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Five Below Has Ambitious Growth Plans

Dan Caplinger, The Motley Fool

Teen shoppers have proven to be far more resilient than their adult counterparts, giving the retailers that serve them a lot more stability than those that have to accommodate a more fickle older audience. Five Below (NASDAQ: FIVE) has taken full advantage of that favorable environment by catering to its adolescent customer base, and the results have been quite encouraging even as many other retailers have faced massive challenges.

Coming into Wednesday's fiscal fourth-quarter financial report, expectations among Five Below investors were high, especially after the company had already given them a glimpse of just how well the holiday season had gone. Five Below's full financial report had even better news, and the retailer is positioning itself to accelerate its expansion efforts and build out a much larger store network over the next several years.

Woman next to a table of makeup products and a Five Below bag.

Image source: Five Below.

A high five for Five Below

Fiscal fourth-quarter results showed how Five Below finished the year strong. Net revenue of $602.7 million was higher by 19% from the year-ago quarter, and that matched up well with what most of those following the stock had expected to see coming into the report. Net income jumped 32% to $89.3 million, and that worked out to earnings of $1.59 per share, topping even the consensus forecast's ambitious projection of $1.58 per share.

Five Below stayed strong from a fundamental perspective. Sales growth was actually understated due to the fact that the year-earlier period had an extra week, and so true top-line gains were closer to 23%. Comparable sales growth of 4.4% wasn't quite as fast as Five Below had seen in the fiscal third quarter, but it still showed strong momentum to end the year.

However, Five Below did show some signs that it isn't managing its expenses as well as it could. Gross margin was down six-tenths of a percentage point to 40.5%, reflecting higher costs of goods sold. Overhead and administrative expenses climbed almost 23%, cutting operating margin by more than a full percentage point to 19.3%. It took a drop of more than 20% in income tax expense to keep net margin climbing.

Even so, CEO Joel Anderson was happy with how things went. "Our strong fourth quarter performance capped off a great year," Anderson said, and pointed to "broad-based strength across our worlds as our incredible, trend-right value offering and fun in-store experience drove both new and existing customers to Five Below."

Can Five Below see a big growth spurt?

Five Below is optimistic about its future. As Anderson put it, "We are focused on elevating our customer experience, delivering even better WOW products, and further enhancing our supply chain as we innovate across the organization."

The teen retailer also sees opportunities to keep expanding the reach of its store network dramatically. The company added just five stores during the fourth quarter, bringing its total to 750. But Five Below said that it expects to open between 145 and 150 stores in the coming year, accelerating from the 125 new locations it had in fiscal 2018.

In addition, Five Below's guidance was encouraging. The company sees fiscal first-quarter revenue of $361 million to $366 million, with 3% to 4% growth in comps and earnings of $0.32 to $0.35 per share. For the full year, revenue of $1.865 billion to $1.885 billion should come from a 3% rise in comps, and earnings of $3 to $3.07 per share would represent growth of around 13% to 15% from last year's figures.

Five Below investors seemed happy with the report, and the stock climbed 6% in pre-market trading Thursday morning following the Wednesday afternoon announcement. As long as teen and tween shoppers have the money to keep spending, Five Below looks to play an increasingly important role in meeting demand for the things its shoppers want the most.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.