It has been about a month since the last earnings report for Five Below (FIVE). Shares have added about 1.9% 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 its most recent earnings report in order to get a better handle on the important drivers.
Five Below Q2 Earnings Meet, Sales Miss Estimates
Five Below, Inc. reported second-quarter fiscal 2019 results, wherein adjusted earnings per share came in line with the Zacks Consensus Estimate, while net sales missed the same. Nonetheless, this specialty value retailer posted decent year-over-year improvement in both the top and the bottom line. Moreover, the company continues to exhibit comparable sales growth, however, the rate of growth decelerated on a sequential basis.
Management highlighted that it remains committed toward enhancing customer experience via refresh store format, remodel program and Ten Below test. The company is focusing on improving supply chain and delivering better WOW products. 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. The company is steadily raising prices on selective items, moving production to other countries and negotiating with vendors.
Further, the company provided third-quarter sales and earnings per share guidance that came below analysts’ expectations. However, it raised fiscal year revenue forecast range by $7 million and increased earnings per share projection range.
Let’s Delve Deeper
Adjusted earnings of 50 cents a share met the Zacks Consensus Estimate and improved from 42 cents reported in the year-ago period. Meanwhile, net sales grew 20% to $417.4 million from the year-ago quarter but came below the Zacks Consensus Estimate of $422.5 million.
Comparable sales rose 1.4% during the quarter under review following an increase of 3.1% in the preceding period and 2.7% reported in the year-ago quarter. The company registered 1% improvement in transactions. Comparable sales performance came below management’s expectation of 2-3%.
Gross profit grew 20.1% year over year to $146.2 million on account of higher sales, while gross margin remained flat at 35%. We note that SG&A expenses increased 20.6% to $110.1 million, while as a percentage of net sales the same expanded 10 basis points to 26.4% 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 $36 million, up 18.4%, while operating margin shrunk roughly 10 basis points to 8.6%. The company now envisions operating margin to decline about 175 basis points in the third quarter and deleverage slightly in fiscal 2019.
Five Below ended the quarter with cash and cash equivalents of $178.8 million and short-term investment securities of $90.3 million. Notably, the company had no debt. Total shareholders’ equity was $651.9 million at the end of the reported quarter.
During the quarter, the company bought back approximately 146,185 shares at a total cost of $16.6 million. Management expects to incur capital expenditure of approximately $210 million in fiscal 2019.
During the quarter under review, the company opened 44 new stores. This took the total count to 833 stores in 36 states, which reflects an increase of 20.4% from the year-ago period store count. The company plans to open approximately 55 new stores in the third quarter, and around 150 new stores in the fiscal year.
Five Below now envisions fiscal 2019 net sales in the range of $1.872-$1.892 billion, with comparable sales expected to improve 3%. We note that fiscal 2018 net sales came in at $1,559.6 million, while comparable sales rose 3.9%. The company had earlier forecast net sales in the band of $1.865-$1.885 billion. Management now projects earnings between $3.08 and $3.19 per share compared with $2.66 reported in fiscal 2018.
For the third quarter, management anticipates net sales between $369 million and $374 million and comparable sales growth of 2-3%. We note that third-quarter fiscal 2018 net sales came in at $312.8 million, while comparable sales improved 4.8%. The company forecasts third quarter earnings in the range of 14-17 cents, down from 22 cents reported in the prior year.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -25.73% due to these changes.
Currently, Five Below has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front 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 C. 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 indicates a downward shift. Notably, 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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