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Five Below (FIVE -22%) is under pressure today after lowering Q2 (Jul) guidance and announcing its CEO has stepped down, effective immediately. Also, a number of analysts downgraded the stock this morning. The value retailer lowered EPS to $0.53-0.56 from $0.57-0.69 and revenue to $820-826 mln from $830-850 mln.

• We did not get a lot of color in last night's press release. However, Five Below has been dealing with weakening sales. Recall that FIVE guided Q2 revs well below consensus when it reported Q1 revs in early June. Then just six weeks later it guides lower again. If you check out our guidance calendar archive, you will see several instance of where FIVE has recently lowered guidance.
• The comps were a trouble spot also. Comps quarter-to-date are down -5%. As such, FIVE now expects Q2 comps to be -7% to -6%, perhaps a slight worsening from prior guidance of a "mid-single digit decrease." On its Q1 call, FIVE said it experienced a meaningful slowdown in sales during the back half of the quarter. Negative comps were driven by a decline in transactions. Also, consumers were more discerning with their dollars, increasingly buying for need and less on discretionary items.
• It seems that trend has continued into Q2. Customers are focused more on consumable categories, such as candy, food and beverage, beauty and less on discretionary items. A silver lining is that FIVE reported positive comps in Q1 from its higher income cohorts, suggesting some trade down of these customers seeking value. However, FIVE saw underperformance in the lower income demographic, which more than offset these results.
• And it is not just the top line, margins have been hurt by rising levels of shrink (retail theft) in recent quarters. FIVE made progress in Q1 with its shrink mitigation efforts by reducing self-checkout lanes and by having employees stand by the front door to discourage shoplifting. It also has been doing receipt-checking at some stores, similar to what you see at Costco. However, last night's downside EPS guidance makes us wonder if trends worsened in Q2.
• In terms of the CEO news, Joel Anderson has stepped down as CEO. We suspect the board was frustrated and had seen enough bad quarters/guidance to warrant a change at the top. The company has begun looking for a permanent replacement.

Overall, we have noted our concerns about FIVE for several quarters. FIVE has some consumable categories (candy, food, beverage, beauty), but the majority of its sales are discretionary in nature. Couple that with high exposure to lower income consumers, which are impacted more by inflation, and it's a recipe for weak results. We think replacing the long time CEO is probably the right move. We think a new perspective would be helpful, and hopefully it's an outsider.

Also, we wonder if FIVE's recent struggles will slow its red hot expansion pace, which we think has been overly aggressive. FIVE now has 1,600+ stores. It added 150 new stores in FY22, 204 in FY23 and has guided to 230 in FY24. Reducing new store buildouts would allow FIVE to conserve cash. The company does not pay a dividend, so that does helps save money, but we think a slowdown in openings in possible, especially when a new CEO takes over and takes a fresh look.