Investing.com -- JPMorgan downgraded Five Below (NASDAQ: FIVE) to Underweight from Neutral on Thursday, citing multiple concerns that could challenge the company's performance over the next several quarters.
The report highlighted key factors such as multi-year margin constraints, declining basket sizes, and leadership changes that pose risks to the company's ability to sustain growth and profitability.
The bank said one of the primary issues is that Five Below (NASDAQ:FIVE)'s basket size has declined year-over-year in nine of the past ten quarters.
"FIVE's 'comp ticket' (or total basket) has declined year-over-year, as consumers continue to manage to a defined budget," said the bank.
This trend is expected to continue, with JPMorgan noting that the retailer faces margin headwinds in 2025 due to labor investments and executive compensation costs.
The firm estimates that these costs could add up to $17 million in incremental headwinds next year.
Additionally, JPMorgan's recent fieldwork indicated a moderation in sales trends heading into October.
The analysts raised their third-quarter same-store sales forecast to a decline of 2.5%, but they still expect some softening due to challenging year-over-year comparisons and a potential pull-forward of Halloween sales.
Moreover, the retirement of Chief Merchandising Officer Michael Romanko adds "key-man" risk, especially as Five Below works through a turnaround that includes overhauling its product assortment by the summer of 2025.
JPMorgan notes that the company is also targeting higher-income consumers to offset continued pressure on its low-income demographic, which accounted for 40-50% of purchases in the first half of 2024.
However, the bank adds that this shift may take time, and it believes margin headwinds will constrain growth in the near term.
JPMorgan raised its price target for Five Below to $95 from $89.