Five Below is backing away from self-checkout to limit theft, after hit to profits

‘The benefit of strong sales performance to our profitability was offset by higher-than-anticipated shrink headwinds,’ CEO says

Teen-centric discount retailer Five Below Inc. on Wednesday said it would further limit self-checkout service and take other measures to combat theft, after executives said stealing at stores hit fourth-quarter profits more than expected.

Chief Executive Joel Anderson, during Five Below’s FIVE, +1.12% earnings call on Wednesday, said he expected 75% of transactions across the chain to be done with the help of an employee, with goal of 100% in stores at greater risk of theft.

He said other measures would include checking receipts, adding more staff and security and using more traditional over-the-counter checkout stations in stores where theft is higher.

Anderson said so-called “shrink” — retail-industry jargon for losses related to theft, fraud or employee error — was a “societal problem that accelerated over the last year.” But the company said plans to combat it would take time to play out, and that it couldn’t offer any details on the financial impact just yet.

Earlier on Wednesday, the chain — which sells clothing, toys, tech gear and decor generally priced around $5 — forecast full-year profit and sales that fell short of Wall Street’s expectations. Shares fell afterward.

“The benefit of strong sales performance to our profitability was offset by higher-than-anticipated shrink headwinds, resulting in earnings at the low end of our guidance range,” Anderson said in Five Below’s earnings release issued before the call on Wednesday afternoon.

“We have implemented additional shrink-mitigation initiatives based on our 2023 learnings,” he added. “However, we expect the resulting benefits to take some time to realize, and therefore, we have not included any associated improvement in our outlook this year.”

Shares tumbled 12% after hours.

Theft, organized or otherwise, has been a regular source of complaints from retailers and retail-industry groups over the past couple of years. Online videos over that time have documented an array of smash-and-grab incidents.

But measuring the financial impact of theft can be tricky. And “shrink” rates, by some estimates, aren’t that much different than before the pandemic. At least one analyst last year said that retailers could be using theft to take the focus off of weaker demand for things like toys and athletic gear. Others have said crime data is often too subjective to call out any definitive trends.

One industry group, the National Retail Federation, late last year deleted a phrase from a report in April that indicated that organized retail crime was responsible for half of the retail industry’s inventory losses in 2021.

Five Below on Wednesday said it expected full-year net sales of $3.97 billion to $4.07 billion, based on the opening of between 225 and 235 new stores and same-store sales that were expected to be anywhere from flat to up 3% when compared with the prior year. The company forecast full-year earnings per share of $5.71 to $6.22.

The sales forecast was below analyst expectations for $4.11 billion, and the midpoint of the company’s same-store sales outlook was below estimates for a 2% gain. FactSet forecast earnings per share of $6.46.

Fourth-quarter results also missed estimates. During the fourth quarter, Five Below’s net sales jumped 19.1% year over year to $1.34 billion, helped by holiday-season demand. The company earned $3.65 a share, compared with $3.07 in the prior-year quarter.

Analysts polled by FactSet expected Five Below to earn $3.78 a share on revenue of $1.35 billion.

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