Just like last time, no one is expecting Five Below (FIVE 0.67%) to have had a bad quarter, and in fact the quarterly report should be a pretty good one once again. However, when the teen and tween retailer reports its first-quarter results on Wednesday, investors will be looking for insight on how the evolving tariffs picture is playing into the business plan.

Because Five Below is priced to perfection, trading at 49 times trailing earnings, 34 times this year's earnings estimates, twice its sales, and over 100 times the free cash flow it produces, investors will have a keen eye on what the future looks like.

Mother and daughter looking at stuffed animal in a store

Image source: Getty Images.

New expenses to face

Management has guided for sales jumping as much as 23% in the first quarter, to between $361 million and $366 million, with net income of $18 million to $19.7 million, or $0.32 to $0.35 per share. The Wall Street consensus is for $0.34 per share, which is $0.05 below the year-ago figure. However, last year's first quarter included a $0.04-per-share benefit from stock-based compensation accounting.

Five Below says its earnings this time around will include expenses that last year's quarter didn't have, primarily accounting-related changes to investments in sales, general, and administrative expenses that began in 2018's second quarter and accelerated across the rest of the year, as well as new standards for leases. There will also be the start-up costs associated with the retailer's new distribution center near Atlanta.

So depending on how the quarter goes, Five Below may at least match the year-ago results, and coming in flat like that wouldn't be a problem considering the changes that are occurring, but other issues may make the rest of the year more difficult.

Running against prevailing trade winds

Unlike a number of other deep-discount retailers such as Dollar General and Dollar Tree, Five Below chose to base its guidance on the assumption that tariffs would remain at the 10% level. As we all know now, trade tensions flared again and rates on so-called List 3 items were hiked to 25%, and now there's the possibility that tariffs on List 4 items could be raised.

A significant majority of the products Five Below sells are sourced from outside the U.S., but only a few were affected by the original 10% trade duties. A lot more, however, are covered under the List 3 tariffs, and the retailer warned that if those duties rise, that could lower its gross margins unless it raises prices, sources the goods from elsewhere, or changes the products.

Five Below said it had worked to "fully mitigate" the 10% tariff, partially by buying more product ahead of the rise. And since the List 3 tariff hike didn't go into effect until May 5, around the end of the first quarter, it shouldn't have an impact on results this time out. Future quarters, however, may be affected, though Five Below also noted that if tariffs are rolled back, the benefit wouldn't come until 2020 as it's already bought lots of product.

A freeze before the thaw

Many retailers have also noted that February was a particularly brutal month for weather and that comps suffered in the month, though they rebounded in March and April. Five Below has guided to comps rising 3% to 4% for the quarter, compared to the 3.2% rise achieved last year.

Ultimately, Five Below is an exceptionally strong retailer that's still growing. It is opening more stores in more states and still has plenty of room to expand further. Earnings should still be superior to what we see from other retailers, even those in the discount space, but its current valuation may be the anchor that holds it back if it ends up faltering in any particular area.