These aren't too many companies reporting earnings during this part of the calendar, but some retailers with fiscal years that conclude at the end of January are stepping up with their third-quarter financial updates this week. One of the more intriguing chains that will do so is Five Below (NASDAQ:FIVE).
Five Below has emerged as a "cheap chic" haven for teens by offering bargain-priced closeouts on trendy items. It has also proven to be one of the more resilient retail players in the new normal. Shares of the company hit another all-time high on Friday, and one Wall Street pro predicts they will head even higher.
Edward Kelly at Wells Fargo has boosted his price target on Five Below from $155 to what is now a Street-high $182. He was the third analyst to raise his price goal this month, but the timing here matters. Five Below reports its fiscal third-quarter results after Wednesday's market close, so Kelly wouldn't have made the move he did early Monday morning unless he felt the retailer was about to impress the market again.
Shopping for bargains
The chain may be cheap for shoppers, but its stock may not initially seem that way for investors. Five Below trades at nearly 90 times trailing reported earnings, and its enterprise value clocks in at 5.7 times trailing net sales. Those valuations are not for the faint of heart when it comes to brick-and-mortar retailers. Even Amazon.com fetches a lower top-line multiple and its trailing bottom-line valuation is comparable.
Five Below also admittedly has a weak e-commerce game -- last quarter, it delivered hardly any sales growth. The red flags are everywhere, and even Wells Fargo's Kelly was a bit hesitant in his bullish update. He stuck to his overweight rating on the shares -- naturally -- but he did point out that the stock has run up quite a bit already in recent months. He also feels that questions remain as to how Five Below will fare over the holidays, but he still tapped it as one of the best growth stories among consumer stocks, and credits it with having the potential to surprise analysts on the upside in 2021.
As for Five Below's weak top-line growth, if one digs a bit deeper into the numbers, it becomes clear that the company is actually killing it right now. It's true that net sales plunged 45% in its fiscal first quarter, which ended in early May, but the company had to temporarily shutter all of its stores halfway through the period when the COVID-19 pandemic struck.
When net sales rebounded to 2% growth in its fiscal second quarter, it was actually an encouraging beat. Analysts had been bracing for a 3% decline. It was Five Below's brisk expansion -- it has grown its empire by 18% to 982 stores -- that helped offset its negative comps figure, which was the natural result of ongoing closures during the early portion of the period.
Store closures will be less of a factor in Wednesday's report. Wall Street expects net sales to climb 18% for the quarter, and anticipates the chain will deliver its strongest earnings growth of the fiscal year.
Five Below's concept is working. Stocking items priced at $5 or less -- hence the name -- has made it magnetic to brick-and-mortar shoppers at a time when many other physical chains' business models are buckling. It makes the most of its retail space, and landlords are hungry for tenants that can draw and pay.
E-commerce is still not a major part of the story, but that's fine for now. Five Below continues to find new ways to drum up interest in its format. It recently launched a store section that features items costing up to $10, which considerably broadens the possibilities for what it can stock. It has been stepping up its dot-com game recently as well. It will be worth watching to see whether it can develop its e-commerce channel into something that can move the needle for it in the near future.
This company has weathered the pandemic in part because it operates under a model that's well-built to outlast recessions. Another strong report this week could push Five Below shares to new all-time highs. Investors like to go shopping, too.