Could Drugstore Real Estate Be Converted Into New Five Below Stores?
Five Below wants to open hundreds of new stores in a tight real estate market -- and former drugstore real estate might offer the best available conversion opportunities
Five Below reports its Q1 2024 earnings this week.
And executives are expected to affirm plans to open 225-235 new stores in 2024.
But in a tight retail real estate market, where will Five Below find the ready-to-go buildings and sites to meet its store opening objective?
One retail real estate category comes to mind:
Former drugstores.
Could recently vacated former Walgreens, CVS and Rite Aid drugstores be home to future Five Below stores?
Five Below has been here before.
In Q1 2023 its executives set a target to open 200 new stores during that year.
It was an aggressive goal — Five Below hadn’t opened more than 150 new stores in any of the four previous years.
Plus the Company had not yet even secured leases or commitments for many of the planned new sites.
And for those new sites for which it had executed leases, Five Below had encountered delays in obtaining municipal permits and delivery of spaces from Landlords.
So executives acknowledged that if Five Below was going to open 200 stores in 2023, over two thirds of the new store openings would happen in the back half of the year.
Ultimately, though, Five Below opened 205 stores in 2023 and exceeded its target.
How was it able to exceed its store opening goal?
Largely due to an assist from the bankruptcy and liquidation of closeout home goods retailer Tuesday Morning.
Tuesday Morning closed all 500 of its stores in 2023 after the 50-year old retailer went bankrupt for the 2nd time.
Tuesday Morning’s failure, though, ended up being a great opportunity for Five Below to pick up additional, “ready-to-go” real estate sites.
Five Below was the top bidder for 17 of Tuesday Morning’s store leases at a bankruptcy auction in March 2023 — and obtain near instant possession of the sites.
Most Tuesday Morning stores were larger than Five Below’s standard 8,000-10,000 square foot store prototype.
But the majority were in good condition and could be quickly and easily converted into a Five Below store.
Also by acquiring the Tuesday Morning leases, Five Below not only secured ‘move-in’ ready sites but it was also able to do without negotiating new leases with landlords.
So what other retail categories are facing bankruptcies, liquidations and store closures — and may offer a similar opportunity for Five Below to meet its 2024 target?
Drugstores come to mind.
Perhaps no retail real estate sector has been more impacted by store closures over the past year than drugstore real estate.
Rite Aid has closed over 520 drugstores just since filing for bankruptcy in October 2023 — and more closings are still possible as the chain struggles to reorganize.
Additionally, CVS and Walgreens have also each closed hundreds of drugstores over the past year as they seek to “right size” their real estate footprint.
So enough former drugstore real estate is likely on the market — but could it be a fit for Five Below?
Drugstore real estate does appear to be a relatively close match to Five Below’s real estate criteria in three important categories — size, location and product sales:
Size — most drugstores are 10,000 - 15,000 square feet, which is larger than the Five Below’s 8,000 - 10,000 prototype. But Five Below did take on several former Tuesday Morning sites that were larger than its prototype — and its executives noted that the additional size of these stores was “immaterial” to the Company.
Location — the majority of drugstores are freestanding buildings and only some are located in the regional shopping centers that Five Below currently targets. But Five Below has been modifying its real estate criteria in recent years and has opened stores in other types of properties including enclosed malls, outlets and grocery anchored centers.
Product — roughly 70% of drugstore sales consist of prescription and generic drugs. However, the average drugstore generates ~$2 MM in annual sales from non-drug “front-of-the-store” products like health and beauty items, toiletries and consumable goods. This annual sales level of non-drug products is comparable to an average Five Below store (even if its offering is a bit different).
And Five Below is not unfamiliar with drugstore real estate:
It has even opened new stores at a few former drugstore sites in recent years.
So could former drugstores be a key real estate conversion opportunity for Five Below?
Perhaps, but the Company is not (yet) aggressively pursuing these sites.
Five Below does not appear to have acquired any store leases that were offered for sale earlier this year in the Rite Aid bankruptcy.
And while Five Below did place bids on certain leases during the bankruptcy auction of 99 Cents store real estate earlier this month, it was not the top bidder for the leases.
But if Five Below is considering drugstore real estate, it may not want to wait long.
Plenty of former drugstores are already being repurposed into everything from fitness centers to restaurants, health clinics…and even car washes!