Five Below's Q2 2026: Contradictions Emerge on Tariff Strategies, Pricing, and Store Growth

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

Date of Call: None provided

Financials Results

• Revenue: $1.027B, up 23.7% YOY
• EPS: $0.81 per diluted share, up 50% YOY (vs $0.54 prior year)
• Gross Margin: 33.4%, up ~70 bps YOY
• Operating Margin: 5.4%, up ~90 bps YOY

Guidance:

• Q3 sales $950M–$970M (+13.8% YOY midpoint); comps +5%–7% (vs +0.6% LY); ~50 net new stores.
• Q3 adj. op margin ~1% (vs 3.3% LY); tariffs −~160 bps to gross margin; SG&A +~100 bps (incentive comp, store labor, inventory counts).
• Q3 adj. EPS $0.12–$0.24 (vs $0.42 LY); net interest ~$4M; tax rate ~26%.
• Inventory to remain elevated into Q3 to support holiday.
• FY2025 sales $4.44B–$4.52B; comps +5%–7%; op margin ~7.9% midpoint (down ~130 bps YOY).
• FY2025 adj. EPS $4.76–$5.16; net interest ~$19M; tax rate ~26%; ~150 net new stores; gross capex ~$210M.

Business Commentary:

• Record Sales and Transaction Growth:
• Five Below reported sales of over $1,000,000,000 for the second quarter of 2025, marking the first time this was achieved outside of a Q4 quarter.

• This growth was driven by a nearly 24% increase in total sales and a 12.4% rise in comparable sales, with a significant contributor being the 8.7% increase in comparable transactions.

• Effective Pricing Strategy and Assortment:

• The company employed a pricing strategy of simplifying their offerings to whole price points, focusing on products at $1, $2, $3, $4, and $5.

• This strategy drove customer response and acceptance, contributing to the improved sales and transaction numbers.

• Improved Inventory Management and Operational Efficiency:

• Five Below achieved better in-stock positions and improved inventory flow, leading to improved sales performance.

• This was attributed to efficient supply chain management and better communication of inventory flow to customers.

• Tariff Mitigation and Strategic Sourcing:

• The company has been actively mitigating the impacts of tariffs, with an increasing focus on diversification of their source base and vendor selection.
• This strategy was aimed at optimizing inventory availability and receipt flow, thereby managing the tariff-related costs and ensuring sustained sales performance.

Sentiment Analysis:

• Management said results were 'very strong and exceeded our expectations,' highlighted the first $1B quarter outside Q4, and reported comps up 12.4% with transactions +8.7%. Adjusted EPS rose 50% to $0.81 and operating margin expanded ~90 bps to 5.4%. They raised full-year sales and operating-margin guidance and expect to open ~150 net new stores. While tariffs and higher incentive comp are headwinds, guidance embeds these impacts (e.g., ~160 bps tariff drag in Q3), and management emphasized improved execution, pricing simplification, and strong holiday plans.

Q&A:

• Question from Edward Kelly (Wells Fargo): How are you thinking about holiday assortment and the Q4 comp/outlook given last year’s setup?
  Response: Holiday will emphasize gifting, decor, and stocking stuffers using front/back-of-store statements; Q4 comp outlook remains unchanged (mid-single digit) pending Q3, reflecting a competitive, condensed season and consumer uncertainty.

• Question from Michael Lasser (UBS): What’s driving the strong comps vs prior single-product cycles, and why not take more pricing to offset tariffs fully?
  Response: Growth is broad-based across six of eight worlds with stronger traffic and new customers; price simplification shows favorable elasticity, but they will preserve extreme value while selectively using pricing to mitigate tariffs.

• Question from Simeon Gutman (Morgan Stanley): What are the key drivers of success—trend, pricing simplification, execution?
  Response: A flywheel of curated newness, better in-stocks and inventory flow, stronger customer communication, and simplified pricing improved both customer experience and store efficiency.

• Question from Kate McShane (Goldman Sachs): Role of licensing and update on SKU rationalization benefits?
  Response: Licensing remains important and is now presented as cohesive cross-category statements; SKU rationalization to fewer, bigger, better statements is already improving clarity and sell-through.

• Question from Chuck Grom (Gordon Haskett): Outlook for reaccelerating store growth and breakdown of ticket growth (UPT vs AUR)?
  Response: They see ample white space and are selective on locations; ticket growth was primarily AUR-driven from price adjustments with lower-than-expected unit degradation.

• Question from Seth Sigman (Barclays): Why is the Q3 tariff headwind now ~160 bps vs prior ~250 bps, and how should we think about AUR?
  Response: Better-than-expected elasticity, sales mix, and refined cost mitigation reduced the headwind; AUR should be similar to Q2, varying with mix.

• Question from Scott Ciccarelli (Truist Securities): Any benefit from de minimis/timu changes and pricing vs inventory cost timing on gross margin?
  Response: Any TIMU impact is unclear and not a major factor; improved elasticity from Q2 is embedded in guidance and helps offset tariff costs.

• Question from Matthew Boss (JPMorgan): Decompose comp strength (traffic vs basket) and any Q3 intra-quarter color?
  Response: Comps were driven mainly by transactions (+8.7%) from new and repeat customers aided by social marketing; AUR rose modestly; no intra-quarter detail beyond confidence in guidance.

• Question from Randy Konik (Jefferies): Update on shrink initiatives and sourcing strategy into 2026?
  Response: They’re mid-cycle on broad physical inventories to gauge shrink and refine actions; continue accelerating receipts, ensuring capacity, and diversifying sourcing with an agile end-to-end approach.

• Question from David Bellinger (Mizuho): Where does momentum go from here; can underperforming worlds recover (e.g., party)?
  Response: They’ll stay agile—exit lagging trends and chase new ones—with more opportunity in personal/holiday celebrations, including party, to sustain growth.

• Question from Jeremy Hamblin (Craig Hallum): Magnitude of incentive comp and status of Five Beyond within pricing simplification?
  Response: Incentive comp deleverage increased to ~70 bps for the year; Five Beyond continues but is integrated in-line with categories, focused on wow value at $6–$7+ price points.

• Question from John Heinbockel (Guggenheim): Store layout changes (Five Beyond in-line), holiday chase, and role of closeouts?
  Response: Back-of-store will host seasonal statements (e.g., Halloween/holiday) while higher-price items move in-line; they will test-and-chase trends and continue opportunistic closeouts.

• Question from Brad Thomas (KeyBanc Capital Markets): Post-crisis priorities and where leadership will focus time (growth, remodels, box)?
  Response: Deeper merchandising focus from tariffs revealed more product opportunity; priorities include evaluating the box and growth while staying anchored on product, value, experience, and the core kid customer.

• Question from Anthony Chukumba (Loop Capital Markets): Opportunity from K-pop Demon Hunters and related trends?
  Response: They’re chasing the property where feasible and leaning into the broader Asia-influenced trend across categories like beauty and candy.

• Question from Philip Lee (William Blair): Runway in store-labor optimization and other in-store improvements?
  Response: Conversion gains reflect labor investments and pricing simplification efficiencies; as they lap labor increases, hours will be repurposed toward customer-facing work.

• Question from Joe Feldman (Telsey Advisory Group): 2H comp mix—transactions vs ticket?
  Response: Expect low-single-digit ticket growth with the balance of comp driven by transactions, consistent with historical patterns.

• Question from Michael Montani (Evercore ISI): Q4 margin pressure split and tariff headwind magnitude?
  Response: Q4 op margin down ~320 bps with ~225 bps net tariff drag; about 70% of the deleverage in gross margin and 30% in SG&A (incl. incentive comp and fixed-cost deleverage).

• Question from Brian Nagel (Oppenheimer): Remaining tariff risks and how mitigation will evolve?
  Response: Tariffs are a constant; mitigation via pricing, assortment shifts, sourcing diversification, and vendor partnerships is embedded in the outlook and will continue to evolve.