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Five Below Up 28% in 6 Months: What's Behind the Rally?

Zacks Equity Research

Five Below, Inc. FIVE is gaining momentum from its focus on pre-teen customers, impressive merchandise assortment, enhancement of digital and e-commerce channels, and pricing strategy. Also, the company is focused on expanding store base.

Backed by these upsides, the company delivered a sturdy fourth-quarter fiscal 2018 performance, wherein both the top line and the bottom line improved year over year and surpassed the respective estimates. (Read: Five Below Q4 Earnings & Sales Surpass Estimates)

In the past six months, shares of this Denton, TX-based company have gained 28% compared with the industry’s growth of 15.3%.

Let’s take a closer look at the aspects driving the company’s performance.

Factors Driving Five Below’s Performance

Five Below remains committed toward enhancing customer shopping experience, improving supply chain, enhancing digital and e-commerce channels and delivering better WOW products. Also, the company has been witnessing positive comparable store sales (comps) growth for nine straight quarters now. It expects comparable sales to increase in the band of 3% during fiscal 2019 and between 3-4% in the first quarter. In fact, the company’s solid store remodeling is a major reason behind its robust comps performance.

The company is also expanding its store base. It believes expanding scale helps it gain access to renowned shopping centers; capitalize on the emerging market trends and increase brand value.  Incidentally, Five Below opened 125 new stores during fiscal 2018. The company ended the fiscal year with 750 stores, reflecting an increase of 20% from the year-ago period. During the first quarter of fiscal 2019, it plans to open approximately 35 new stores, while in the fiscal year it intends to open approximately 145-150 new stores. Further, it envisions of having a network of more than 2,500 stores in the long run.

Apart from these, the company is known for its remarkable range of merchandise, as it remains committed toward making innovations and refreshing its product range per the evolving consumer trends. These factors combined with the company’s pricing strategy enable it to cater to demographic shoppers, alongside resonating with value-seeking customers. Further, it remains focused on achieving efficient cost structure, solid average net sales per store, supply-chain initiatives and economies of scale.

Possible Deterrents

SG&A expenses have been increasing for quite some time now. In the fourth quarter of fiscal 2018, SG&A expenses increased 22.6%. Analysts believe that SG&A expenses are likely to increase in the near future due to store growth. This will, to an extent, hurt the company's operating income, unless fully offset by substantial increase in net sales. As a percentage of sales, SG&A expenses increased approximately 60 basis points to 21.2% in the fourth quarter.

Nevertheless, we expect Five Below’s strategic endeavors to address these challenges and help sustain momentum.

3 Stocks to Watch

Sally Beauty Holdings, Inc. SBH has a long-term earnings growth rate of 4% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Build-A-Bear Workshop, Inc. BBW has a long-term earnings growth rate of 9% and a Zacks Rank #2 (Buy).

The Estee Lauder Companies Inc. EL delivered average positive earnings surprise of 11.7% in the trailing four quarters. It has a long-term earnings growth rate of 12.9% and a Zacks Rank #2.

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