Five Below Solves AI Strategy With 4 Smart Steps

While AI strategy potential infatuates investors, many executives struggle to identify, articulate and deploy lasting strategic, return-enhancing applications.

That’s because too many, see AI, at best, as an efficiency tool to fix today, rather then a transformative force to shape and ensure an enterprise’s future.

Impressively, trendy discount retailer Five Below exemplifies the latter as it chases its mission to be “the cool store for kids, the yes store for parents.” Founded in Philadelphia in 2002, Five Below’s revenue now tops $4 billion across nearly 1,800 stores in 43 U.S. states. Growth plans include 150 new stores in FY 2025, with aims to soon double the presence. Accordingly, its shares are up over 17% this year.

Investor expectations of ambitious expansion in the inherently thorny retail sector, naturally challenge board and c-suite leaders to deliver meaningful and measurable results. That’s why Five Below tapped AI to sharpen competitive edge, master inventory needs and drive cash flow. Four uncommon steps set the burgeoning retailer apart.

Penny Pouncer

Retailer executives loathe margin-squeezing sales erosion, markdowns, write-offs and shrink. Unfortunately, impulsive, inventory-optimization metric chasing often soothes symptoms while elevating strategic risk.

That’s why AI initiatives, built on legacy optimization convention, can go quickly astray. Inventory skimping and myopic procurement chases off target customers, frustrates suppliers and diminishes competitive position. Conversely, Five Below exemplifies how to shatter AI strategy inertia and overcome digital era ineptitude:

1. Prioritize strategy over scaling. Cutting through all of the pricey consultant-speak and obtuse, idealistic models, strategy clarifies how companies (1) create value for customer and (2) differentiate from competitors. Both parsimonious tenets are measurable, explainable and actionable. Otherwise, “scaling meetings” devolve into operational troubleshooting, blame shifting and ambition dilution and deferral.

Simply, Five Below prioritizes its longstanding mission to be “the cool store for kids, the yes store for parents” to frame AI investment decisions. Resulting business process choices free store associates to elevate customer experience and dramatically reshape corporate staff responsibilities for more strategic attention. Plans and measures follow.

2. Protect digital strategists. Five Below partnered with invent.ai, a pioneering AI-decisioning platform that helps retailers grow revenue and margins with actionable sourcing pricing and merchandising insights. Specifically, their proprietary algorithms forecast store and product sales across millions of SKUs and diverse product lines to maximize inventory turns, minimize overstock and, importantly, drive sales.

Beyond bean counting, Five Below CEO Winnie Park sees how smarter inventory selection frees store staff to elevate customer experience. She explained on the Q1 2025 earnings call, “To get the traffic across the threshold is one thing and to get them to convert as a second. And we’ve also seen really nice progress in terms of conversion. Customers are greeted with fresh new products that they can see [and] we did a much better job wowing our customers compared to last year. The investments in store experience including increasing labor and simplifying processes are paying off.”

Operational efficiency is a means to enable Five Below to invest more in the customer experience, including increased labor hours and simplified store processes. When employees are not distracted managing inventory challenges, they can focus on customer engagement that renews traffic and bolster transaction size and volume.

“Our crew is now in a much better position to assist customers while also ensuring our shelves are stocked with trend-right products. We remain committed to making the store easier and more fun to shop for our customers,” Park highlighted.

3. Fix a glaring value chain pain point. Five Below identified inventory management as its vital business constraint. Forecasting errors carry heavy costs — stockouts fuel immeasurable lost sales and frustrated customers, while overstock gobbles precious capital and dents margins. Additionally, performance drag often drives corporate bloat as corporate staff grow to mask inefficiency and solve unforced errors.

Tav Tepfer, invent.ai’s chief revenue officer, contrasted her client’s approach in a recent Philadelphia Inquirer interview, explaining, “Five Below’s transactions have lower dollar amounts. When you try to take all the categories the company’s has — phone chargers, candy, home goods — it was a challenge to apply the same rules to each of those products and make sense of it all. A system that’s very rigid can’t handle that.”

She noted, “At first, Five Below started adding smart people to add more rules-based strategies behind the data. They hired data scientists. It meant lots of manual work for their planners, dumping things into spreadsheets, manipulating data into their format, dumping it back. That takes time. But candy melts in a distribution center — you can’t let it sit forever.”

Five Below chief strategy and analytics officer Graham Poliner, immediately saw the partnership value, citing how AI “helps us optimize inventory levels, reduce stockouts and overstocking while ensuring that each location has the right products at the right time.” That translates into cash flow — and underestimated employee productivity.

“They had 80% higher efficiency for their planners. You could say they got four days a week back for them because of all the manual work they didn’t have to do anymore,” Tefler emphasized. That frees high-priced talent to both be more strategic and enjoy higher job satisfaction — with ample squishmallows for smiling customers.

4. Mandate accountability with real business metrics. Five Below doesn’t just track AI performance through technical metrics. Their investor relations site touts success indicators that connect sales growth, margin gains and cash flow. The company reports an astoundingly speedy one-year payback on new stores. To continue that fsical success, executives must discern how AI investments can handle expansion.

As the retailer doubles its network, it will need adaptive AI tools to re-write inventory distribution curated to its wider geographic footprint so that trendy products meet its target demographic. Its Q1 2025 results demonstrate this momentum. New stores outperformed targets and comparable sales increased despite retail sector challenges.

Outgoing CFO Kristy Chipman, beamed “Total sales in the first quarter of 2025 increased 19.5% to $971 million. Comparable sales increased 7.1%.” That’s substantive, compelling evidence customers are embracing strategy with their wallets.

Premium Thinking

Companies have an under-appreciated leadership obligation to equip high potential talent with adequate resources to deliver top performance. Five Below just did so for its newly-appointed board chair and CFO. Who’s AI strategy is bargain basement?