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It's been a rough summer for discounters, but now the market turns to see if Five Below (NASDAQ:FIVE) has the secret formula for keeping penny pinchers close this dicey season. The fast-growing retailer reports its fiscal second quarter results on Wednesday afternoon.

True to its moniker, Five Below sells a wide range of merchandise priced at $5 or less. It's not fair to call it a dollar store. It stocks items including t-shirts, backpacks, and sneakers that you're never going to see for a buck. It closed out its first quarter with 323 stores, and it's expanding quickly. Its store count has increased by 25% over the past year. 

Analysts are holding out for another quarter of trend-bucking growth. The pros are holding out for a profit of $0.14 a share, up from $0.11 a share a year earlier. They also see net sales climbing 30% to $152.3 which implies another period of modest comps growth on top of its brisk expansion. Analysts may seem aggressive here, but Five Below has actually blasted through Wall Street's quarterly profit targets more often than not since going public at $17 two years ago.

Momentum is building at Five Below. Net sales rose 28% in its fiscal year that ended in February as a result of new store openings and a 4% uptick in comps. It followed that up in fiscal 2014's first quarter with sales climbing 32% on a 6.2% spike in comparable-stores sales growth. Clearly the chain is holding up better than the two largest discount department store operators, Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) that have been posting flat or negative comps during the past few quarters.

Five Below initially saw sales growth of 26% to 27% in fiscal 2014, with adjusted earnings climbing slightly better than that. It boosted its top-line guidance slightly during its first quarter report, and naturally it will do so again if it comes through with another strong showing. 

The weakness we've seen earlier this earnings season at Wal-Mart and Target should be -- wait for it -- discounted. Wal-Mart's never been a good match. Five Below appeals to teens and young adults that don't want to shop where their parents or grandparents shop when they want to stretch a dollar. Target's a closer fit given its "cheap chic" panache, but Target's been stumbling suffering an embarrassing data breach late last year. 

A strong report won't necessarily mean that Five Below skyrockets higher on Thursday. The fast-growing retailer is trading at 46 times this fiscal year's projected profitability, and simply meeting or slightly beating expectations isn't always enough to keep the gains coming. Five Below will have to justify its substantial market multiples, but there are plenty of scenarios were it can make its own luck.

  • Five Below can surpass Wall Street expectations by a wider margin than it has in the past. It hasn't beaten analyst profit prognostications by more than $0.02 a share in any quarter over the past year. 
  • Five Below can once again juice up its guidance, perhaps taking its adjusted earnings forecast higher in the process.
  • It can step up the pace of expansion, growing the number of new stores it expects to open this year beyond the current slate of 62.

Then again, just proving that it shouldn't be lumped into the same pool as larger discounters could be enough to remind investors that everything's fine. One way or another, the fireworks are set to go off after Wednesday's market close.


Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Five Below. The Motley Fool is short Five Below. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.