Five Below is backing away from self-checkout to limit theft after hit to profits

By Bill Peters

'The benefit of strong sales performance to our profitability was offset by higher-than-anticipated shrink headwinds,' CEO says

Teen-centric discount retailer Five Below Inc. on Wednesday said it would further limit self-checkout and take other measures to combat theft after executives said stealing at stores hit fourth-quarter profits a bit more than expected.

In doing so, the retailer - which sells clothing, toys, tech gear and home-decor items generally priced around $5 - joins chains like Dollar General Corp. (DG) and Target Corp. (TGT) in restricting self-checkout services. Shares of Five Below (FIVE) were down 15.9% on Thursday amid concerns about the retailer's profit forecast and the potential costs of the efforts to clamp down on theft.

After the market close on Wednesday, Chief Executive Joel Anderson said during Five Below's earnings call that he expected 75% of transactions across the chain to be done with the help of an employee, with a goal of 100% of transactions in stores at greater risk of theft.

He said other measures would include checking receipts, adding more staff and security measures, and using more over-the-counter checkout stations in stores where incidence of theft is higher.

Anderson said that "shrink" - retail-industry jargon for losses related to theft, fraud or employee error - was a "societal problem that accelerated over the last year." But the company said plans to combat the problem would take time to play out, and that it couldn't offer any details on the financial impact just yet.

Theft has been a regular source of complaints among retail executives and industry groups over the past few years, who have characterized it as a multibillion-dollar problem that has weighed on profit margins. But others have said calculating its financial impact can be tricky, and that retailers could be using theft to take the focus off of weaker demand for things like toys and athletic gear.

Five Below Chief Financial Officer Kristy Chipman said during the call that the chain's fourth-quarter operating margin of 20.1% was "consistent" with that of the fourth quarter of 2022. For all of 2023, operating margin of 10.8% was down from 11.2%, thanks in part to higher shrink and other costs, she said.

Five Below's actual shrink levels for last year, she said, came in at approximately 100 basis points higher than the prior year - 100 basis points equals 1% - before accounting for adjustments.

"The benefit of strong sales performance to our profitability was offset by higher-than-anticipated shrink headwinds, resulting in earnings at the low end of our guidance range," Anderson said in Five Below's earnings release, issued before the call on Wednesday afternoon.

"We have implemented additional shrink-mitigation initiatives based on our 2023 learnings," he added. "However, we expect the resulting benefits to take some time to realize, and therefore, we have not included any associated improvement in our outlook this year."

Online videos over the past few years have documented an array of smash-and-grab incidents. But shrink rates, by some estimates, aren't that much different now than they were before the pandemic. Others have said crime data is often too subjective to call out any definitive trends.

One industry group, the National Retail Federation, late last year deleted a phrase from an April report that indicated that organized retail crime was responsible for half of the retail industry's inventory losses in 2021.

Five Below on Wednesday said it expected full-year net sales of $3.97 billion to $4.07 billion, based on the opening of between 225 and 235 new stores and same-store sales that were expected to be anywhere from flat to up 3% when compared with the prior year. The company forecast full-year earnings per share of $5.71 to $6.22.

The sales forecast was below analyst expectations for $4.11 billion, and the midpoint of the company's same-store sales outlook was below estimates for a 2% gain. FactSet forecast earnings per share of $6.46.

Fourth-quarter results also missed estimates. During the fourth quarter, Five Below's net sales jumped 19.1% year over year to $1.34 billion, helped by holiday-season demand. The company earned $3.65 a share, compared with $3.07 in the prior-year quarter.

Analysts polled by FactSet expected Five Below to earn $3.78 a share on revenue of $1.35 billion.

Still, as consumers seek out cheaper options in an era of stubborn inflation, Jefferies analysts were optimistic on the stock overall.

"We like [Five Below's] value-oriented offering, nimble and scaling business model, ample real estate growth opportunity, and the upside potential offered by Five Beyond," they said in a research note on Thursday, referring to the segment of Five Below that sells items priced above $5.

"We see a path to [Five Below's long-term] store-count target of 3,500 units, which we think may be conservative," they added. "The inclusion of higher-price-point products in its assortment should enhance [Five Below's] value offering and yield many benefits."

-Bill Peters

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03-21-24 1457ET

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