Five Below Seeks to Break Its Slump

On Wednesday, Five Below (NASDAQ: FIVE  ) will release its latest quarterly results. But with the stock finally giving up some ground after having soared since its IPO last summer, investors really want to see positive results from the company this time around.

Five Below combines the attraction of teen and preteen retail with the customer cost-effectiveness of deep-discount products. For kids on a budget, the retailer has a wide array of accessories for bargain-conscious shoppers. Let's take an early look at what's been happening with Five Below over the past quarter and what we're likely to see in its quarterly report.

Stats on Five Below

Analyst EPS Estimate

$0.04

Year-Ago EPS

($0.03)

Revenue Estimate

$94.11 million

Change From Year-Ago Revenue

31%

Earnings Beats in Past 4 Quarters

3*

Source: Yahoo! Finance. * Since IPO three quarters ago.

Can Five Below get above its earnings estimates this quarter?
Analysts have reined in their expectations on Five Below's earnings in recent months, cutting their April-quarter estimates by a penny per share and cutting $0.03 per share from their views for the current fiscal year. The stock, though, has responded a lot more negatively, falling almost 15% since early March.

Most of those losses came following Five Below's quarterly report in late March. At first glance, results seemed reasonably good, with a 38% jump in revenue and better than 50% growth in net income, beating estimates. However, same-store sales of 4.4% shows just how dependent Five Below has been on expansion for its overall revenue growth, and when the company projected weaker earnings for the year than investors had expected, they sold off shares dramatically.

Still, those results haven't halted Five Below's expansion plans. Interestingly, the company has focused on the Midwest recently in its growth, with new stores in Michigan and Central Illinois among its new locations in the past two months.

The big challenge for Five Below is keeping its margins up. High-end teen retailers True Religion (NASDAQ: TRLG  ) and Buckle (NYSE: BKE  ) have done a far better job of keeping their profit margins high, but that's a lot easier to do when you have high-priced merchandise that relies on brand-name value to add to its appeal. The right mix of deep-discount products can support margins for Five Below, but it has to watch out for the trap that general-purpose discount retailers have often fallen into, as they try to balance how many low-margin products they want to offer in order to get people into their stores.

In Five Below's quarterly report, check to see if the officers and directors that sold off shares in a recent secondary offering offer any explanation for their actions. It's not uncommon for insiders to exit at their first opportunity following an IPO, but it nevertheless doesn't mark a vote of confidence in the company. In addition, with accessories rival Claire's seeking to go public in the very near future, publicity could pose a threat to Five Below's future prospects.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of the last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

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