1) maniacal focus on target customers (Gen Alpha, Gen Z, and Millennial Moms), 2) connected customer journey from social to in-store, 3) cross-functional collaboration to strengthen execution. - The business has moved from an item-focused merchandising model to an assortment-focused model with cross-functional seasonal curtain-up moments aligned to customer holidays and life milestones, which aligns the entire organization to deliver the right product at the right time. The former Buy Beyond segregated higher-priced section has been eliminated, with products placed in relevant in-line categories, leading to better performance for these SKUs. - A Social First marketing approach has been adopted, shifting spend from traditional channels to social media, creator content, AI-generated connected TV ads, and in-store viral activations, resulting in far faster, more relevant engagement with core customer groups. The company is actively building an email customer database to enable personalized marketing and long-term customer relationship building. ### Viral Trend Activation Capability - The company leveraged social listening and cross-functional agility to capitalize on the viral RMS squishy dumpling trend, turning a niche existing product into a cultural moment that drove strong new customer acquisition and reinforced brand strength. The end-to-end process from trend detection to social amplification to in-store activation is now a core repeatable capability. - The company has seen strong results from the trading card and Pokemon categories following the National Pokemon Day in-store activation, and is actively pursuing additional supply and assortment expansion for trading cards and related anime collectibles, which are viewed as longer-term enduring trend opportunities. ### Operational & Inventory Position - Inventory totaled $813 million at quarter end, up 16% YoY, with a 10% increase in total units and 7% higher average inventory per store. The inventory build reflects opportunistic buying to take advantage of favorable current tariff conditions and precautionary stocking to offset global supply chain volatility, leaving the company well-positioned for the upcoming summer and holiday seasons. Gross margin expansion was driven by fixed cost leverage from strong comp sales, distribution efficiencies, and lower shrink accruals.

Guidance

- **Q2 2026 Guidance (Upward Revision from Previous Implied Outlook):** Total sales are expected to be $1.18–$1.2 billion, representing 16% year-over-year growth at the midpoint, with comparable sales growth of 7%–9%. Approximately 50 net new stores are expected to open. Adjusted operating margin is expected to be 7% at the midpoint (up 160 basis points YoY); midpoint adjusted net income is $68 million (up 52% YoY), and midpoint adjusted diluted EPS is $1.23, up from $0.81 YoY. - **Full Year 2026 Guidance (Upward Revision):** Total sales are expected to be $5.4–$5.48 billion, representing 14% year-over-year growth at the midpoint, with comparable sales growth of 6%–8% (nearly 20% two-year stacked growth at the midpoint). Full-year adjusted operating margin is expected to increase 170 basis points to 11.6% at the midpoint, with gross margin expansion offset partially by higher incentive costs. Adjusted diluted EPS is expected to be $8.85 at the midpoint, representing 33% year-over-year growth. Capital expenditures are maintained at $230–$250 million (excluding tenant allowances), which supports ~150 net new store openings and increased technology/infrastructure investments. - **Back Half 2026 Guidance:** Comparable sales assumptions are maintained at prior levels, with no change from previous guidance despite Q1 outperformance, reflecting intentional caution around macroeconomic headwinds and difficult year-over-year comparables (cycling 15% comp growth in H2 2025). - **Tariff Assumptions:** Guidance includes the full benefit of the 10% global tariff rate in place through July 2026, and assumes tariffs will revert to start-of-year levels after that date. No benefit from potential IEPA tariff refunds is included in current guidance.

Segment performance

Five Below operates as a single-segment specialty value retailer focused on products for kids and young-at-heart customers, so separate product segment financial results are not broken out in this call. Overall company-level results for Q1 2026 were: net sales of $1.3 billion, up nearly 33% year-over-year, with 23% comparable sales growth (30% on a two-year stacked basis); 49 net new stores opened, ending the quarter with 1,970 total stores (8% year-over-year store count growth); adjusted gross profit of $479 million (37.2% of net sales, up 340 basis points YoY); adjusted SG&A of $324 million (25.2% of net sales, down 250 basis points YoY); adjusted operating income of $155 million, up 160% YoY, with a 12% adjusted operating margin (up 600 basis points YoY); adjusted net income of $123 million, up 160% YoY; adjusted EPS of $2.22, up 158% YoY. 15 of 18 product departments posted positive comparable sales, with Games & Toys seeing particularly strong growth driven by collectibles and viral squishy trends; growth was also strong in candy, beauty, and food, and broad-based across all store vintages, geographic districts, and customer income cohorts.

Risks & headwinds

- Macroeconomic headwinds: Management cites rising fuel costs, sticky persistent inflation, a softening labor market, and broader consumer caution as potential headwinds for the back half of the year, particularly after the temporary boost from larger-than-usual Q1 tax refunds fades. The company faces difficult year-over-year comparables in H2 2026, cycling very strong 15% comp growth from 2025. Trend-driven growth can be volatile, with viral trends such as squishy dumplings potentially driving temporary traffic with smaller average basket sizes and fading after their viral peak. - Tariff uncertainty: While the company has mitigated current higher supply chain and fuel costs via lower current tariff rates and distribution efficiencies, potential reversion to higher tariff rates in the second half creates margin uncertainty. The timing and magnitude of potential IEPA tariff refunds remain undefined. - Marketing investments are intentional and currently delivering strong returns, but could require pullback if consumer demand weakens in a more severe downturn.

Analyst Q&A

• Q: The company has seen very strong Q1 traffic growth. How is new customer acquisition trending, and how is your shifted marketing strategy driving brand awareness? /

  A: The quarter saw strong double-digit growth in both new and retained customers, driven by the shift from traditional marketing to social-first spend. Brand awareness (aided and unaided) still remains low relative to competitors, so the company is still in early innings of this growth journey. Building the customer email database is a key priority to enable personalized messaging and long-term customer lifetime value growth, and initial results from the new marketing approach have been very positive across all seasonal and trend-focused campaigns.

• Q: What foundational changes have you made to support sustained comp growth after four straight quarters of double-digit gains, and how much remaining merchandise opportunity do you see? /

  A: Key foundational changes include shifting from item-focused to storytelling-driven assortment merchandising, consistently refreshing products to align with customer demand, simplifying pricing, and eliminating the segregated Buy Beyond section to place higher-priced products in relevant in-line categories. Over 80% of products remain $5 and below, and higher-priced SKUs are performing well because they deliver strong relative value. All categories see remaining growth opportunity, with strong momentum already in toys, beauty, food, and candy, and the company has diversified its vendor base to support continued new product expansion. The cross-functional curtain-up seasonal activation model has also aligned the entire organization to improve execution.

• Q: Can you break down the contribution of trend-driven items like squishy dumplings to Q1 comps, and what unique cost pressures should be factored into a more conservative earnings scenario for 2027? /

  A: The underlying core strategy (strong product, value, improved stores, social engagement) is delivering a high single-digit annual comp run rate, with temporary additional contributions from Q1 higher tax refunds and the squishy trend. For costs, the two main unique items are transitory higher fuel/diesel supply chain costs (a 20-25 basis point headwind for the year, fully offset by tariff benefits and distribution efficiencies) and intentional increased marketing investment (a 20-25 basis point year-over-year increase, which is delivering strong returns and can be pulled back if the operating environment weakens).

• Q: Management maintained unchanged back half comp guidance despite strong Q1 performance, and Q2 guidance appears below current consensus expectations. Is this driven by expectations of a slowdown or intentional caution around macro factors? /

  A: The company is off to a good start to Q2, with strong early results from seasonal events like Mother’s Day and graduation. The guidance reflects intentional caution: the bulk of Q2 revenue comes in June and July, so there is still significant execution risk remaining, and the company has now fully anniversaried last year’s pricing actions, removing that tailwind. The mid-May squishy dumpling event was a successful one-day promotional event with constrained supply, and was not intended to be a material driver of Q2 comps, so it was not baked into the guidance as a large uplift.