Analyst: Five Below posts ‘stunning set’ of second quarter numbers
The spinner craze continues to benefit Five Below which has produced a stunning set of second quarter numbers, beating even its own high expectations. Total sales rose by almost 29% over the prior year, supported by a 9.3% uplift in comparables. Meanwhile, a substantial expansion of margins fueled bottom line growth where net income was up by 71.4%.
As helpful as spinners have been, and as successful as Five Below has been in capitalizing on the craze, it would be unfair to attribute all of the group's success to this one trend. Certainly, spinners have helped to drive footfall and increase customer numbers, but we also believe that several other factors have boosted growth this quarter.
Foremost among these are improvements to the assortment. Categories like technology now have more authority, include far more 'must have' lines, and deliver some very compelling prices. These 'wow' products have proved popular among existing shoppers, and there is some early evidence that they are helping to draw in new customers. Fortunately, the process of range enhancement seems to be an ongoing process and, as such, we believe it will provide buoyancy to future quarters.
The refreshed format, which makes product display across several categories more compelling and engaging, has also been beneficial. This is helping to improve the return on investment from new stores and is aiding productivity at older stores where it has been applied. Again, there is much more runway here, so Five Below will likely accrue further benefits as the year progresses.
A smaller, but still important, contribution came from the later than usual tax refunds. This acted both as a slight drag on first quarter numbers and also provided a small but measurable boost at the start of the second quarter.
On top of these favorable dynamics, Five Below continues to expand at pace. Over the past year, store numbers have risen by 18.9%, and the company now has 584 stores across 32 states. That new shops quickly become profitable is allowing Five Below to drive this kind of fleet expansion while still posting good gains on the bottom line. Ultimately Five Below has set itself a target of 2,000 US stores — a figure that we still see as reasonable.
One of the more encouraging aspects of Five Below's store expansion program is its ability to flex across different types of market. The company now comfortably operates stores in rural, suburban, and urban locations. This allows much more headroom for growth and puts it ahead of other discount operators, many of which are still experimenting with urban shops.
Looking ahead we are optimistic about the prospects for Five Below. Its assortment and the way in which it sells remains distinct from other discounters and has captured the attention and spending of younger demographics. This should insulate it from some of the competitive pressures in the market and ensure that it maximizes share in the new locations it enters. Meanwhile, more embryonic projects — like the push into e-commerce, will augment an already strong growth story.
Dollar General beats Street, but profit slides; ups forecast
Dollar General turned in mixed results for its second quarter, with gains in sales but a dip in profits and a decline in gross margins.
Net sales rose 8.1% to $5.83 billion in the quarter ended Aug. 4, compared to $5.39 billion in the year-ago quarter, better than analysts were expecting. Same-store sales increased 2.6%, also better than expected, driven by increases in average transaction amounts and customer traffic.
Net income fell 3.8% to $295 million, or $1.08 per diluted share, compared to net income of $307 million, or $1.08 per diluted share, in the year-ago period. Included in diluted earnings per share for the 2017 second quarter was an approximate $0.02 charge primarily for the lease termination costs related to the stores it acquired. (Dollar General acquired 323 stores in the spring that were sprung off in 2015’s Dollar Tree-Family Dollar merger.)
Excluding items, Dollar General earned $1.10 per share, beating analysts' average estimate of $1.09.
Neil Saunders, managing director of GlobalData Retail, commented that Dollar General's bottom line pain is being caused by a range of issues, "none of which are easily solved."
"Foremost among these are various cost increases in wages, including at management level," Saunders said. "A rise in occupancy costs – which at mature stores are running well ahead of sales increases – was also unhelpful. A small acquisition created some lease termination charges, though unlike the other expense hikes, this is an exceptional entry."
Dollar General reported a 47-basis-point decline in gross margin to 30.7% from the prior-year quarter.
"This is a function of both higher promotional activity in a competitive marketplace and a shift in the sales mix towards lower margin consumables," Saunders said.
“I am pleased with our results at this point in the year," said Todd Vasos, Dollar General’s CEO. "For the quarter, same-store sales grew 2.6%, driven by an increase in our average transaction amount and, importantly, positive customer traffic. In a dynamic retail and consumer landscape, we continue to make targeted investments in our business to execute on our focused strategic and operating initiatives which we believe will contribute to sustainable improvement over time."
For fiscal 2017, the retailer plans to open approximately 1,285 new stores, which includes the originally forecasted approximate 1,000 locations plus the net acquired stores. It also is remodeling or relocating 760 stores.
Dollar General lifted the lower end of its profit forecast range for the year ending January. It now expects earnings of $4.35 to $4.50 per share, compared with a previous forecast of $4.25 to $4.50.
The company said its financial outlook does not reflect any potential impact from disaster-related expenses related to Hurricane Harvey, given the assessment of damage is still in process.
Dollar General operated 14,000 stores in 44 states as of August 19, 2017.
Study: Shoppers look for deals
As much as today's shoppers want convenience, they also prioritize saving money and will make time to uncover the best deals online and offline.
Over half (53%) of consumers indicated they invest over two hours a week looking for deals and savings across all sources, according to a survey from Valassis. About 25% of millennials and moms spend over four hours a week in their search for value.
According to the “2017 RedPlum Purse String Survey," in taking advantage of deals, 41% of respondents said they use an equal mix of print and digital coupons — up six percentage points from last year. More than half (52%) print out digital coupons for use in stores. Meanwhile, 71% said they would use a featured coupon code from a print advertisement to buy online. This group increases to 78% for millennials and 79% for affluent shoppers ($100K+ household income).
Mobile also plays a key role in how consumers save. More than three quarters of respondents and 93% of millennials use mobile while in a store to look for coupons and discounts.
Additionally, more than half of millennials said they have used their mobile device to compare deals online and in-store. Showcasing the power of mobile and geolocation data, 57% of consumers said they have visited a business after receiving an offer on their mobile device when they were near that location.
Other multichannel consumers’ savings habits include:
• Ordering more items online to qualify for free home delivery (31%), and using pick up in store services (15%);
• Using more print coupons (57%); and
• Using more mobile coupons and apps (42%; 55% for affluent shoppers, and 52% among millennials).
“Consumers are embracing a multitude of channels to browse, research, compare prices and make purchases,” said Curtis Tingle, chief marketing officer, Valassis. 'This is keeping marketers of both small and large businesses on their toes, as they work to disrupt consumers’ non-linear shopping journeys. Our recent research indicates that shoppers don’t necessarily delineate between the physical and digital shopping worlds; they want to be able to redeem print and digital deals both in-store and online.”