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Behind Five Below’s Rapid Store Expansion Strategy

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Apr. 16 2018, Updated 4:25 p.m. ET

Vision 2020

Five Below (FIVE) is one of the few retailers that is resisting a big industry trend. In an environment where retailers ranging from Macy’s (M) to JCPenney (JCP) to Sears (SHLD) are closing stores to cut down costs, Five Below is on a store opening spree. The company has upped its store openings target to 2,500 locations by 2020 from 2,000 projected earlier. The company expects new store openings to be the biggest catalyst that will help the company to achieve sales growth of 20% by 2020. The company operated 625 stores as of February 3, 2018.

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During the fiscal 4Q17 earnings conference call, CEO Joel Anderson stated that the new stores opened in fiscal 2017 were on track to deliver record first-year average unit volumes exceeding $2 million, making them the first such batch of stores. The company opened 103 net new stores in fiscal 2017 across 28 markets. The company opened 15 new stores in the California market, which it entered in 2017.

The company expects to open 125 stores in the current fiscal year in both existing and new markets. The company is also remodeling stores to provide a better shopping experience. Five Below is focused on opening in high-visibility areas to boost brand awareness.

Establishing a lean distribution network

Along with accelerated store openings, the company is also putting special emphasis on improving its distribution network. An efficient distribution network reduces logistics costs, thereby keeping a check on operating expenses. The company will open a distribution center in the Southeast and the Southwest in 2019 and 2020, respectively. The company is planning a 3PL (third-party logistics) in California in 2019 and another distribution center in the Midwest by 2021.

The company has projected capex for the year at $137 million, which will primarily be used for the opening of stores and the planned distribution center.

We’ll discuss some more growth initiatives of Five Below in the next part of this series.

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