Five Below, Inc., not to be considered as your typical ninety-nine cent store. For unlike competitors such as Dollar Tree and Dollar General that focus on necessities such as laundry detergent and toothpaste, the firm caters to a target demographic of teen and preteen customers by offering a various selection of products across a number of categories including style, room, sports, tech, toys, party supplies, and seasonal items – all priced between $1 and $5.

And so far, 2018 has been a successful year as Five Below continues to experience robust increases in profit margins from the opening of new store locations. In doing so, Five Below takes great pride in its bricks-and-mortar outlets over a much smaller online sales operation via the company’s webpage.

But as Five Below continues to expand across different parts of the country, its real estate costs could also begin to hurt them by accruing excessive debt under long-term leases.  

In the fiscal third quarter, Five Below reported an outstanding year-to-date increase in net sales of 23.7% to $956.9 million, followed by a 72.2% increase in profit to $60.4 million. President and CEO Joel D. Anderson acknowledged that the firm’s biggest driver derived from the opening of new stores.

Also, the company indicated committing to 35 new store leases with terms of 10 to 15 years and future minimum payments of approximately $61.2 million, totaling a sum of 118 additional locations this year all-together. In comparison to 2017, the number of new store openings has increased so far by 16%.

Along with the move, Five Below also acquired other commitments of approximately $7.5 million in purchase agreements for materials used towards the construction of the new stores.

In addition, Five Below also signed a purchase agreement for land and building construction back in June for an approximate 700,000 square foot distribution center located in Georgia. The company reported its cost to be approximately $42 million and expects to occupy the space sometime in early 2019.

Indeed, Five Below has demonstrated to have ample room to expand profitability, particularly as its nimble supply chain and distribution network are well-suited to meeting the ever-changing demands of its customers. Its assortment offers a young target clientele wide variety of items in a tailored store environment while giving their parents a measure of cost-certainty.

With more than half of its items priced at or below $3 and the average store transaction totaling around $15, Five Below’s physical locations have the tendency to fulfill orders more economically than competing digital sellers can on an item-for-item basis, considering shipping costs.  

However, Five Below has yet to achieve competitive edge over its clientele. For which competition for discretionary dollars spent on younger consumers is fierce and widespread, coming from not just other retailers but also entertainment providers such as mobile apps. Competitive pressure from online retailers boosting their distribution cost leverage, and threat from physical rivals such as mass merchandisers dedicating their aisles to items priced at a given dollar amount or less.

The need to consistently provide a high level of value at a low price could limit Five Below’s profit margins despite burgeoning operating leverage. As well as the expansion of new store openings. If they are not careful, the accrued costs could eventually catch up to them.