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Why Is Five Below (FIVE) Down 9.1% Since Last Earnings Report?

Zacks Equity Research
·5 min read

It has been about a month since the last earnings report for Five Below (FIVE). Shares have lost about 9.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Five Below due for a breakout? 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 Posts Wider-Than-Expected Q1 Loss

Five Below, Inc. reported dismal first-quarter fiscal 2020 results. The company reported loss per share wider than the Zacks Consensus Estimate. Also, sales tumbled year over year and delivered a negative surprise for the second straight quarter. Results were marred by store closures undertaken by the company in the wake of coronavirus. Further, the company did not offer any top or bottom-line guidance for the second quarter, given the uncertainty surrounding the pandemic.

Markedly, the company started reopening stores in late April itself and had about 90% of its stores reopened as of Jun 9, depicting impressive initial sales trends. Management informed that comparable sales for reopened stores, including e-commerce business, were up approximately 8% for the second quarter through Jun 9.

Amid the crisis, Five Below undertook several cost-cutting measures to preserve its financial position. To this end, the company had furloughed most of its store and distribution center workers, canceled merchandise orders, procrastinated payments and curtailed capital expenditure plan for 2020. Now with most of its stores operational, the company believes that it is well positioned on all fronts. With respect to merchandise, the company is focusing on essential goods, consumables and everyday items, such as healthcare and personal care that customers are looking for now days. On marketing front, the company is focusing on digital advertising.

Let’s Delve Deeper

Five Below posted a quarterly loss of 91 cents per share, which includes a benefit of 2 cents related to share-based accounting. The Zacks Consensus Estimate stood at a loss of 35 cents. Net sales slumped 44.9% to $200.9 million from the year-ago quarter and fell short of the Zacks Consensus Estimate of $225.6 million. Results were affected by coronavirus-led store closures.

Incidentally, all stores were closed from Mar 20, which considerably affected the company’s results. However, e-commerce sales grew more than four times in the quarter, though it still formed a very small portion of the top line. Five Below still anticipates e-commerce penetration to remain in the low single digit range in relation to overall sales for 2020.

Comparable sales tumbled 51.8% during the quarter under review following a dip of 2.2% in the preceding period. This was accountable to the store closures as well as loss of Easter selling days. Results were only partly cushioned by e-commerce strength. Till Mar 11 (when coronavirus was declared a pandemic), comparable sales registered a rise of 2.9%.

Gross profit collapsed considerably to $20.5 million compared with $120 million in the year-ago period. Again, gross margin contracted from 32.9% to 10.2%. This was accountable to lower sales stemming from store closures as well as the related fixed-cost deleverage.

We note that SG&A expenses dipped nearly 3% to $92.7 million, while as a percentage of net sales the same expanded from 26.2% to 46.1%. Five Below posted an operating loss of $72.2 million against an operating income of $24.5 million in the same period last year.

Financials

It ended the quarter with cash and cash equivalents of $69.8 million and short-term investment securities of $69.2 million. Total shareholders’ equity was $689.8 million at the end of the reported quarter. The company had no debt, including nothing outstanding on its $225 million line of credit.

Management now anticipates capital expenditures of roughly $200 million for fiscal 2020 compared to pre-COVID-19 estimate of $270 million. This reflects the planned investments in the new Texas and West distribution centers, new stores and remodels, and investments in systems and infrastructure.

Till the middle of first-quarter fiscal 2020, the company bought back 137,023 shares for about $12.7 million. Additionally, Five Below expanded its line of credit by $175 million to $225 million as of the quarter-end.

Store Updates

During the quarter, the company opened 20 net new stores. This took the total count to 920 stores in 36 states, reflecting an increase of 16.6% from the year-ago period’s store count. The company still expects to open 100-120 net new stores in 2020, representing 11-13% growth over 2019. The company had earlier planned to open 180 stores. Further, the company envisions of having a network of more than 2,500 stores in the United States in the long run.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. The consensus estimate has shifted -30.66% due to these changes.

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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