Investors are eager for Five Below's (FIVE 1.55%) earnings update, set for release this week. The youth-focused retailer's stock has been swinging wildly in recent weeks as rivals reported a mix of good and bad news around consumer spending patterns. Some companies are seeing declining demand for many niches that had been booming. Others are reducing their earnings outlook as costs soar.
Five Below has a good shot at navigating through those challenges thanks to its focus on value and its flexible merchandising strategy. Let's look at how these factors might help the chain report surprisingly strong results on Wednesday, June 8.
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Sales trends
Five Below's growth strategy involves adding as many as 400 new stores over the next two fiscal years. But first, it will have to show it can continue expanding sales at existing locations.
Comparable-sales growth slowed to just 3.4% in the fiscal 2021 fourth quarter, which ended in late January, after booming for most of the year. The company faced a tough year-over-year comparison due to soaring demand a year earlier, driven by financial stimulus payments.
Look for comparable sales to potentially slip into negative territory for the fiscal first quarter. Back in late March, management guided for flat to down 2% comps, and since that time, several retailers have described a challenging selling environment as shoppers shifted spending to different categories. Five Below's success will depend on its ability to respond to these changes by stocking the right products.
Earnings pressure
Both Walmart and Target recently lowered their 2022 earnings outlook, while a few other retailers, including Dollar Tree, affirmed their forecasts. It's not clear yet which of these paths Five Below will take for the rest of the year.
Data by YCharts.
It is likely the chain avoided the inventory challenges that hurt Target, since it doesn't sell many bulky products. Its value focus might even lift demand during this inflationary time.
Follow operating margin for signs of stress here. That figure landed at 13.3% of sales in fiscal 2021, and management is hoping to push it to 14% of sales over time. We'll learn on Wednesday whether the retailer is less optimistic about short-term profitability.
Looking ahead
Last quarter, management articulated a plan to more than triple the current store count to as many as 3,500 locations by fiscal 2030. That outlook implies 400 new launches through fiscal 2023.
Wall Street will be nervous if management revises comparable-sales guidance downward since that might threaten Five Below's store growth ambitions. On the bright side, the company has demonstrated a knack for navigating through a wide range of selling conditions.
If it can repeat that success through today's consumer spending shifts, the stock should reward patient shareholders with market-beating returns.
