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Activist Target: Five Below

By Alexandra Garfinkle

Though Five Below Inc. (FIVE) has done well overall since its debut on the public markets in 2012, the company’s recent poor earnings show vulnerabilities that an activist could target, according to at least one analyst.

The tween- and teen-focused retailer — in which Dan Loeb’s Third Point LLC owns a 1.5% stake, according to mid-November filings — has seen its shares drop roughly 5% in the past 12 months. The company particularly took a hit after it posted disappointing holiday earnings and, more generally, said it was negotiating “pricing confusion,” Judah Frommer of Credit Suisse AG told The Deal.

Overall, the company’s growth trends have been positive, and Frommer described the Philadelphia-based company as the rare “square-footage growth story,” since Five Below’s growth is tied to an increase in brick-and-mortar retail locations. The company also has few one-to-one competitors, said Frommer, who pegged Harrisburg, Pa.-based Ollie’s Bargain Outlet Holdings Inc. (OLLI) as Five Below’s nearest competitor.

Five Below stores are directed at individuals aged between 12 and 20, particularly those who don’t have credit cards and the spare time to hunt for a bargain.This separates Five Below from publicly traded dollar stores, which generally target an older demographic.

“The treasure hunt seems to drive people into [Five Below] stores,” Frommer said.

Five Below, however, fell short of expectations in the aftermath of the 2019 holiday season, which was six shopping days shorter than in 2018. To Brian Nagel of Oppenheimer & Co., this is one of a few factors that amounted to Five Below’s holiday sales dropping more than 2% year over year.

“A number of retailers have bemoaned a shortened holiday selling season as a recent sales challenge,” Nagel wrote on Jan. 14. “That said, we view a lacking online effort and a reliance upon traffic to other nearby chains as key factors that render [Five Below] more susceptible to the challenges of fewer holiday selling days.”

Additionally, Five Below hasn’t found its sweet spot in terms of its overall pricing policies. The company somewhat controversially decided to raise the prices on some of its items, including tech accessories, to $5.50.

“They continue to struggle with what to do on the price point front,” said Frommer, who also noted the company’s experimentation with a “Ten Below” concept — that is, a section of stores devoted to products $10 and under.

Governance-wise, Five Below has a nine-person board with an average tenure of 4.92 years, according to BoardEx, a sister company of The Deal. No board member’s tenure has exceeded 7.5 years to date, and no board member is above the age of 68, good signs for the company’s management.

No single shareholder, though, has a blocking stake in the discount retailer, which could be a boon for an activist. For instance, Five Below’s shareholder base consists of a few insiders and a number of high-profile institutions, such as BlackRock Fund Advisors, which holds an 8.17% stake, and Vanguard Group Inc., which holds a 9% stake in the company.

The individual with the largest stake is Five Below CEO Thomas Vellios, who owns 1.09% of the company.

The deadline to nominate directors at Five Below is April 19, and the retailer’s annual meeting was held in June in both 2018 and 2019.

To be sure, activism at discount retailers has been active recently, though completed M&A in the space hasn’t occurred since 2015.

For instance, in 2019, hedge fund Starboard Value LP launched, but eventually canceled, its change-of-control proxy contest at Dollar Tree Inc. (DLTR). Sources at the time indicated private equity was the most likely buyer, with large buyout shops such as KKR & Co. (KKR), Apollo Global Management LP (APO), Blackstone Group LP (BX) and Sycamore Partners LLC presenting the most experience in the retail space.

The last deal in the sector closed in June 2015, when Family Dollar Stores Inc. was acquired by Dollar Tree for $9.2 billion. The two gained regulatory approval through a divestiture package to Sycamore.

Third Point declined comment.

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