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Five Below Earnings: What to Watch

Demitrios Kalogeropoulos, The Motley Fool

Investors could be described as giddy heading into Five Below's (NASDAQ: FIVE) holiday-season earnings report. Thanks to a mid-January sales update, shareholders already know the broad contours of its recent operating results -- and the news didn't disappoint. The youth-focused retailer enjoyed accelerating sales gains during the peak shopping period.

In its full earnings report set to publish after the market closes on March 27, CEO Joel Anderson and his executive team will provide key details about that fourth-quarter performance while updating investors on their growth plans for the year ahead.

Let's take a closer look at the metrics that could determine whether Five Below's stock rally pushes deeper into 2019.

A young boy and a girl dispensing bulk candy in a store

Image source: Getty Images.

Customer traffic

Five Below already revealed that its holiday sales growth sped up when compared with the prior quarter. Sales rose 4.9% at existing locations compared to 4.8% in Q3, and the addition of new shops helped revenue jump 25% compared to 22% three months earlier.

On Wednesday, we'll find out whether those same-store sales gains were powered by rising customer traffic, as was the case in the fiscal third quarter. If so, then Five Below likely continued benefiting from the Toys R Us liquidation while winning market share in its value-priced tech, candy, and room furnishing categories. Specifically, management predicted sales between $593 million and $600 million for the full quarter, which would translate into roughly 18% growth year over year.

Pricing

While traffic-led growth is good news, it's still important to the business that Five Below can protect its pricing. Gaining market share through sales promotions isn't a sustainable operating strategy, after all. That's why investors will be watching this week's report for signs that the retailer is flexing its pricing power.

Gross profit margin should hold steady at around 33% of sales as the chain passes along most cost increases in the form of higher prices. Five Below's operating margin declined last quarter as it ramped up spending on initiatives aimed at improving the customer shopping experience. Investors will find out how much those projects pressured profitability for the full year. The news is good on that score so far, with operating income over the last nine months landing at $250 million, or 26% of sales, to stay steady with the prior year.

Looking out ahead

Management should issue their first detailed fiscal 2019 outlook in this report. Assuming no big surprises since early January, the company likely wrapped up a fiscal 2018 that included comps growth of around 4% compared to 6.5% in 2017, steady profit margins, and a quickly expanding store footprint.

Forecasting consistency on these trends would entail another slowdown in sales gains at existing locations. Still, investors are likely to accept that moderation in stride. Five Below is aiming for a fourth consecutive year of robust sales growth and even faster gains in operating income.

That track record suggests the retailer is finding plenty of ways to stay relevant with its customer base through big demand swings like the recent rise and fall of the spinner fad. If Five Below can keep that merchandising momentum going, then investors should gain confidence that it can eventually meet its goal of operating over 2,500 locations across the country compared to just 700 right now.

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