What happened
Shares of discount retailer Five Below (FIVE -1.80%) soared on Thursday after the company released financial results for the third quarter of 2022 and issued guidance for the fourth quarter that surprised Wall Street. As of 1:45 p.m. ET today, Five Below stock was up 14%.
So what
In the third quarter, Five Below generated net sales of $645 million. On one hand, this looks good: Revenue was up 6.2% year over year and trounced management's most-optimistic forecast of $619 million. On the other hand, same-store sales (comps) -- a crucial metric for retail stocks -- dropped 2.7% from last year. Comps are also down 4.1% year to date.
Turning to the bottom line, Five Below's third-quarter results were also better than expected but down from last year. The company earned $16.1 million in net income, down from $24.2 million in the same quarter last year but far better than the $4 million to $11 million guided for by management.
Now what
Given these results, it might seem surprising that Five Below stock is up so sharply today. But in my opinion, this all has to do with expectations. Wall Street's expectations had fallen given the company's weak guidance going into the third quarter. However, analysts are far more encouraged today now that Five Below's results are strengthening right as the crucial holiday shopping season begins. Analysts were consequently raising their price targets today, contributing to the stock's gains.
Management said sales improved throughout the third quarter, giving hope for the fourth quarter. It is guiding for net sales of $1.085 billion to $1.11 billion, which would be up about 10% year over year at the midpoint. However, this growth will come from new stores; comps are expected to be flat compared to last year.
In my opinion, the third quarter wasn't great for Five Below, and fourth-quarter guidance isn't spectacular, either. But the stock was trading cheaply on low expectations, and those expectations are now coming back up on relatively stronger results. And that's why the stock jumped today.
Now that expectations are back up, Five Below will need to deliver comps growth and profit growth in 2023 if the stock is going to keep heading higher.
