After trailing the market for most of the last few months, Five Below's (NASDAQ:FIVE) stock is jumping again. Share prices have shot up in the last few weeks ahead of the specialty retailer's upcoming earnings announcement.

That report, set for release on the afternoon of Dec. 1, will be packed with fresh data about demand trends for its youth-focused merchandise through the fiscal third quarter. Investors will be just as interested in management's outlook for the key holiday shopping season that just started, too.

Let's take a closer look.

A shopper holding bags on an escalator in a mall.

Image source: Getty Images.

Jumping sales

Look for good news on the sales front. Five Below in early September revealed that revenue jumped 52% year over year in the fiscal second quarter. Sure, a lot of that spike can be attributed to temporary store closures a year ago. But sales are still up 21% year over year at locations that were open in both periods.

Most investors who follow the stock are expecting another strong result this week. Revenue should jump 15% to $562 million. Ideally, the company will achieve that growth through a healthy balance of new store launches and rising customer traffic at its existing locations. CEO Joel Anderson said three months ago that the chain was capitalizing on "broad-based" demand growth. Those trends likely accelerated in the weeks that followed.

Profit margins

Investors have two good reasons to expect rising profit margins. First, the selling environment should have supported higher prices on many products. Major retailers, including Walmart, have noted how consumers are spending freely these days.

Five Below also is pushing deeper into products priced beyond its traditional $5 ceiling. Sales in its $10-and-below niche helped push gross profit margin above 35% of sales last quarter.

While the retailer likely dealt with rising costs on transportation, labor, and shipping, there's a bright outlook for that key profitability metric in 2021 and over the long term as the company extends into more premium niches like home furnishings and video games.

FIVE Gross Profit Margin Chart

FIVE Gross Profit Margin data by YCharts

The holiday outlook

When Anderson and his team comment on the fourth-quarter outlook, that prediction will carry extra weight because it will incorporate the first few days of peak holiday shopping demand. Heading into the announcement, investors are expecting to hear that sales will rise to roughly $2.8 billion for the full year compared to $1.96 billion in 2020.

Yes, there's a likely short-term boost ahead for the stock if Five Below beats those expectations. But investors should be even more excited about the chain's store-growth potential in that scenario. Management has been saying that they could easily double their total selling footprint to roughly 2,500 locations across the U.S. over time.

If Five Below can grow sales at existing locations compared to the records these stores set in the second half of 2020, then that expansion pace might speed up to near 200 launches per year. Toss in higher average spending and rising profit margins, and you've got a formula for solid investor returns over the next several years.

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