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Five Below Moves Above the Retail Fray

By Dan Caplinger – Jun 2, 2016 at 6:41PM

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The teen-targeting discount retailer enjoyed strong growth even in a tough retail environment.

Image source: Five Below.

Retailers have had a tough time so far in 2016. Consumers seem reluctant to spend, even though gasoline prices remain low, and the positive impact on disposable income has been measurable. For Five Below (FIVE -0.53%), the health of the consumer is extremely important because teen shoppers rely on money either from parents, or part-time jobs, to finance their purchases.

Coming into Thursday's fiscal first-quarter financial report, Five Below investors had expected the teen discount retailer to hold up fairly well, and the company did even better than most thought possible. Let's take a closer look at how Five Below did, and whether it can keep moving upward.

Five Below keeps enjoying its growth spurt

Five Below's fiscal first-quarter results were exactly what most investors wanted to see. Revenue jumped 25%, to $192.7 million, which was faster than the 22% growth shareholders were expecting. Net income jumped by more than half, to $6.8 million, and that produced earnings of $0.12 per share. That beat the consensus forecast among those following the stock by $0.02 per share, and represented 50% growth from the year-ago quarter.

Looking more closely at Five Below's report, some other encouraging figures stood out. Comparable-store sales growth accelerated to 4.9%, which was higher by more than a percentage point compared to the most-recent quarter. Operating income also climbed at a better than 50% pace.

Five Below has historically relied on new-store openings to bolster its growth, and the retailer opened 21 new locations during the quarter. That gives Five Below a total of 458 stores, which sustained its 19% growth rate compared to a year ago. Gross margin was up more than half a percentage point, to 31.3%, and operating margin jumped by a full percentage point, to 5.6%.

CEO Joel Anderson was pleased with how Five Below did, saying that the results "demonstrate the universal appeal of Five Below, and the disciplined execution of our key initiatives." The CEO pointed to 40 straight quarters of positive comps, and keeping fixed costs in line has been a key component of getting more of the retailer's growth down to the bottom line.

Can Five Below keep up the pace?

Five Below expects that it will continue to find success. "We are very encouraged by the strong start in the first quarter and the momentum that we have built," Anderson said, "as our teams continue to work to deliver exciting assortments, compelling marketing campaigns, and an engaging in-store experience that continues to resonate with our customers."

For the most part, Five Below's guidance was consistent with what shareholders were looking to see. The retailer's fiscal second-quarter projections call for sales of $216 million to $219 million, with 28 new store locations and a roughly 3% rise in comps.

Earnings should come in between $0.16 and $0.17 per share. Expectations among investors are for the high sides of those ranges, so Five Below will need to do well in order to satisfy its shareholders. The company repeated its full-year guidance for fiscal 2016, including sales of $995 million to $1.005 billion, and earnings of $1.27 to $1.31 per share.

Five Below investors didn't react particularly strongly to the numbers, as the stock moved upward by less than 1% in after-hours trading following the announcement. What's encouraging, though, is that Five Below has managed to avoid the calamitous collapses that some of its retail peers have experienced this earnings season.

If the teen retailer can continue to buck the overall downtrend and keep posting impressive growth, then Five Below stock will look even more impressive to investors looking for ways to fight back in a tough industry environment.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Five Below. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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