We sold Five Below (FIVE)

We elected to sell Five Below (FIVE) for clients in our Opportunities strategy following abrupt news that the CEO was stepping down and the company was revising guidance lower. 

We got this one wrong and own the mistake. We are temporarily holding the proceeds in strategic cash and plan to redeploy that cash into other higher conviction positions in the near future.

Let’s dive in.

We sold Five Below

Our thesis for Five Below (FIVE), one of the leading specialty discount stores in the U.S., was fairly simple and largely centered around the unit expansion opportunity (i.e. new store growth); that is, Five Below’s runway to open more stores (with high returns on capital) and further penetrate underserved markets across the country.

Despite the unit expansion story tracking in line with our expectations, it’s clear we misinterpreted the near-term spending trends of the lower-end consumer. We believe the last few years of inflation and elevated interest rates (and thus borrowing costs on mortgages, auto loans, etc.) have had a larger consumer impact than we originally expected and are now culminating in materially weaker spending by lower income households on discretionary purchases which happen to constitute much of Five Below’s inventory.

While management believes the worst is behind them, our confidence has eroded given softening sales (worse than management’s previous guidance), an abrupt CEO departure, and management’s admission of self-inflicted wounds such as disappointing merchandising efforts (e.g., lack of on-trend products).

The stock has clearly turned into a ‘show me story’ that we believe will require at least several quarters of positive momentum and a bigger reset of investor expectations by the new management team in order to regain investor trust. Even if management is able to regain control of execution efforts within its power, the challenging macro environment may prove to be a more persistent overhang for the company than many investors appreciate today – a scenario still not fully baked into the stock’s valuation, in our eyes.

Suffice to say, we were wrong about Five Below. As mentioned in our Q2 Investor Letter, we had intentionally kept FIVE one of our smallest positions in our Opportunities strategy because of the execution and macro concerns we’d observed in months prior. While this minimized the portfolio impact from the stock’s decline, we regret not exiting sooner. We’ll be conducting a full post-mortem to better understand where we were incorrect, and how we can mitigate these mistakes moving forward.

The proceeds from the sale have been allocated to strategic cash for the time being. We plan to redeploy that cash into other higher conviction positions in the near future. You’ll notice these changes in the coming days and we’ll of course keep you updated and informed every step of the way.

As always, let us know if you have any questions about the recent trades; we’re happy to assist.

– Your Titan Team

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