Five Below (FIVE -2.07%) has been of the few winners in the retailing industry through the latest market downturn. Shares have trounced the market in the past full year, rising nearly 30% through mid-March. Walmart and Target stocks have declined in that time.
The specialty retailer just issued an operating update that showed a mixed performance on key sales and earnings metrics. Let's look at where the stock might be headed given its current momentum and management's new outlook for fiscal 2023.
Beating expectations
Five Below finished fiscal 2022 on a positive note. Instead of flat comparable-store sales trends, as management had initially forecast back in late October, comps rose 2%. Revenue gains were helped along by a quickly expanding store base, too, as overall sales improved to $1.1 billion compared to $996 million a year earlier.
That revenue figure also modestly outpaced management's outlook. "We are pleased to close out fiscal 2022 with fourth quarter results that demonstrate the relevancy, resiliency, and flexibility of our model," CEO Joel Anderson said in a press statement.
Looking deeper into those sales trends shows how the youth-focused retailer is making the best of a tough selling environment. While average spending declined over the holiday period, Five Below offset that slump with higher shopper traffic. This success is a testament to the retailer's flexible merchandising approach that seeks to capitalize on trendy products.
Profitability is strong
Five Below achieved good results on profitability despite major cost pressures. Operating income dipped to 11% of sales from 13% a year ago but remained well ahead of most retailing peers.
This metric alone goes a long way toward explaining why the stock is outperforming industry rivals. Target and Walmart have both seen margins fall to the low single digits in recent quarters.
FIVE Operating Margin (TTM) data by YCharts
Five Below ended the year in a strong financial position, with healthy inventory levels, $400 million of cash on the books, and no debt.
Outlook and value
Management's 2023 forecast is for a comps gain of between 1% and 4% in fiscal 2023, which doesn't look much different from the projections by large national peers like Walmart and Target. Yet the company sees a large opportunity to add new stores to its footprint, with plans to launch a record 200 new locations this year.
Five Below is also busy transitioning many of its existing stores into a new format that includes merchandise that isn't limited by the $5 price point. These moves should help sales rise by between 13% and 17% this year to as much as $3.6 billion.
The wide range of that forecast reflects management's caution about a potential slowdown in consumer spending in the second half of the year. But its momentum through late January shows no sign of a slump like that.
In the meantime, investors have some reasons to worry about the stock's elevated valuation. Shares are priced at 3.8 times sales today compared to 2.5 times sales six months ago.
Sure, Five Below has earned a premium by keeping sales growth and operating margin metrics in the double digits during this tough selling environment. But the stock's rally also suggests more modest gains for shareholders ahead. Risk-averse investors might want to watch the stock rather than jump into a big purchase today.
