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Five Below is Set for a Great Holiday Retail Season

By Demitri Kalogeropoulos - Dec 15, 2020 at 4:27PM

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The latest earnings report suggests that the discount chain is still attracting plenty of shoppers to its stores.

Investors were expecting good news from Five Below ( FIVE 1.36% ) in its third-quarter operating update, released on Dec. 2. Sure, the company is getting hit by the pandemic pressures on the retailing industry. But its second-quarter announcement back in September suggested that it might outperform peers in 2020 as its focus on trendy, low-priced merchandise resonates with young shoppers.

Five Below this month confirmed that bullish reading. Sales and profits surged for the selling period that ended Oct. 31, putting the discount chain in a great position to win market share over the holiday season.

Let's take a closer look at the company's latest report and what it might mean for investors.

Three young women shopping together.

Image source: Getty Images.

Five Below's sales are rising

Sales jumped 26% year over year in Q3 while most investors who follow the stock were expecting just an 18% increase. Looking beyond that headline number, though, reveals some encouraging growth metrics.

Five Below got most of its sales boost from an expanding store base, with 36 new locations opened in the quarter. But sales at existing locations also showed a big rebound. The chain notched a 13% increase on the same-store sales metric compared to a 6% bump in Q2.

Management implied that this rebound was no fluke. "Our third quarter results surpassed our expectations," President and CEO Joel Anderson said in a press release, "as customers responded very positively to our extreme value, trend-right offering."

Executives credited their "clean and safe" shopping environment, plus an adaptable approach to merchandising, for the growth win. "Our performance ... demonstrates the inherent flexibility of our model and the agility of our teams to deliver a differentiated shopping experience with incredible value," Anderson said.

Other Five Below earnings wins

The financial news was just as bright. Thanks to strong pricing and modest expense growth, Five Below roughly doubled its earnings as operating income jumped to $24 million from $13 million a year ago. Net income rose 101% year over year to $20 million.

Looking ahead, management said COVID-19-related uncertainty is still severe enough to render any short-term growth outlook meaningless. However, they said the holiday shopping season was off to an "early and strong start."

FIVE Operating Revenue (Quarterly YoY Growth) Chart

FIVE Operating Revenue (Quarterly YoY Growth) data by YCharts

Five Below is aiming to build on the positive traffic momentum it is seeing at its stores by boosting its e-commerce abilities. Same-day delivery service is now available at about a third of its locations and will likely play a key role in supporting its holiday sales volume.

Meanwhile, the retailing chain is moving full steam ahead on its expansion plans and is on track to open 120 new stores this year, leaving it with 1,020 locations spread across most of the country.

Prior to COVID-19, management had hopes of eventually reaching 2,500 stores. Plunging sales threatened that outlook in early 2020 as many investors assumed shoppers would avoid its stores in favor of big-box retailers with robust e-commerce platforms.

But the good news is that Five Below put that key worry to rest, showing with its last two earnings reports that it has a connection with its young shopper demographic that's helping deliver impressive sales growth through the industry's worst disruption in years. As a result, investors have another big data point in favor of this business becoming far larger over the next few years, and likely delivering solid returns for shareholders who simply hold on to the stock.

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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