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Why Five Below Stock Is Dropping This Week

By Demitri Kalogeropoulos – Updated Sep 3, 2021 at 2:50PM

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The earnings report hinted at inventory challenges ahead for the retailer.

What happened

The stock of Five Below (FIVE -0.49%) is losing ground to a rising market this week. The stock had dropped 10% by 2 p.m. EDT Friday, compared to 0.2% boost in the S&P 500, according to data provided by S&P Global Market Intelligence.

The drop was sparked by a poorly received earnings report, yet the stock is still in positive territory so far in 2021.

A couple shopping together in a mall.

Image source: Getty Images.

So what

Five Below's second-quarter announcement, which covers the period that ended in late July, contained plenty of good news. Sales jumped 52%, beating management's prior forecast. Margins rose again, thanks to rising prices and the popularity of the retailer's new Ten Below shopping section, which carries products priced as high as $10. "We had another strong quarter with the team executing well in a dynamic operating environment," CEO Joel Anderson said.

It's that operating environment that has investors worried about the second half of 2021. Costs are spiking on shipping and transportation, and it might be difficult for Five Below to obtain enough high-quality merchandise to handle the holiday shopping period.

Now what

Executives hinted at those challenge in the earnings report, saying its buyers are working hard to "mitigate the impact of global [shipping] disruptions." They declined to offer a full-year outlook, too.

It's likely Five Below will end up paying more to secure enough inventory over the next few months, which would pressure profit margins over the short term. But its wider growth story is still intact, including more than doubling its store base from its current 1,100-store footprint. That's why this week's stock swing shouldn't have investors questioning their growth thesis on this stock.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Five Below 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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