Five Below to open flagship store on Fifth Avenue

Key Points
  • Five Below's first location in Manhattan, on Fifth Avenue, is set to open later this year.
  • Commercial rents are starting to stabilize in the city, making it more feasible for retailers to either move in or expand.
  • Five Below has roughly 600 locations in the U.S. today but envisions having more than 2,500 stores in the future.
Source: Five Below

Value retailer Five Below is moving into one of the most desirable yet pricey shopping districts in the U.S.: New York's Fifth Avenue.

The location, which will be Five Below's first in Manhattan, is set to open in November near Bryant Park in between 44th and 45th streets, the company told CNBC. It will be about 10,800 square feet, compared with an average Five Below store that's roughly 8,000 square feet.

The move comes as New York, along with the rest of the U.S., has seen a glut of vacant storefronts come back on the market. Companies like Bon-Ton and Toys R Us have filed for bankruptcy in recent months, shuttering hundreds of stores across the country as a result. In New York specifically, growth has been hampered by sky-high rents and brokers unwilling to negotiate on price and lease terms.

More recently, however, the situation has improved — landlords are more willing to accommodate and pricing pressures have eased, real estate analysts based in New York tell CNBC. This has opened up the doors for more expansion: e-commerce brands like Casper, Everlane and Allbirds are setting up shop in the city, while international retailers like Primark are increasingly interested in moving there.

According to a recent report from the Real Estate Board of New York, average asking rents declined in 9 of 17 New York corridors from a year ago during the spring. Still, rents on the upper half of Fifth Avenue — starting at 49th Street and close to Five Below's new store — were a whopping $3,900 per square foot, on average, REBNY found.

This pocket of the city, right near Times Square, can be a marketing ploy for retailers today more than anything else. Steep rent payments can be justified by the foot traffic that comes past your doors, the photo ops and the word of mouth generated simply by being there.

"This is a unique opportunity for us to establish a presence in one of the world’s most iconic and popular shopping destinations and introduce new customers to the Five Below brand," CEO Joel Anderson said.

To open 125 stores in 2018

Ahead of the New York opening, Five Below has already embarked on an aggressive store growth strategy, with plans to open about 125 locations in fiscal 2018, adding to the roughly 600 it has today. As it opens new stores, Five Below anticipates roughly one-third of its store fleet will be "refreshed" by the end of the year — this means brighter signage, white shelves instead of gray, and other enhancements. Anderson has said he envisions a day when the company has more than 2,500 locations.

Five Below also sees a huge opportunity to take a larger share of the toy market in the wake of the demise of Toys R Us.

Its stores sell everything from Barbie dolls and squishies, to fidget spinners and board games, all for less than $5 per item. Anderson said recently on a call with analysts and investors that Five Below has been "introduced to several new vendors as the Toys R Us transition [has] taken place."

The inside of one of Five Below's existing locations.
Five Below

The Five Below store in Manhattan will be built with New Yorkers and tourists from around the world in mind, featuring local merchandise where there's extra space inside, the company told CNBC. The building will sit in close proximity to Best Buy, Barnes & Noble, Adidas and the NBA Store, to name a few.

While they're not direct competitors, off-price retailers T.J. Maxx and Ross Stores, along with dollar stores Dollar General and Dollar Tree, each target the same shoppers as Five Below: people who live on a budget, are in search of value and don't mind a treasure-hunt browsing experience.

Those companies, along with luxury brands like Tiffany and Kate Spade-owner Tapestry, have seen the most success in the industry of late. Retailers in the so-called middle market, namely department stores, are suffering because they don't tout something entirely unique — something that you can't find online.

On the heels of a strong fiscal first-quarter earnings report, Five Below shares are up more than 115 percent from a year ago, trading around $100. The company has a market capitalization of roughly $5.5 billion.

Risky bet

Retail industry analysts are largely optimistic about Five Below's growth prospects, especially as the discount retailer maps out more stores across the U.S. where others have failed.

"We believe the upside from here lies in several areas, including store growth, consistent improvement in merchandising and the value proposition (scale helps) ... increased TV marketing and brand awareness, an expanded store remodel program next year and potentially a loyalty program further down the road," Jefferies analyst Daniel Binder said.

Matthew Boss, a retail analyst at J.P. Morgan, recently raised his price target on Five Below's stock to $107 from $87, saying the company's first-quarter results back up his investment thesis. Boss said Five Below is set for years of solid income growth and share price gains thanks to new store openings.

To be sure, not all retailers that have ventured to Fifth Avenue or Times Square have succeeded there. Five Below is taking that risk, and people will be watching. Aeropostale, Toys R Us and FAO Schwarz, to name a few, were each once in the area, with massive flagship shops that ultimately they couldn't continue operating.

Many retailers today are avoiding running down that same path by signing shorter leases, thereby committing to less time in a certain spot. Five Below declined to comment on the length of its upcoming lease in Manhattan.

WATCH: Five Below reports first-quarter earnings

Five Below beats on top and bottom
Five Below beats on top and bottom