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Five Below Sees Another Growth Spurt

By Dan Caplinger - Dec 5, 2018 at 5:44PM

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This part of the retail industry isn't seeing many problems.

Throughout the past several years, the retail industry has gone through countless challenges. Between new competition from e-commerce and pressures from existing rivals, most retailers have struggled just to find any growth.

But not every part of the retail world has seen the same tough conditions. In particular, the teen shopping niche has been extremely resilient, and that's put Five Below ( FIVE 1.16% ) in a commanding position because of its emphasis on providing affordably priced accessories to tween and teenage shoppers.

Coming into Wednesday's fiscal third-quarter financial report, Five Below shareholders were hoping that solid sales gains would translate into better earnings. Five Below managed to outpace those hopes with even better growth, and an upgrade to guidance gave investors a lot more reassurance that even under turbulent conditions in the stock market, the teen retail specialist still is going strong.

Young woman holding forearms up next to table with various cosmetics and a Five Below bag.

Image source: Five Below.

Five Below comes alive

Five Below's fiscal third-quarter results sustained the company's run of solid performance. Overall revenue jumped 22%, to $312.8 million, easily outpacing the 18% growth rate that most of those following the stock were looking to see. Net income soared 37%, to $13.5 million, and that translated into earnings of $0.24 per share, beating the consensus forecast among investors for just $0.19 per share.

Fundamentally, Five Below kept executing well on its overall strategy. At its existing store network, comparable sales growth of 4.8% accelerated dramatically from the periods earlier in the year, showing exceptional strength during the key back-to-school period. Meanwhile, expansion plans continued to take shape, with 53 new stores bringing Five Below's total to 745 locations.

Just about the only concern for Five Below came on the expense side of the income statement. Once again, overhead expenses outpaced revenue gains, rising 26% from the third quarter of fiscal 2017. That limited operating income gains to just 5%, and once again, it took a dramatic decline in income tax expenses compared to the year-ago period to keep profit margin from dropping significantly.

CEO Joel Anderson celebrated the results. "Continued robust performance from new stores," Anderson said, "with a record 53 openings during the quarter, and above-plan comp results were driven by a positive customer response to our compelling assortment of trend-right products." The CEO also was pleased to have topped the company's own guidance for the period.

What's ahead for Five Below?

Five Below has high hopes for the holiday season. In Anderson's words, "We look forward to amazing our customers and delivering the magic of the holidays with freshness and newness at outstanding value, further reinforcing Five Below's position as a favorite destination for holiday shopping and gift giving."

In fact, the retailer was so optimistic about how things are going at the company that it once again boosted its guidance for the full year. Five Below sees sales of $1.550 billion to $1.557 billion in fiscal 2018, up by $17 million to $22 million from its previous range, and earnings of $2.60 to $2.64 per share represent a roughly $0.08 rise from its most recent projections. For the fiscal fourth quarter, revenue of $593 million to $600 million, comps growth of 3% to 4%, and earnings of $1.53 to $1.57 per share were roughly in line with what investors were expecting from Five Below.

With the markets closed for Wednesday's day of mourning for President George H.W. Bush, there was no after-hours market session in which shareholders could respond to the announcement. However, with all signs pointing to continued dominance for Five Below, investors are right to feel confident that the retailer's proven business model will keep bearing fruit for those willing to stay the course.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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