Five Below (FIVE) Q2 Earnings Top On Spinners Trend, View Up

Five Below, Inc. (NASDAQ:FIVE) posted robust second-quarter fiscal 2017 results, wherein the top and bottom lines outpaced the Zacks Consensus Estimate and grew on a year-over-year basis.

Notably, the reported quarter witnessed highest comparable sales (comps) since the initial public offering (IPO) five years ago. Consequently, management raised its fiscal 2017 outlook following the stellar quarterly performance.

Moreover, the quarter witnessed one of the highest sales and earnings growth since the company’s IPO. While the fiscal second quarter marked the eighth consecutive positive earnings surprise, it was Five Below’s third straight quarter of sales beat.

However, shares of this specialty value retailer marginally declined 0.6% in the after-market trading session following the earnings release. Nevertheless, shares of this Zacks Rank #2 (Buy) company have rallied 24.1% in the last six months, as against the industry’s decline of 14.4%. Also, the stock has outperformed the Retail-Wholesale sector’s gain of 8.6%.

Q2 Highlights

Five Below posted fiscal second-quarter earnings of 30 cents per share, which escalated nearly 67% from 18 cents in the year-ago quarter and topped the Zacks Consensus Estimate of 26 cents. Additionally, bottom line exceeded the company’s guided range of 24-27 cents per share. The uptick can be attributable to higher sales and significant growth in margins.

Net sales grew 29% to $283.3 million from the year-ago quarter and also came ahead of the Zacks Consensus Estimate of $277 million. Also, the top line surpassed the company’s guided range of $273-$280 million. The improvement was due to solid comps growth, along with strong execution of the company’s strategic initiatives and store openings.

Comps increased 9.3% versus 3.1% in the prior-year quarter and also exceeded the guided range of 5-8%. This was primarily driven by the robust growth in comp transaction, coupled with sturdy performance in its core business and solid fidget spinners’ sales.

Margins

Gross profit improved 34.3% year over year to $98.5 million with the gross margin expansion of roughly 145 basis points (bps) to 34.8%. The increase was mainly backed by higher merchandise margins from solid spinner sales as well as favorable store occupancy and distribution expenses.

Meanwhile, improved gross profit led operating income to jump 67.4% to $26.3 million during the fiscal second quarter. Further, operating margin expanded 220 bps from the year-ago quarter to 9.3%.

Financials

Five Below had cash and cash equivalents of $74.8 million and short-term investment securities of $92.7 million as of Jul 29. Notably, the company had no debt and its total shareholders’ equity was $366.5 million at the end of the reported quarter.

During the first half of fiscal 2017, the company generated net cash from operating activities of $31.1million and incurred capital expenditures of $29.9 million.

Going forward, management still intends to incur capital expenditures of roughly $78 million for the fiscal year. This represents the introduction of new stores along with the leftover balance to be used in the company’s new Home Office, store remodels, distribution centers as well as its infrastructure.

Store Update

In the quarter under review, Five Below introduced 31 stores in 13 states. While the California stores continued with its robust performance, the company looks forward to enhance its footprint in the Southern California over the next two-year period.

During the six months of fiscal 2017, the company inaugurated nearly 62 stores, which signifies roughly 60% of its store-expansion plan in the year. As of Jul 29, Five Below had roughly 600 stores across 32 states.

This specialty value retailer expects to open nearly 35 stores in the fiscal third quarter versus 26 stores introduced in the year-ago quarter. Further, it is likely to launch roughly 100 stores in the second half of fiscal 2017, taking the total store count to 622 at the end of the year.

Outlook

Management remains impressed with its quarterly performance, wherein the results beat expectations significantly. Going forward, the company remains committed to its strategic initiatives like enhancement of its digital and e-Commerce channels, improvement in customers’ shopping experience, store openings as well as marketing efforts.

Consequently, the company raised its fiscal 2017 view and issued guidance for the fiscal third quarter. In fact, the fiscal year includes 53rd week in the final quarter that is likely to contribute roughly $15 million in sales as well as 2 cents in earnings.

Currently, Five Below projects sales in the band of $1.236-$1.248 billion versus $1.227-$1.242 billion forecasted during the fiscal first-quarter conference call. The projected range reflects nearly 24-25% rise from fiscal 2016. Furthermore, comps are anticipated to increase 3.5-4.5% compared with 3-4%, guided earlier.

The company estimates its operating margins to grow modestly compared with 11.4% in the previous year.

Earnings for fiscal 2017 are now envisioned in the band of $1.62-$1.66 per share compared with the previous range of $1.59-$1.64. The Zacks Consensus Estimate is currently pegged at $1.64. The company delivered earnings of $1.30 per share in fiscal 2016.

For the fiscal third quarter (ending Oct 28, 2017) sales are projected to be between $241 million and $246 million. Comps are anticipated to grow 3-5%, reflecting a slower spinner fad in comparison with the quarter under review. Earnings are expected in the band of 11-13 cents per share versus 10 cents in the year-ago quarter. The Zacks Consensus Estimate is pegged at 12 cents.

Still Interested in Retail? Check these Key Picks

Some other top-ranked stocks in the Retail sector include Sally Beauty Holdings, Inc. (NYSE:SBH) , Aaron's, Inc. (NYSE:AAN) and The Children's Place, Inc. (NASDAQ:PLCE) . While Sally Beauty and Aaron's sport a Zacks Rank #1 (Strong Buy), Children's Place carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Sally Beauty has long-term earnings growth rate of 5.6% and delivered positive earnings surprise of 6.1% in the last reported quarter.

Aaron's has pulled off an average positive earnings surprise of 14% in the trailing four quarters.

Children's Place has long-term earnings growth rate of 9% and came up with an average positive earnings surprise of 16.3% in the trailing four quarters.

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