Five Below (FIVE 0.72%) is a great example of a company that can be an appealing investment for young investors, because the shopping experience it provides to teens and tweens is specifically tailored for their wishes and their budgets. That's proven to be an attractive business model that's even managed to overcome many of the obstacles that retailers with a broader audience have struggled against.
Coming into Wednesday's fiscal first-quarter financial report, Five Below investors wanted to keep seeing sizable gains in revenue and were ready to sacrifice bottom-line growth to get it. Five Below's numbers were better than most had expected, and the teen retailer seems to be following a familiar path toward continued expansion for the remainder of the year and beyond.
Image source: Five Below.
Five Below stays a cut above
Five Below's fiscal first-quarter results were consistent with how the teen retailer has done recently. Net revenue came in at $364.8 million, which was up 23% from the same period a year ago and was just slightly higher than what those following the stock were looking for. Net income was higher by 18% to $25.7 million, and after accounting for benefits from share-based accounting, adjusted earnings of $0.35 per share topped the consensus forecast among investors by $0.01 per share.
Fundamentally, Five Below kept using the same methods it's used to bolster its growth for a long time. Comparable sales growth came in at 3.1%, which was somewhat slower than it was three months ago. However, Five Below continued to open new store locations at a breakneck pace, with 39 store openings during the quarter. That brought the quarter-end total to 789 stores spread across 36 states, and that's almost 20% larger than Five Below's store network was just 12 months earlier.
Yet as we've seen in past quarters, not all the news was good for Five Below. Operating income was down 1% from year-ago levels, with the teen retailer citing investments related to tax reform, new standards for lease accounting, and start-up costs related to the company's new distribution center in the Southeast U.S. for the downturn. Operating expenses were up nearly 32% from the first quarter of 2018, and Five Below benefited from a lower tax rate to help it boost its bottom line.
CEO Joel Anderson was pleased overall with the results. "Both sales and earnings were at the high end of our guidance ranges," Anderson said, "and new stores continued to exceed expectations and drive our growth." The CEO noted that out of the 39 new locations Five Below opened, fully a dozen made it into the top 25 grand openings for the spring season in company history.
What's ahead for Five Below?
Five Below also has high hopes for making improvements to its operations. Anderson described it in almost exactly the same way he's done in past quarters, referring to the need to make supply chain improvements, boost the customer experience level, and come out with intriguing and interesting product lines. The CEO said that in following up on the opening of its Southeast distribution center, Five Below expects to open a counterpart in the Southwest in 2020.
Five Below made some moves with its guidance as well. For the second quarter, revenue of $417 million to $422 million should produce comps growth of 2% to 3%, and earnings should be between $0.48 and $0.51 per share. Five Below repeated its past guidance for full-year sales of $1.865 billion to $1.885 billion, including 145 to 150 new stores and a 3% rise in comps. Earnings of $3.11 to $3.18 per share, however, marks an $0.11 per share improvement from last quarter's guidance.
Five Below investors were satisfied with the news, and the stock moved higher by 1% to 2% in after-hours trading following the announcement. With signs that teen and tween shoppers are continuing to come into its stores, Five Below looks like it's doing all the right things to keep its business moving in the right direction.
