Five Below investors are alleging securities fraud in a class action
Lawyers for the Philadelphia-based discount retailer say “failing to make accurate predictions does not amount to securities fraud.”
A federal judge in Philadelphia ruled Monday that a lawsuit alleging discount retailer Five Below defrauded investors can move forward as a class action on behalf of numerous shareholders.
U.S. District Judge Gerald Austin McHugh’s 34-page order handed a win to the lead plaintiffs, two Arkansas public employee retirement plans. The pension funds say that for more than a year, Philadelphia-based Five Below misled investors about its ability to identify and stock popular products — a skill company executives referred to as their “secret sauce.”
Once investors learned the full extent of the company’s challenges in July 2024, Five Below’s stock price plummeted, wiping out almost $8 billion in shareholder value, the suit says. The company’s CEO resigned around that time.
The Arkansas Public Employees’ Retirement (APER) and the Arkansas Teacher Retirement System say they lost more than $5 million combined due to the alleged fraud.
McHugh granted their motion asking him to certify a class of people and entities who bought Five Below stock between December 2022 and July 2024.
“We are pleased to be able to represent the interests of these public pension funds, where teachers and other public servants were invested in this company and lost a considerable amount of money,” Michael Dell’Angelo, executive shareholder and general counsel of Philadelphia-based law firm Berger Montague, said in a statement.
“Our clients lost millions of dollars after they relied on the exaggerated expectations set by this retailer,” he said.
Five Below has 1,800 stores in 44 states and says most of its products are priced between $1 and $5, many of them aimed at children and teens. The company didn’t respond to a request for comment. Attorneys for Five Below and two other defendants — former CEO Joel Anderson and chief operating officer Kenneth Bull — didn’t respond to requests for comment.
The defendants have denied the allegations in court papers.
“Being honest with the market about the pitfalls of a business strategy as they are learned in no way reveals advance knowledge that the approach would fail, and failing to make accurate predictions does not amount to securities fraud,” Jay A. Dubow and Erica H. Dressler of the Philadelphia firm Troutman Pepper Locke LLP wrote in a court filing last year.
The suit alleges that despite management’s repeated assertions that Five Below could identify and capitalize on trends, the company in fact “did not operate with any real ability to stock its stores with in-demand products.”
Nevertheless, Five Below told investors it planned to triple its number of locations and double its sales based on this “trend-right” strategy, the suit says. The “plan was abruptly throttled down” shortly after Anderson, the CEO, resigned in July 2024, according to the complaint.
Even as Five Below’s problems with product assortment, inventory, and expansion dragged on its operating performance, executives falsely blamed shoplifting, the suit says.
The company eventually allegedly admitted its shortcomings in a series of disclosures to investors, with executive Bull conceding in late 2024 that Five Below had “lost our way.”
While investors suffered losses, Bull and Anderson sold more than $9 million in Five Below shares during the period in question, “while also receiving incentive compensation valued at over $10 million based on the inflation in the company’s share price,” the suit says.
The company has since rebounded, with executives citing the popularity of games and viral toys, as well as artificial-intelligence tools that help with inventory.
