Why Is Five Below (FIVE) Up 3.9% Since Last Earnings Report?

A month has gone by since the last earnings report for Five Below (NASDAQ:FIVE). Shares have added about 3.9% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Five Below due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Five Below Q3 Earnings Beat, Comparable Sales Up 14.8%

In spite of a challenging supply chain environment, Five Below, Inc. posted stellar third-quarter results, wherein both the top and the bottom lines not only surpassed the Zacks Consensus Estimate but also improved year over year. Impressive comparable sales run also continued in the quarter. Better-than-expected performance, prompted management to provide an upbeat view for fiscal 2021.

Five Below stated that the holiday season is off to a robust start. The company’s focus on providing trend-right products, strengthening digital and distribution capabilities as well as delivering better WOW products, including the Five Beyond offering, bode well. It is adding assisted checkout capabilities and committed toward providing same-day delivery service to make shopping convenient.

Let’s Introspect

Five Below delivered third-quarter fiscal 2021 earnings of 43 cents a share that topped the Zacks Consensus Estimate of 29 cents. Remarkably, the bottom line improved from earnings of 36 cents reported in third-quarter fiscal 2020.

Net sales of $607.6 million came ahead of the Zacks Consensus Estimate of $562.7 million. The metric rose 27.5% from revenues of $476.6 million in third-quarter fiscal 2020, thanks to solid product trends that drove traffic and new customers to outlets.

We note that comparable sales for the quarter under review climbed 14.8% compared with an increase of 12.8% registered in the year-ago period. The growth was driven by increase in comp transactions of 14.3% and a comp ticket increase of 0.5%.

Gross profit surged 33.9% year over year to $202.4 million, while gross margin expanded 160 basis points to 33.3%. The increase in gross margin was driven mainly by occupancy leverage, thanks to strong sales results which helped offset higher inbound freight costs. Also, lower distribution labor and store freight expense, primarily due to the shift of receipts and flow of inventory to stores from the third quarter into the fourth quarter contributed to the gross margin.

We note that SG&A expenses climbed 26.1% to $159.9 million during the quarter. As a percentage of sales, SG&A expenses decreased approximately 30 basis points to 26.3%, driven primarily by fixed cost leverage, offset in part by higher incentive compensation. Operating income amounted to $42.4 million during the quarter under discussion, up 75.1% from $24.2 million in the third quarter of fiscal 2020. Operating margin expanded 190 basis points to 7% during the quarter.

Financials

Five Below ended the quarter with cash and cash equivalents of $86.8 million and short-term investment securities of $224.6 million. Total shareholders’ equity was $1,033.2 million as of Oct 30, 2021.

Management incurred capital expenditures of approximately $213.2 million during the 39-week period ended Oct 30, 2021. Five Below anticipates capital expenditures of approximately $310 million in fiscal 2021, excluding the impact of tenant allowances.

Store Updates

During the quarter, Five Below opened 52 new stores across 24 states, including entering the 40th state, New Mexico. This took the total count to 1,173 stores, as of Oct 30, 2021, reflecting an increase of 15.2% from the year-ago count. The company also informed that with the additional 17 new stores opened in the final quarter, it has completed 171 new openings for the fiscal year.

Guidance

Five Below envisions fourth-quarter fiscal 2021 net sales in the range of $985 million to $1,005 million compared with $858.5 million reported in the year-ago period. The company guided 2-4% increase in comparable sales versus the record comparable sales growth of 13.8% last year. Management forecast fourth-quarter earnings between $2.36 and $2.48 per share compared with $2.20 in the prior-year period.

The company foresees operating margin to delever by about 125 basis points in the fourth quarter, as store and marketing expenses are expected to be higher. It also expects gross margin to delever slightly when compared with the prior-year period, as some of the costs associated with the handling of delayed inventory receipts, shifted from the third quarter into the fourth quarter.

Management projected fiscal 2021 net sales in the band of $2,837 million to $2,857 million compared with $1,962.1 million reported in the year-ago period. The company anticipates a 30% jump in comparable sales. Management forecast earnings between $4.82 and $4.94 per share compared with $2.20 in the prior-year period, including benefit from share-based accounting of approximately 8 cents. The company anticipates operating margin to reach a record 13% or leverage of over 120 basis points versus fiscal 2019.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

VGM Scores

At this time, Five Below has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Five Below has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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