Specialty retailer Five Below (FIVE -1.47%) recorded another solid earnings report this month, posting 14.1% comparable sales growth in the second quarter and extending its streak of double-digit comps for the fifth quarter in a row. The value-priced store sells most of its items for $5 or less and is geared toward kids and teens.
The Q2 comparable sales increase of 14.1% was better than a year ago, when Five Below posted comparable sales growth of 12.4%, with demand spread across all customer groups and product categories. The report provides evidence that the company's turnaround under CEO Winnie Park, who joined in December 2024, is well underway.
Management raised full-year comp guidance to a midpoint of 11% and adjusted earnings per share to $10.07, representing a 51% year-over-year increase.
Image source: Getty Images.
Margin expansion meets tough comparisons
Gross margins expanded by 220 basis points to 35.6%, which helped drive adjusted operating income up over 100% to $113 million. Despite the strong quarter, the comparisons get harder from here. Five Below will now begin comparing its results for the rest of the year against its stronger quarters in 2025, making year-over-year growth harder to achieve. Management expects comparable sales growth of 9% at the midpoint in the third quarter, but just 3% for the fourth quarter.
Five Below faces a 15.4% comp from Q4 of last year, followed by a 22.7% comp in Q1 2026. Its social media marketing strategy has proven effective at driving traffic, but its durability will be tested in the year ahead.
A self-funding runway
The investment case remains attractive. Five Below recently opened its 2,000th store and is on its way toward a long-term target of more than 3,500 locations. The retailer is adding roughly 150 net new stores this year, funded by a strong balance sheet with $1.2 billion in net cash.
NASDAQ: FIVE
Key Data Points
The unit economics remain solid, with new stores generating around $2 million in first-year sales and management reporting a payback period of about one year. That said, matching the productivity of existing stores will still be a challenge for the next thousand.
Even if comparable sales settle into the middle single digits once these comparisons flow through, new store expansion plus a normalized comp could still produce mid-teens earnings growth.
After a strong run, Five Below stock trades for approximately 25 times forward earnings estimates, a fair valuation for a retail stock. For investors who believe in the company's long-term potential, the stock is worth owning.
