Five Below Funded to Grow

Five Below's founders, David Schlessinger and Tom Vellios, formerly the founder and CEO, respectively, of Zany Brainy, are again targeting teens and pre-teens, this time with a mix of "extreme value, trend-right, quality merchandise in a vibrant shopping environment," says Schlessinger. It includes thousands of items encompassing sporting goods, games, accessories, jewelry, hobbies and collectibles, bath and body, snacks and beverages, room décor and storage items, stationery and school supplies, computer software, books, electronic accessories, novelty and gag items, and seasonal products.

Vellios and Schlessinger see the concept as a new retail category within the specialty discount market. They describe it as "a reinvention of the traditional five-and-dime for today's younger generation." The first Five Below opened in October 2002, "and by next week, there will be 27 units," Vellios tells GSR.

Stores range between 4,000 sf and 5,000 sf and are located primarily in strip centers along the east coast from Virginia to New Jersey. "We built the concept around strip center locations," Vellios says, "because that's more of a destination for teens, pre-teens and their Moms. It makes shopping easier and more convenient for them." The projected expansion through 2006 will follow the same format and also remain in the Virginia to New York corridor.

"The primary things we look for in locating a store is a strip mall with access and visibility, density and demographics with good 'kid count'," Michael Levin, EVP of operations, tells GSR. He's in charge of real estate. "We're still really in the process of learning a lot about our shoppers," he says, "but density is important. We want to be in front of a lot of shoppers. We have four mall locations, but that is just because of some opportunistic circumstances.

"Ideally we want to be on a busy road and next to stores that draw a lot of traffic. Income in Lancaster PA is different from the Main Line," Levin adds, "so the level we look for varies from place to place, but basically, it's the middle-income level."

Of his company's investment in Five Below, Michael Ross, an LLR partner, tells GSR, "we think Five Below is an innovative retail concept with a very attractive target market. There are 23 million tweens between eight and 12 years old with huge spending power. The stores are very profitable. We think the number of stores could eventually go to 1,000.

"We've known these guys for years," he says of Schlessinger and Vellios, "and we're very high on the management team." He speculated that the retailer could go public "in a couple of years, or sell to another retailer. This is a pure equity investment for us. In the past three years, the team has invested and rolled out what is essentially a new market niche. Schlessinger and Vellios have stellar reputations in the retail sector, and we are excited to work with them as they take Five Below to the next level."

In the March 31, 2005 edition of CNN/Money, Neil Stern, a retail analyst and senior partner with Chicago-based McMillan Doolittle retail consulting firm, listed Five Below among "five hot retailers on the IPO radar." Of Five Below, he said, "don't expect (an IPO) any time soon," but also said, "it could happen any time soon." He credited the retailer's strength to its use of "a dollar store concept to create a store catering exclusively to the lucrative teens and tweens market. . . . This retail concept can potentially grow very, very fast," he added.

The concept has spawned a competitor, BTween $1 and Five, based in Irving, TX. That company opened five stores, all in Texas, last year, beginning in August and plans to add about a dozen more this year. Like Five Below, products are all priced at $5 or under and all of the prices are in even, $1, $2, $3, $4 and $5 increments.

LLR and its affiliates manage $620 million in private equity. Ross says it invests primarily "in middle market companies with growth potential, proven business models and outstanding management teams." To him, Five Below fits his company's $20-million bill.