Five Below has made “meaningful progress” optimizing its inventory as the discount retailer develops methods to “improve our ability to predict demand” and “track the movement of product through the supply chain,” CEO and President Joel Anderson told analysts last week on the company’s earnings call.
In Q3, inventories rose 8.8% year over year. On a per store basis, however, levels fell 5.1% YoY, according to CFO Kristy Chipman. She added that Five Below strategically ordered inventory earlier to ensure strong holiday in-stock position and that management is “pleased with the level and quality of our inventory going into this holiday season.”
The retailer has also opened an office in India, where the company has 50 sourcing factories. The office is “another example that will help us innovate,” Anderson said, having recently visited the site. “It will help us move faster. It will help us keep costing down and it really starts to spread out our supply chain to other countries.”
As Anderson explained, Five Below’s efforts around inventory are meant to drive both sales and profits, and revolve around pushing inventory productivity by using “more sophisticated processes, technology and analytics.”
Kenneth Bull, who moved from CFO to COO this year, noted in August that the company was working on a new merchandise financial planning system and replenishment forecasting tool.
“Using technology and data analytics, we are focused on improving inventory forecasting, ordering, replenishment and flow with a goal of increasing in-stocks and turns and improving end-to-end visibility,” Bull told analysts in August.
Asked by an analyst about where Five Below had the biggest opportunity on inventory, Bull pointed to the company’s buying and merchandising operations.
“It's all about buying better at the end of the day, making sure we've got the right inventory in the right location at the right time,” he said. “We want to make sure we have the ability to continue to place or buy those trends and put them in front of the customers appropriately. So, there's still opportunity out there. And it's going to come from process.”
Speed at various points in the supply chain has helped other retailers — including Target, Burlington and Abercrombie & Fitch, among others — keep their inventories in check by allowing them to better chase product.
To the extent that it helps source products more quickly, Five Below’s India office could aid that effort. Anderson told analysts in August that having team members in Asia would help “drive speed and improve quality along with strengthening strategic partnerships with key suppliers in the region.”
During 2022, Five Below sourced from about 1,000 vendors, with 60% of purchases coming from domestic vendors and no single vendor accounting for more than 5% of spend, according to the company’s 10-K. The retailer says its low-cost sourcing and operating model helps it meet its $5 price target for products.