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Five Below (FIVE) Up 3.2% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Five Below (FIVE). Shares have added about 3.2% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Five Below due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Five Below Beats on Q3 Earnings, Updates FY19 View

Five Below, Inc. reported third-quarter fiscal 2019 results, wherein both the top and the bottom line surpassed the Zacks Consensus Estimate. Although net sales continued to improve year over year, earnings per share declined from the year-ago period. Nonetheless, results exceeded management’s expectations.

This specialty value retailer sustained comparable sales momentum with rate of growth accelerating on a sequential basis. Impressive performance prompted management to lift the low end of fiscal 2019 sales and earnings view. However, the company’s fourth-quarter projection, which is below the current Zacks Consensus Estimate. Nonetheless, management remains committed toward enhancing customer shopping experience via refresh store format, reimagined front-end, remodel program and new Ten Below Gift Shop section. The company is focusing on improving supply chain and delivering better WOW products.

Let’s Delve Deeper

The quarterly earnings of 18 cents a share beat the Zacks Consensus Estimate by a penny and surpassed management’s guided range of 14-17 cents. However, it came below the prior-year reported figure of 24 cents, which includes share-based accounting benefit of approximately 2 cents. Higher cost of goods sold and SG&A expenses might have hurt the bottom line. Meanwhile, net sales grew 20.7% to $377.4 million from the year-ago quarter. The top line also outdid the Zacks Consensus Estimate of $374 million, following a miss in the preceding two quarters.

Comparable sales rose 2.9% during the quarter under review following an increase of 1.4% in the preceding period and 4.8% in the year-ago quarter. The company registered 1% improvement in transactions and 1.9% increase in comp ticket. Comparable sales performance came above management’s expectation of 2-3%.

Gross profit grew 16.3% year over year to $118.7 million due to higher sales. However, gross margin contracted 120 basis points to 31.4% on account of net unmitigated tariff costs and the shift of other merchandise costs to the third quarter from the second. We note that SG&A expenses rose 22.5% to $106 million, while as a percentage of net sales the same increased 40 basis points to 28.1% owing to depreciation expenses associated with opening of new Southeast distribution center and adoption of the new lease accounting standard.

Operating income came in at $12.7 million, down 18.4%, while operating margin shrunk 160 basis points to 3.4%. The company envisions operating margin to increase more than 100 basis points in the fourth quarter but deleverage slightly in fiscal 2019.

Management expects fourth-quarter operating margin to expand on account of improved merchandise margin on toy product, slight leverage from the new distribution center, and the benefit of tariff mitigation efforts including cut in corporate expenses. These gains are likely to be offset in part by the depreciation of new Southeast distribution center and the new lease accounting standard.

Financials

Five Below ended the quarter with cash and cash equivalents of $77.5 million and short-term investment securities of $54.1 million. Notably, the company had no debt. Total shareholders’ equity was $645.4 million at the end of the reported quarter. During the quarter, the company bought back approximately 191,367 shares at a total cost of about $20.3 million. Management expects to incur capital expenditure of approximately $210 million in fiscal 2019.

Store Updates

During the quarter under review, the company opened 61 new stores. This took the total count to 894 stores in 36 states, reflecting an increase of 20% from the year-ago period store count. Since the end of the third quarter, the company has opened six stores thereby attaining its planned target of opening 150 new stores for the fiscal year. Five Below remains on track to complete 50 remodels during fiscal 2019. The company expects to remodel approximately 300 stores in the next few years with greater percentage of remodels next year compared to current fiscal year.

Outlook

Five Below now envisions fiscal 2019 net sales in the range of $1.877-$1.892 billion with comparable sales expected to improve 2.5%. We note that fiscal 2018 net sales came in at $1,559.6 million, while comparable sales rose 3.9%. Management now projects earnings between $3.11 and $3.19 per share, which is up from $2.66 reported in fiscal 2018, which includes share-based accounting benefit of approximately 9 cents. The company had earlier forecast net sales in the band of $1.872-$1.892 billion and earnings between $3.08 and $3.19 per share.

For the fourth quarter, management anticipates net sales between $717 million and $732 million and comparable sales growth of 2-3%. We note that fourth-quarter fiscal 2018 net sales came in at $602.7 million, while comparable sales improved 4.4%. The company forecasts fourth-quarter earnings in the range of $1.97-$2.05, which is above the prior-year reported figure of $1.59.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

At this time, Five Below has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Five Below has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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