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Why Five Below’s First-Quarter EPS More Than Doubled

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EPS growth

Five Below (FIVE) reported its first-quarter results on June 6. Its adjusted EPS was $0.35, which was better than analysts’ estimate of $0.32. On a reported basis, EPS was $0.39, which more than doubled year-over-year. EPS was $0.15 in the first quarter of fiscal 2017. Higher revenue, leverage in its SG&A (selling, general, and administrative) expense rate, and a lower tax rate led to strong bottom-line numbers.

The company’s gross margin expanded 110 basis points to 32.8% in the first quarter due to higher revenue. Its SG&A expense rate improved 170 basis points to 24.5%. Its operating margin expanded 280 basis points to 8.3%, and inventory rose 19.6% to $215.4 million.

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Future expectations

For fiscal 2018, Five Below expects net income of $136.5 million–$139.9 million, which compares to the previous $133 million–$136 million. The company increased its EPS range to $2.42–$2.48 compared to $2.36–$2.42 previously. Capex is pegged at $137 million for fiscal 2018 and will be used for store openings and building the Atlanta distribution center. The company expects to open 125 stores in fiscal 2018, with 50% of them slated for the first half of the year.

For its fiscal second quarter, net income is expected to be $20 million–$21.2 million, reflecting a year-over-year growth of 19%–26%. EPS is expected to be $0.36–$0.38, reflecting a year-over-year growth of 20%–27%. For the second quarter, management expects a 100-basis-point deleverage in its operating margin, mainly due to tax-related reforms.

Peer performance

For the first quarter of 2018, Big Lots’ (BIG) reported adjusted EPS of $0.95 was much lower than $1.19 projected by analysts. Lower sales and escalating expenses marred its bottom-line performance.

Dollar Tree’s (DLTR) and Dollar General’s (DG) first-quarter adjusted EPS of $1.19 and $1.36, respectively, missed analysts’ consensus estimate of $1.23 and $1.40, respectively. Both companies blamed the weather for weaker quarterly numbers.

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