• Five Below's sales were hurt due to overstock of Squishmallows and price-sensitive customers.
  • Inflation has made customers prioritize food and drink items, said Five Below CEO.
  • Low-cost retailers say they're seeing a slowdown in discretionary spending.

Five Below said its sales were hurt this quarter because it bought far more Squishmallows than its customers wanted.

The popular soft toys went viral in the years after their 2017 launch, becoming "Gen Z's Beanie Babies," Business Insider reported in 2020.

On Wednesday, Five Below cut its forecasts for the year because of price-sensitive customers who are prioritizing buying food, candy, and drinks over Squishmallows. Outdated inventory, like older Squishmallows, is also hurting Five Below, chief executive officer Joel Anderson said in an earnings call on Wednesday.

"The quarter solidified that consumers are feeling the impact of multiple years of inflation across many key categories, such as food, fuel, and rent, and are therefore far more deliberate with their discretionary dollars," Anderson said.

Shares of the retailer were down nearly 4% at closing time and have fallen 38% year-to-date.

Just months earlier, Squishmallows looked like a good bet for Five Below, which lists 40 items from the brand on its website. The product was on Five Below's list of "strong performers" for 2023, Anderson said on a March earnings call.

However, a rise in cost of living around the US is hitting Five Below, like other low-cost retailers who are seeing a slowdown in non-essential spending.

A rise in expenses means that Americans are saving less — the personal savings rate slumped to 3.2% in March, according to government data, down from 5.2% a year ago.

Over the last month, McDonald's, Burger King and Wendy's all announced meals at or under $5 to win back penny-pinching customers.

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