A month has gone by since the last earnings report for Five Below (FIVE). Shares have added about 7.5% in that time frame, outperforming 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 Q3 Earnings Beat Estimates, Comps Surge
Five Below, Inc. maintained its stellar performance in third-quarter fiscal 2020, wherein the top and the bottom line not only surpassed the Zacks Consensus Estimate but also improved year over year. It marked the second straight quarter of sales and earnings beat. Notably, comparable sales improved significantly during the quarter under review.
This specialty value retailer effectively met customer demand for products relevant in this pandemic-hit environment. Moreover, to make shopping convenient, it expanded checkout capabilities. Markedly, the company is now offering same-day delivery service in roughly 300 stores and has seen a strong start to the holiday selling season.
Five Below delivered third-quarter earnings of 36 cents a share that comfortably surpassed the Zacks Consensus Estimate of 19 cents and increased from 18 cents in the year-ago period. The bottom line gained from higher net sales and lower effective tax rate.
Net sales of $476.6 million increased 26.3% year over year and topped the Zacks Consensus Estimate of $444.9 million. We note that comparable sales rose 12.8% compared with a 2.9% jump recorded in the year-ago quarter. Management informed that stores registered a double-digit comparable sales increase. Again, e-commerce sales were robust in the quarter but represented a low single-digit percentage of total sales.
Gross profit surged 27.3% year over year to $151.1 million, while gross margin expanded 30 basis points to 31.7%. Management now envisions gross margin in the range of 39-40% for the fourth quarter.
We note that SG&A expenses climbed 19.7% to $126.9 million during quarter under review, while as a percentage of net sales, the same shrunk 150 basis points to 26.6% owing to fixed cost leverage and savings from lower store operating hours when compared with last year. However, management forecasts approximately 50 basis points of SG&A deleverage for the final quarter.
Operating income came in at $24.2 million, significantly up from $12.7 million in the prior-year quarter. Also, operating margin increased 170 basis points to 5.1%.
Five Below ended the quarter with cash and cash equivalents of $117 million and short-term investment securities of $96.7 million. Total shareholders’ equity was $749.5 million at the end of the reported quarter. The company has nothing outstanding under its $225 million line of credit.
Management expects to incur capital expenditures of approximately $200 million in fiscal 2020. The company plans to invest in new stores and remodels, the new Texas and West distribution centers, and systems and infrastructure.
During the quarter, Five Below opened 36 net new stores. This took the total count to 1,018 stores as of Oct 31, 2020, in 38 states, reflecting an increase of 13.9% from the year-ago count. Management expects to open 120 net new stores in fiscal 2020.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
At this time, Five Below has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions looks promising. Notably, Five Below has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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