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Five Below Stock Has a Lot to Prove on Thursday

By Rick Munarriz – May 31, 2017 at 1:06PM

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The fast-growing "cheap chic" retailer gears up for an important report.

There aren't too many retailers still waiting to talk about their fiscal first-quarter results, but one of them is Five Below (FIVE -2.38%). The trendy retailer that, true to its name, stocks a wide array of merchandise priced at $5 or less will report fresh financials after Friday's market close.

Five Below's own guidance back in March is calling for $228 million to $232 million in net sales with earnings per share clocking in between $0.12 and $0.14. The chain's outlook would represent 19% top-line growth at the midpoint and marginal improvement over the $0.12 a share it posted a year earlier. Five Below also sees same-store sales coming in flat to up 2% for the period, an important metric to watch since one of the reasons that the stock commands a healthy market multiple is that it's defying the fickle nature of its retailing peers by posting 11 consecutive years of positive comps.

Exterior shot of a Five Below store.

Image source: Five Below.

Let's go shopping

Five Below has an ambitious "20/20 through 2020 strategy" where it's targeting 20% annual growth at both ends of the income statement through at least 2020. The lofty goal is easier stated than done. Growth has decelerated in each of the six previous fiscal years, according to data from S&P Global Market Intelligence, going from 57.6% growth in net sales to 20.2% in its latest fiscal year. It's also coming off back-to-back quarters of year-over-year growth in the high teens, a feat that will be repeated on Thursday unless it lands at the high end of its guidance. Thursday should also be the second quarter in a row where earnings growth fails to keep pace with Five Below's 20% annual goal.

Expansion is obviously the key to Five Below's top-line growth. After opening 71 net new stores in fiscal 2015 and 85 units last year, the chain is eyeing 100 new locations going up this year. Its mid-March forecast was calling for 26 new stores opening by the end of April, a goal it clearly hit since it announced that it opened its 555th store -- meaning 33 stores since its fiscal 2017 began in late January -- on May 5. 

Wall Street generally likes what it sees. Jefferies analyst Daniel Binder bumped his price target on the stock from $55 to $62 earlier this month. Binder's field checks indicate that comps should come in at the high end of its earlier guidance, or closer to 2% growth. He is sticking to his Buy rating, naturally. 

If Binder's right it would mean accelerating growth in terms of both comps (same-store sales rose just 1% during the holiday-including fiscal fourth quarter) and net sales. The bottom line remains a mystery, as Five Below's initial outlook implies contracting margins. Five Below stock is trading 31% higher so far in 2017, and as long as it's able to stick to the "20/20 through 2020" game plan, those gains should stick. However, with top- and bottom-line growth struggling to get theirs chins up above that 20% bar lately, it's not safe to assume that anything is guaranteed.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.

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