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How Five Below Keeps Climbing Higher

By Dan Caplinger – Sep 7, 2018 at 9:33AM

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The teen discount retailer continues to defy industry trends with its success.

Don't tell Five Below (FIVE -0.50%) that there've been challenges in the retail industry. Conditions throughout much of the sector might have been bad in recent years, but for the specialist in selling low-priced accessories to tweens and teens, the growth potential in its business model has remained extremely attractive.

Coming into Thursday's fiscal second-quarter financial report, Five Below shareholders fully expected that the teen retailer would be able to sustain its impressive track record. Five Below's results were even better than many had foreseen, and that's making investors feel even more confident about the company's prospects for the remainder of this year and beyond.

Five Below logo superimposed on images of dollar bills.

Image source: Five Below.

Five Below hits its stride

Five Below's fiscal second-quarter results remained strong. Revenue was higher by 23% to $347.7 million, which was slightly slower than its growth rate in the first quarter, but still above what most of those following the stock had expected to see. Net income jumped by nearly half to $25.1 million, and that produced earnings of $0.45 per share, topping the consensus forecast for $0.38 per share on the bottom line.

Five Below continued to get a good combination of growth from various sources. Comparable sales among existing locations were higher by 2.7%, holding up fairly well compared to its figures from the first quarter. At the same time, Five Below opened 34 new stores during the quarter, adding a 33rd state to its geographical coverage and bringing the total number of locations in its network to just under the 700 mark.

Not everything was completely in sync at the teen retailer, though. Overhead expenses climbed by 26% from year-ago levels, and that led to a somewhat less impressive rise in operating income of just 16%. As we saw last quarter, what really goosed earnings for Five Below was the lower corporate tax rate, which helped to cut income tax expense for the retailer by more than a third.

CEO Joel Anderson was happy with the performance. "We saw broad-based strength across our worlds," Anderson said, "as our high quality, trend right products at incredible values continued to resonate with customers." The CEO also pointed to the balanced contribution of expansion and greater market penetration in driving sales growth.

Can Five Below keep climbing?

Five Below doesn't see anything stopping it from building on its past success. As Anderson pointed out, "With our increasing scale, digital marketing expansion and store densification strategy, our brand awareness is growing, and we are seeing great opportunities for product, real estate, and talent."

The retailer believes those positive factors will keep producing outpaced performance. For the fiscal third quarter, revenue is expected to be between $301 million and $304 million, with 50 new store openings and a 3% to 4% rise in comparable sales. Earnings projections for $0.17 to $0.19 per share could top what most investors foresee. For the full year, Five Below raised its sales projections by roughly $25 million to a new range of $1.528 billion to $1.54 billion, and earnings of $2.51 to $2.57 per share represented a $0.09 boost from what Five Below expected three months ago.

Five Below shareholders celebrated the news, and the stock soared more than 10% in pre-market trading Friday following the Thursday evening announcement. With consumers starting to regain confidence, and even traditional retailers starting to see signs of a turnaround, it looks like the industry environment could become even more favorable for Five Below. If it can keep executing as well as it has in the past, then Five Below will have additional opportunities to grow and expand its customer base and keep delivering the results that shareholders want to see.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.

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