Five Below's Q2 2025: Contradictions Emerge on Pricing Strategy, Store Growth, and Tariff-Driven Margin Pressures

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 27, 2025

Financials Results

• Revenue: $1.27B, up 23.7% YOY
• EPS: $0.81 per diluted share, up ~50% YOY
• Gross Margin: 33.4%, up ~70 bps YOY
• Operating Margin: 5.4%, up ~90 bps YOY

Guidance:

• Q3 sales expected at $950–$970M (midpoint +13.8% YOY); comps +5% to +7%; ~50 net new stores.
• Q3 adj. operating margin ~1% vs 3.3% LY; ~160 bps gross margin drag from tariffs; SG&A ~+100 bps (incentives, labor, inventory counts).
• Q3 net interest income ~$4M; tax rate ~26%; adj. EPS $0.12–$0.24 vs $0.42 LY.
• Inventory to remain elevated at Q3-end due to accelerated receipts.
• FY25 sales $4.44–$4.52B; comps +5% to +7%; adj. operating margin midpoint ~7.9% (up ~60 bps vs prior outlook; down ~130 bps YOY).
• FY25 net interest income ~$19M; tax ~26%; adj. EPS $4.76–$5.16; capex ~$210M; ~150 net new stores.
• Q4 framework unchanged: implied mid-single-digit comp; ~320 bps op margin decline with ~225 bps tariff drag; ~70% of deleverage in gross margin.

Business Commentary:

• Record Sales and Transaction Growth:
• Five Below reported over $1 billion in sales for the second quarter of 2025, marking the first time the company achieved this milestone outside of a Q4 quarter.
• This growth was driven by a 24% increase in total sales and a 12.4% increase in comparable sales, with a notable 8.7% increase in comparable transactions.

• The company emphasized strategic actions like curating relevant products, simplifying pricing, and improving inventory management as key contributors to this success.

• Inventory Management and Supply Chain Efficiency:

• Five Below ended the second quarter with approximately $800 million in inventory, a 12% increase on a per store basis compared to the previous year.
• The company accelerated receipts in response to shifts in the global trade environment, reflecting strategic inventory adjustments to be well-positioned for key seasons like the holiday.

• These actions are aimed at controlling the controllable factors and mitigating risks despite a volatile trade environment.

• Operating Margins and Profitability:

• Five Below's adjusted operating income grew nearly 50% to $55.1 million in Q2 2025, with an adjusted operating margin increase of approximately 90 basis points to 5.4%.
• This improvement was driven by fixed cost leverage on strong comp sales and strategic pricing adjustments that simplified the shopping experience.

• The company acknowledged the net impact of tariffs but highlighted proactive pricing and product strategies to mitigate these effects.

• Store Expansion and New Store Performance:

• Five Below opened 32 net new stores in Q2 2025, with a focus on strategic expansion into new markets, like the Pacific Northwest.
• The new stores showed productivity at target levels, contributing to the overall sales growth.
• The company's selective approach to new store expansion, focusing on white space opportunities and evaluating the best market fits, will continue to guide future growth.

Sentiment Analysis:

• Sales rose 23.7% to $1.27B; comps +12.4% with transactions +8.7%. Adjusted EPS increased 50% to $0.81. Management raised FY25 sales to $4.44–$4.52B and lifted operating margin midpoint ~60 bps to ~7.9%. Cash ~$670M, no debt. CEO: “We feel good about where the business is today,” entering Halloween/holiday with strong assortments. Tariff headwinds persist but pricing elasticity, mix, and mitigation reduced expected Q3 impact vs prior.

Q&A:

• Question from Edward Kelly (Wells Fargo): Holiday assortment plans and thoughts on Q4 comp/guide given easy compares and last year's lost sales.
  Response: Holiday will emphasize gifting, decor, stocking stuffers leveraging front/back of store with clearer timing messaging; Q4 comp framework stays mid-single-digit due to condensed, competitive season and consumer uncertainty.

• Question from Michael Lasser (UBS): What’s driving strong comps now vs past single-product fads; and why not pass more tariff costs via pricing?
  Response: Growth is broad-based across 6 of 8 worlds with strong traffic; price simplification showed favorable elasticity, but strategy prioritizes extreme value while selectively pricing to offset tariffs.

• Question from Simeon Gutman (Morgan Stanley): Which factors—trend, price simplification, execution—most drove success?
  Response: A flywheel of curated newness, improved in-stocks/flow and end-to-end execution, plus price simplification that eased shopping and limited unit degradation.

• Question from Kate McShane (Goldman Sachs): Role of licensing and progress on SKU rationalization?
  Response: Licensing remains key and is presented as cohesive statements; SKU rationalization to “fewer, bigger, better” assortments is improving clarity and performance, with more benefits ahead.

• Question from Charles Grom (Gordon Haskett): New store growth reacceleration and ticket drivers (UPT vs AUR)?
  Response: Plenty of whitespace with selective site criteria; Q2 ticket growth was largely AUR-driven with lower-than-expected unit degradation.

• Question from Seth Sigman (Barclays): Why is Q3 tariff impact lower than prior view and AUR outlook?
  Response: Tariff drag now ~160 bps (vs ~225 bps prior) due to better elasticity, sales mix, and updated mitigation; AUR should be similar to Q2, varying with mix.

• Question from Shervin (Truist Securities): Any benefit from de minimis/TEMU changes, and margin sustainability?
  Response: TEMU impact is uncertain and not material; momentum stems from kids-centric, experiential categories, and price actions with lower unit loss support improved tariff mitigation.

• Question from Matthew Boss (JPMorgan): How much of H1 comp is traffic/new customers vs basket; any Q3-to-date color?
  Response: Comps were led by transactions via new customer acquisition and repeat visits; AUR up low single digits; feel good about Q3 but no intra-quarter update.

• Question from Randal Konik (Jefferies): Update on shrink and sourcing strategy into 2026?
  Response: Chainwide physical inventories are underway (raising Q3 labor); results next quarter; sourcing remains diversified with accelerated receipts to navigate trade/tariff volatility.

• Question from David Bellinger (Mizuho): Opportunities in underperforming worlds and for 2026 growth (e.g., party/balloons)?
  Response: Plan to pivot from laggards and chase emerging trends; see additional upside in personal/holiday celebrations including party.

• Question from Jeremy Hamblin (Craig-Hallum): Incremental incentive comp impact and status of Five Beyond strategy?
  Response: Incentive comp deleverage now ~70 bps for FY; Five Beyond persists but is integrated in-line by category with strict wow/value criteria, not isolated in back.

• Question from John Heinbockel (Guggenheim): Store layout changes for Five Beyond and holiday chase vs closeouts?
  Response: Back of store used for seasonal statements while higher-price items move in-line; maintain test-and-chase agility and continue opportunistic closeouts that fit trend/value.

• Question from Brad Thomas (KeyBanc Capital Markets): Post-crisis priorities and resource allocation (store growth, remodels)?
  Response: With tariff response normalized, focus returns to product/value/experience, box optimization, and disciplined expansion while staying customer-first.

• Question from Anthony Chukumba (Loop Capital): Potential from KPop Demon Hunters trend for Halloween/holiday?
  Response: Teams are pursuing it where possible; broader strategy is to ride rising Asia-influenced trends (e.g., K-beauty, novelty food) across assortments.

• Question from Phillip Blee (William Blair): Runway for store-labor optimization and operations improvements?
  Response: Labor investments boosted conversion; price simplification improved efficiency; expect less SG&A deleverage as we lap and will redeploy hours to customer-facing work.

• Question from Joseph Feldman (Telsey Advisory Group): 2H comp mix of transactions vs ticket and elasticity outlook?
  Response: Expect ticket up low single digits with the balance driven by transactions, consistent with history.

• Question from Brian Nagel (Oppenheimer): Remaining tariff risks and evolution of mitigation?
  Response: Tariffs are an ongoing reality; mitigation spans pricing, assortment/mix, and supplier/country diversification with strong vendor support.

• Question from Michael Montani (Evercore ISI): Q4 margin split and tariff headwind detail?
  Response: Implied Q4 op margin down ~320 bps: ~70% in gross margin, ~30% in SG&A; ~225 bps net tariff drag assumed, plus some fixed-cost deleverage and higher incentives.