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3 Things to Watch in the Stock Market This Week

By Demitri Kalogeropoulos - May 30, 2021 at 9:11AM

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Zoom is one of several popular stocks that will announce earnings results over the next few days.

Stocks rose last week, as both the Dow Jones Industrial Average (^DJI 0.56%) and the S&P 500 (^GSPC -0.01%) gained roughly 1%. The indexes are up more than 11% so far in 2021 after surging last year. 

Earnings season comes to a few popular stocks this week, including Zoom (ZM -4.27%), Five Below (FIVE 6.83%), and RH (RH 6.49%). Let's look at the metrics to follow in those highly anticipated announcements.

Person making video call on laptop.

Image source: Getty Images.

Zoom's updated outlook

Expectations are running high for Tuesday's first-quarter earnings report from Zoom, the video communications giant that became a household name during the pandemic. Sales soared in fiscal 2021, which ran through late January. Revenue jumped 326% for the year as usage swelled while people shifted to videoconferencing for all types of meetings.

That surging demand probably softened over the past few months as economies, especially the U.S., relaxed economic restrictions. But sales are still expected to jump to over $900 million in fiscal Q1 compared to $328 million a year ago.

The big question for investors is to what extent Zoom can turn the past year's engagement spike into enduring competitive advantages. For clues on that score, watch metrics like user growth, especially for larger clients that spend more than $100,000 per year on the service. Zoom needs more gains here if it's going to reach its ambitious fiscal 2022 goals of $3.8 billion in sales, up from $2.7 billion last year and $623 million in fiscal 2020.

Five Below's expansion strategy

Five Below was one of the surprise winners from pandemic shifts in shopping behavior. After initially collapsing during those lockdown weeks last year, demand soared for its youth-focused merchandise. Five Below saw strength in its home furnishings and entertainment categories. Customers also loved its push into more expensive products priced as high as $10.

That initiative is likely to have helped profitability in early 2021, which should show up in rising operating margin on Thursday. Five Below might have had some inventory and supply chain challenges, too.

But the main focus will be on management's expansion plan. Five Below suggested it could open as many as 160 new locations this year after slowing down launches during COVID-19. That would mark a big step toward executives' hopes of more than doubling the store base over time -- and it likely to produce solid long-term sales and earnings growth.

RH's profit margin

It's easy to see why Wall Street is so excited about RH stock heading into this week's report. Yes, revenue soared as the home furnishings industry swelled during the pandemic. But that trend has lifted most of its peers, too. What's special about RH is that its profitability is surging, too. Adjusted operating margin jumped over seven percentage points this past year to 22% of sales. As CEO Gary Friedman told investors in March, "It's an operating margin never seen before in the furniture market...50% better than our closest competitor."

Friedman said the company can reasonably target 25% margins over the next few years as it works to dramatically improve on its current $3 billion of annual sales. Those are ambitious predictions that would put RH in league with some of the most successful growth stocks on the market. The flip side to that optimism is that investors will be demanding some head-turning sales and earnings numbers from RH in Thursday's report.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zoom Video Communications. The Motley Fool recommends Five Below and RH and recommends the following options: long January 2022 $115 calls on Five Below and short January 2022 $120 calls on Five Below. The Motley Fool has a disclosure policy.

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Stocks Mentioned

RH Stock Quote
$332.67 (6.49%) $20.27
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$34,102.03 (0.56%) $189.59
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$4,296.66 (-0.01%) $0.48
Five Below, Inc. Stock Quote
Five Below, Inc.
$147.54 (6.83%) $9.43
Zoom Video Communications Stock Quote
Zoom Video Communications
$108.39 (-4.27%) $-4.84

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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