Five Below (NASDAQ: FIVE) is down nearly 10% in the last three sessions ending August 30. With the company due to report earnings on September 1, it’s fair that investors might be wondering why FIVE stock is being treated so roughly. However, with no news about the company, I see this as a general reaction to recent retail earnings reports, some of which, for example, Dollar General (NYSE: DG), disappointed analysts.
There’s no doubt that Five Below is going to face tougher comparisons. In its first-quarter earnings report, the company posted a 197% year-over-year revenue gain. But that was a comparison to a quarter when the pandemic forced the company to shut most of its stores. A more intriguing comparison was to the same quarter in 2019. That showed a 63% gain in revenue and a 151% improvement on the bottom line.
This time around analysts expect earnings of $1.11 per share on revenue of $646.93 million. Those numbers would be a 51% YOY increase on the top line and a 109% YOY increase on the bottom line.
Higher Prices, Larger Footprint
Those are two things that analysts want to hear from Five Below when it reports after the market closes on Wednesday. One of the company’s stated objectives is to build out a national footprint. After opening a record 68 locations in the prior quarter, the company looks to be on track to open the 170-180 new stores it was forecasting. Investors will be paying close attention to see if the company is on track to meet that number.
Analysts will also be looking for updates on the company’s move to sell products that are more than $5. This isn’t about raising prices; the store doesn’t want to lose its “treasure hunt” appeal. But this is about seeing if their customer base will accept items of slightly higher quality and price. The company started the initiative in 2020. And so far, according to management, consumers do not feel it has diluted the company’s brand.
If that sentiment continues, the benefit to stockholders is likely higher margins and a customer base that will capture higher incomes. When Five Below reported earnings in June, CEO Joel Anderson remarked that the “ability to go above the $5 price point … is a great way to overcome the pressures of inflation.”
A Captive Audience
Another appealing attribute of Five Below is that it caters to tweens and teenagers. This is an audience that, in many cases, still needs to rely on a parent to get them to the store. And once you have a parent in the door, there’s a greater opportunity for a larger sale.
Plus, Five Below has upped its e-commerce game. Prior to the pandemic, the company acquired the e-commerce platform, fulfillment operation, and select other assets of Hollar.com. That turned out to be a timely acquisition and the company is beginning to see it pay off, although digital sales remain a small part of the company’s overall revenue.
Too Far, Too Fast
The recent drop in FIVE stock may be a case of a stock getting too far ahead of itself. Even after the dip, the stock is still up 90% in the last 12 months and 74% in the last 24 months. Is it fair to think that maybe investors have priced in a lot of the company’s future growth?
That certainly seems possible. The stock is currently trading right around the consensus price target of 18 analysts. However, as the saying goes, that’s why they play the games. The market wants to move higher. If Five Below delivers a strong earnings report (which the whisper number suggests is possible), the technical indicators suggest that FIVE stock has room to move back to where it was trading before the selloff.
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