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Five Below is ready to roll

Teen retailer Five Below is looking to become a household name following a wildly successful public stock offering this week that could see the company expand its store base from the current 200 units to 2,000.

Roughly 10 years after the company opened its first store in Philadelphia, Five Below on Thursday completed an initial public offering that involved the sale of 9.6 million shares priced at $17. Even though priced at the upper end of the initial $15 to $17 ranges, shares still surged at the open and by the end of the day closed at $26.50 as investors clamored for a piece of a growth retailer with enticing prospects.

The company added 50 stores last year and is on track to add 50 stores this year with plans to open 60 units next year. Same-store sales increased 12.1% in 2009, 15.6% in 2010 and 7.9% last year. During the same time frame, operating income increased from $6.9 million to $26.2 million for a compound annual growth rate of 95%.

The company’s stores are designed to offer a merchandise assortment and store experience that appeals to teens and pre-teens. Stores average about 7,500-sq.-ft. and contain roughly 4,000 items in categories identified as Style, Room, Sports, Media, Crafts, Party, Candy and Seasonal.

“We focus our merchandising strategy on maintaining core categories within our stores, but aim to generate high item velocity and sell-through to keep our assortment fresh and drive repeat visits,” the company said in its registration statement filed with the Securities and Exchange Commission. “We monitor trends in our target demographic market, historical sales trends of current and prior products and the success of new product launches to ensure that our merchandise is relevant for our customers.”

The company’s merchandising strategy and financial performance has led to a belief that over time the company could operate as many as 2,000 locations. To achieve that goal, Five Below is looking to expand its distribution capacity by opening a new facility in a southern state. Currently, the company stores are concentrated in the northeast and serviced from a single 421,000-sq.-ft. distribution center in Delaware. A second facility in a southern state would facilitate expansion into southern markets.

In addition to a clear strategy and an early record of financial success, investor optimism in Five Below stems from the experience of senior leadership and involvement of some high profile board members. The company’s executive chairman, David Schlessinger, founded the Zany Brainy specialty retail chain. Five Below president and CEO Thomas Vellios also served in that capacity at Zainy Brainy.

In addition, Five Below benefits from the involvement of veteran retailers as Staples chairman and CEO Ron Sargent and longtime CVS chairman and CEO Tom Ryan. Sargent invested in the company in 2010 through a company he controls in which Ryan is also involved. Both men serve on the retailer’s board and their expertise in guiding high growth retailers should prove invaluable in helping Five Below capitalize on its growth potential while avoiding pitfalls associated with rapid expansion.

Five Below contends its unique merchandise offering and value proposition enables it to target a market of teens and pre-teen markets that numbers around 63 million. It is a segment of the population with disposable income estimated to be more than $250 billion.

 

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