Five Below (NASDAQ:FIVE) isn't done surprising Wall Street. On Wednesday, the specialty retailer announced another strong quarterly result, with sales and earnings trends both blasting past expectations. 

The report eased concerns that the holiday period might bring slower growth and inventory challenges due to supply chain issues. Let's look at why Five Below's business is looking better than ever at the start of its fiscal fourth quarter.

Sales trends

Investors had high expectations heading into the report, with sales projected to rise 15% on top of large gains a year earlier. Five Below easily surpassed those targets. Revenue landed at $608 million, up 28% year over year.

The retailer got help from a quickly expanding store base, but nearly half of the gains came from higher sales at existing locations. Comparable-store sales were up 15%, in fact. "We delivered record-setting third-quarter performance," CEO Joel Anderson said in a press release, "on top of a record third quarter last year."

More wins

There was other good news in the report, too. Five Below successfully launched 52 new locations, including New Mexico, its 40th state. It now maintains 1,173 stores, or fewer than half of the 2,500 spots management thinks it can achieve in the U.S. over the long term.

Three people sitting on a bench holding shopping bags.

Image source: Getty Images.

Margins were also strong despite extra cost pressures. Gross profit was $202 million, or 33% of sales, compared to $151 million, or 32% a year ago. Operating income nearly doubled to $43 million.

These gains were possible thanks to successful initiatives like the chain's "Ten Below" offering that features higher-priced merchandise in niches like gaming and home decorating. It's also due to Five Below's skilled buyers, who maintained the right mix of inventory. Anderson highlighted "phenomenal execution by our teams in a challenging supply chain environment."

Looking ahead

The short-term outlook is bright. Five Below is now predicting that sales will reach $1 billion in the fourth quarter, pushing revenue up to $2.8 billion for the year. That forecast approximately matches what most investors were predicting for 2021.

Net income should jump to over $270 million, compared to $123 million last year and $175 million in 2019 before the pandemic struck. That should translate into earnings per share of between $4.82 and $4.94, a bit higher than investors had forecast.

Five Below has already launched 17 new stores in Q4 and is on track to open 170 locations this year. That rising square footage metric is a sure way to boost sales in fiscal 2022, and there's a long runway for growth on the way to 2,500 spots.

But the news is just as good regarding Five Below's established locations, which today are handling much higher customer traffic and average spending than they were two years ago. That mix of higher sales at existing stores and at new launches implies more good earnings news for shareholders through 2022 and beyond.

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