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What Five Below Wants Investors to Know

By Demitri Kalogeropoulos - Aug 29, 2019 at 12:00PM

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The chain still sees robust sales and profit growth ahead for 2019, but with rising tariff challenges on the way.

Five Below (FIVE 1.83%) continues to impress investors by posting strong sales growth despite many industry challenges. This week, the youth-focused retailer reported customer traffic gains and steady profitability for the fiscal second quarter. The chain also made big strides toward reaching the high end of management's store launch target for the year.

Following the release of the report, CEO Joel Anderson and his team held a conference call with Wall Street analysts to discuss the latest trends and how they're positioning the company for the all-important peak shopping season. Below are a few highlights from that presentation.

A young girl and her mother examining a stuffed animal in a shop

Image source: Getty Images.

Meeting guidance in a surprising way

Sales were within the guidance range and while our [comparable-store sales] performance was below expectations, strong new store performance enabled us to deliver earnings per share near the high end of our guidance range.
-- Anderson

Five Below met management's forecast for the quarter, but it got to that target in an unusual way. Comparable sales growth at existing locations came in weaker than expected at just 1.4%, and that slump was offset by a quicker expansion pace. The company added 83 new stores over the past six months, compared to 67 in the year-ago period, helping overall revenue jump 20% in Q2.

Management said growth was sluggish at the start of the quarter but improved as it progressed. They highlighted several areas of strength that culminated in a 1% increase in customer traffic and positive store launches in several new markets.

Staying flexible

Our model is very flexible ... and this flexibility is a key attribute to Five Below that enables the strength of our business model.
-- Anderson

Tariff rates are boosting costs for many of Five Below's products, which threatens customer traffic and poses an added problem given that many of its offerings are already priced at or near the $5 mark. Yet the company tested prices above that level -- and across its lower-priced items -- during the quarter and found that customers were in most cases willing to pay more.

That success helped keep profitability steady despite rising costs this quarter. It also bodes well for future gains as the retailer rolls out more price increases. To that end, Five Below is testing a "$10 below" concept, too, that will open up its offerings to higher-value products including video games over the next few months.

A wider outlook

The complexity associated with the fluid tariff situation leads to a wider range of outcomes. The high end of our guidance reflects the assumption that the 2019 tariff impact is fully mitigated, while the low end assumes the tariff impact is not fully offset.
-- CFO Kenneth Bull

Given the quick pace of new tariff announcements, management thought the most prudent path would be to widen their earnings outlook to try to capture all potential avenues of the U.S-China trade war over the next few weeks. At the low end, executives predict $3.08 per share in earnings and a slight drop in operating margin. On the other end of the spectrum, the retailer forecasts a 20% sales increase with earnings of $3.19 per share.

In either case, Five Below is still projecting a 3% increase in sales at existing locations that, coupled with new store openings, will deliver 20% higher sales in 2019 for the growth stock, to mark just a minor slowdown from last year's 22% spike.

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