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Five Below Up More Than 25% YTD: Will Momentum Sustain?

Zacks Equity Research

Shares of Five Below, Inc. FIVE have outperformed the industry so far in a year. Shares of this Philadelphia, PA-based company have gained approximately 27% in the aforementioned time frame against the industry’s decline of 3%. This Zacks Rank #3 (Hold) stock has also comfortably outperformed the Retail-Wholesale sector and the S&P 500 Index that advanced 21.1% and 18.5%, respectively, in the said time frame. With a long-term earnings growth rate of 25.5% and Growth Score of B, Five Below is positioned to attain new highs.

The company is benefiting from merchandise assortment, focus on pre-teen customers, enhancement of digital and e-commerce channels, and pricing strategy. Also, it remains focused on expanding store base, improving supply chain and delivering better WOW products. Moreover, strategic endeavors, healthy performance of new outlets and comparable sales (comps) run are aiding the company’s performance.

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 and economies of scale.

These tailwinds helped the company to deliver a decent performance in the second quarter of fiscal 2019, wherein both the top line and the bottom line improved on a year-over-year basis. It registered 11th successive quarter of comparable sales growth. The company also informed that start to the third quarter remains satisfactory with back to school assortments finding favor with customers.

Management also shed some light on the recent tariff increase from 10% to 25%. The company is steadily raising prices on selective items, moving production to countries other than China and negotiating with vendors. The tariff-related concern along with stiff competition from both brick-&-mortar and e-retailers and deleverage in operating margin owing to higher SG&A expenses remain matters of concern.

The company envisions operating margin to decline about 175 basis points in the third quarter and deleverage slightly in fiscal 2019. Management expects operating margin to remain under pressure on account of deleverage in SG&A expenses owing to depreciation expenses associated with the opening of new Southeast distribution center and adoption of the new lease accounting standard. Shift in merchandise costs from the second quarter to the third is also a concern. Management also pointed that unmitigated tariff costs will hurt gross margin during the third quarter.

Nonetheless, Five Below raised fiscal year revenue forecast range by $7 million and increased earnings per share projection range. Five Below now envisions fiscal 2019 net sales in the range of $1.872-$1.892 billion. In fiscal 2018, it had reported net sales of $1,559.6 million. Management now projects earnings between $3.08 and $3.19 per share. Earnings of $2.66 were reported in the prior year.

3 Stocks to Watch

Regis Corporation RGS has a long-term earnings growth rate of 7.5%. It currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Hibbett Sports, Inc. HIBB has a long-term earnings growth rate of 10.9% and has a Zacks Rank #1.

Office Depot, Inc. ODP has a long-term earnings growth rate of 11.1% and a Zacks Rank #2 (Buy) at present.

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