This Discounter Is Killing Wal-Mart

It had been a pretty disappointing run for discount retailers this earnings season before Five Below posted blowout quarterly results last night.

Dollar General shares took a 9% hit the day it reported uninspiring quarterly results last week. The deep discounter lowered its guidance for the balance of the fiscal year. Wal-Mart and Target disappointed investors last month, surprising the market with negative same-store sales for the period.

Now we have Five Below -- a fast-growing retailer that sells fashionable clothing, accessories, and furnishings for $5 or less -- showing the market that there's still a way to do thriftiness right in this market.

Net sales soared 33% to $95.6 million in its latest quarter, fueled primarily by the popular concept's brisk expansion. However, unlike Wal-Mart and Target, which failed to surpass what their average store raked in a year earlier, Five Below's comps rose an encouraging 4.2%.

Results were just as impressive on the bottom line, where Five Below reversed a year-ago deficit by posting a better-than-expected profit of $0.05 a share. Unlike Dollar General, which offset any warm fuzzies about its positive comps by hosing down its outlook, Five Below is raising its guidance.

Five Below now sees an adjusted profit of $0.65 a share to $0.68 a share on $524 million to $529 million in net sales for the entire fiscal year. Three months ago it was targeting no more than $0.65 a share in earnings on $516 million to $521 million on the top line.

Why is Five Below doing so well at a time when Dollar General, Wal-Mart, and Target are struggling? The key here is Five Below's appeal to young shoppers. Teens and young adults have realistic expectations about what $5 will get them, but Five Below has managed to resonate with young consumers. Target may be cheap chic, but Five Below is succeeding with its cheaper chic approach.

Wal-Mart may not care. Five Below may be eating at Target's popularity with young shoppers, but Sam Walton's discount department store chain never really appealed to youthful penny pinchers. A whopping 60% of the country shops at Wal-Mart in any given month according to the chain! Why should it be bothered by a company ringing up less than $530 million in sales when it's eyeing nearly $500 billion in sales this year?

Well, Wal-Mart's slipping comps show that there's more to discounting than low prices. Five Below has excelled at figuring out what young shoppers want, and if Wal-Mart's smart, it may want to consider snapping up the trendy discounter -- possibly opening locations within its own stores -- before those young shoppers grow up without any kind of loyalty to the Wal-Mart that their parents used to shop at.

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