A 15% gain in store for Five Below after rosy holiday outlook

There are some concerns that Five Below NASDAQ: FIVE is overvalued, trading at 34X this year's earnings, but some factors suggest this stock is still undervalued relative to peers and its outlook. The company is well-positioned in the off-price retail space, resonating with consumers and is on track to post robust growth over the next few years. It is a higher value than peer TJX Companies NYSE: TJX, the off-price leader trading at 23X, but only marginally, and there is ample room for the company to grow into its value and surpass it. 

The consensus estimate for next year’s earnings implies a value of 28X and is likely low, given the results in 2023. Beyond that, the company is on track to continue opening stores, entering new territories and expanding its reach in existing. The takeaway is that Five Below revenue and earnings growth is expected to accelerate over the next year or two, compounded by increased leverage and a widening margin. 

Five Below has an above-consensus quarter; shares advance

Five Below had a solid quarter, proving the value of off-price retail and its position within the segment. The company reported $736.4 million in net revenue for a gain of 14.2% compared to last year. This is 1000 basis points better than the consensus estimate and well above TJX Companies' 9% growth, Walmart’s NYSE: WMT 5% and Target’s NYSE: TGT 5% decline. 

Five Below revenue gains were made on a 2.5% comp offset by a slight reduction in ticket average. More importantly, traffic remains strong and is a driver of business. The company also opened 74 new stores in the quarter and is on track to surpass the 200-store target for F2023. 

The margin news is also favorable to shareholders. The gross margin contracted and SG&A expenses increased YOY but less than expected. The net result is a $0.03 reduction in YOY GAAP earnings, but the $0.26 reported is $0.03 better than expected and compounded by solid guidance. 

The company's Q4 guidance was raised to a range bracketing the consensus estimate and leaving room for outperformance. Revenue growth will accelerate to nearly 18% and come with wider margins and earnings growth. Earnings are expected to grow by almost 19%, and the guidance is likely cautious due to economic uncertainties. 

Share repurchases and sound financials will support this market

Five Below is among the most financially sound retailers on the market today. The company has a strong balance sheet with cash up more than 4X YOY, inventory solid and assets on the rise. Debt and leverage are remarkably low, with total liabilities less than 0.7X assets. This allows for a healthy free cash flow used to fund growth and repurchase shares. 

The company repurchased $80 million in shares during the Q3 and announced a new buyback allotment. The board retired the previous authorization but announced a new one worth $100 million over the next few years. Based on the $80 million repurchased in Q3 and the growth outlook, the company could easily use up the authorization and add to it ahead of schedule. 

Analysts are leading Five Below shares to new highs

The analysts' activity has been mixed over the past year, but the result is a bullish trend in the price target. The consensus of 40 ratings is Moderate Buy with a target of $216. The $216 price target is up 25% YOY, 16% above the current action and edging higher following the Q3 results. Marketbeat is tracking a single revision within the first 18 hours of the report, and it is an upward price target revision. The new target has the market trading near $227, just below the analysts’ high price target and near a new high for this market. 

The technical outlook is promising. The market for FIVE stoch corrected last year but formed a Head & Shoulders Bottom. Recent action has the stock price breaking out of this pattern to the upside, and the post-release action echoes that move. The market is up about 1.5% now and on track to test resistance at $193; if the market can get above that level, a move into the $200 to $240 range is expected.