The Transformative Power of AI in Retail: Five Below’s Innovative Approach
While enthusiasm for AI strategies captivates investors, numerous executives face challenges in identifying, articulating, and executing lasting applications that enhance returns. Many perceive AI merely as an efficiency tool for current problems rather than recognizing it as a transformative force capable of shaping the future of an enterprise.
However, the trendy discount retailer, Five Below, serves as a prime example of harnessing AI for a forward-thinking mission. Established in Philadelphia in 2002, Five Below has rapidly grown to generate over $4 billion in revenue across nearly 1,800 stores spread across 43 U.S. states. With ambitious plans to expand by opening 150 new outlets in the fiscal year 2025, the company aims to effectively double its footprint. Notably, the retailer’s shares have appreciated more than 17% this year, reflecting investor confidence in its growth trajectory.
As Five Below embarks on this ambitious expansion within the notoriously challenging retail sector, it faces natural pressure from stakeholders for meaningful and measurable results. Recognizing this, the company has turned to AI to sharpen its competitive edge, manage inventory needs more effectively, and boost cash flow. Below are four strategic steps that differentiate Five Below in the retail marketplace.
Penny Pouncer: Mastering Inventory Management
Executives in retail commonly seek to avoid margin-eroding sales, markdowns, write-offs, and shrinkage. Yet, many turn to impulsive inventory-optimization measures that might temporarily alleviate symptoms but significantly elevate strategic risks. AI initiatives grounded in outdated optimization methods can lead organizations astray, as excessively conservative inventory approaches often alienate customers, frustrate suppliers, and weaken competitive positioning.
Five Below effectively breaks free from AI strategy inertia and overcomes challenges typical of the digital age by taking a more holistic approach based on the following principles:
1. Prioritize Strategy Over Scaling
Amidst professional jargon and abstract models, an effective strategy unambiguously defines how companies create customer value and differentiate from competitors. These two fundamental tenets are measurable, explainable, and actionable. A lack of focus can lead “scaling meetings” to devolve into operational troubleshooting, blame shifting, and a dilution of ambition.
To counter this, Five Below concentrates on its mission to be “the cool store for kids, the yes store for parents” when making AI investment decisions. This strategic framework enables the company to design business processes that not only empower store associates but also profoundly reshape corporate roles with an eye toward more strategic engagement. Plans and performance measures subsequently align with this mission.
2. Protect Digital Strategists
Five Below has partnered with invent.ai, an innovative AI decision-making platform designed to help retailers enhance revenue and margins through actionable insights related to sourcing pricing and merchandising. The proprietary algorithms employed by this platform can accurately forecast store and product sales across millions of SKUs and diverse product lines. This helps Five Below maximize inventory turnover while minimizing overstock—driving sales in the process.
Beyond basic analytics, CEO Winnie Park emphasizes how enhanced inventory selection allows store staff to elevate the customer experience. During the Q1 2025 earnings call, she stated, “To get the traffic across the threshold is one thing, and converting that traffic is another. We have made significant progress in terms of conversion rates. Customers are welcomed with fresh products that are engaging, and we’ve improved in wowing our customers compared to last year. Our investments into store experience—like increasing labor and simplifying processes—are yielding positive returns.”
By focusing on operational efficiency, Five Below has been able to invest more in the customer experience, which includes increasing employee hours and streamlining store processes. Employees, no longer preoccupied with inventory issues, can devote their attention to customer interaction—renewing foot traffic and increasing the size and volume of transactions.
3. Address Critical Value Chain Pain Points
Inventory management emerged as a central constraint for Five Below. The repercussions of forecasting errors can be severe—stockouts may trigger immeasurable lost sales and discontented customers, while overstock can drain valuable capital and reduce margins. Additionally, inefficiencies often lead to increased corporate bloat as companies expand staff to mitigate these problems and cover preventable errors.
As Tav Tepfer, Chief Revenue Officer at invent.ai, shared in a recent interview, Five Below’s approach is pragmatic: “Five Below’s transactions involve lower dollar amounts, and trying to apply the same rules across diverse categories — from phone chargers to candy to home goods — can complicate things. A rigid system struggles to handle this variety.”
Initially, Five Below sought to enhance rules-based strategies by hiring data scientists and introducing more complex practices. However, this only resulted in cumbersome manual processes for planners, who spent valuable time manipulating data in spreadsheets. The perishable nature of some products, like candy, necessitated a more agile approach.
Five Below’s Chief Strategy and Analytics Officer, Graham Poliner, recognized the immense value of the partnership, noting that AI enables better optimization of inventory levels, reduced instances of stockouts and overstocking, and ensures that each location effectively stocks the appropriate products. The implication is clear: effective inventory management translates into improved cash flow and previously overlooked employee productivity gains.
Tepfer highlighted the operational efficiency achieved through this collaboration—Five Below’s planners experienced an 80% boost in efficiency, effectively regaining four days of productivity each week that had previously been consumed by tedious manual data handling. This newly freed talent can now shift their focus to more strategic initiatives while enjoying higher job satisfaction, all while enhancing the shopping experience for customers.
4. Foster Accountability Through Real Business Metrics
Five Below goes beyond merely tracking AI performance through technical metrics. Their investor relations site emphasizes key success indicators that link sales growth, margin improvements, and cash flow enhancements. Remarkably, the retailer reports a rapid one-year payback on new store investments. To maintain financial success, executives must discern how AI contributions can facilitate expansion.
As Five Below doubles its network, it will require adaptive AI tools that can re-calibrate inventory distribution tailored to its broader geographic reach, ensuring that trendy products effectively meet the demands of its target demographic. The first quarter results of 2025 illustrate this positive momentum: new stores exceeded performance targets while comparable sales increased despite challenges faced within the retail sector.
Outgoing CFO Kristy Chipman expressed optimism, stating, “Total sales for the first quarter of 2025 climbed 19.5% to $971 million, while comparable sales rose by 7.1%.” These figures provide compelling evidence that customers are financially supporting the strategic direction of the company.
Redefining Retail: Premium Thinking
Organizations carry an often-overlooked duty to empower their most promising talent with sufficient resources to achieve peak performance levels. Five Below has recently taken significant steps to ensure its new board chair and CFO are adequately equipped to lead these transformative initiatives.
In a landscape where retail dynamics continually evolve, understanding the intersection of AI, strategic planning, and inventory management can dramatically reshape an organization’s future. As companies evaluate their own paths forward, Five Below’s example serves as a guiding light on how to successfully harness AI’s potential in the retail sector.