Will Five Below Beat Wall Street’s Q3 Earnings Forecast?

Five Below (FIVE) will declare its results for the third quarter of fiscal 2019 on December 4. The specialty retailer beat analysts’ earnings expectations in the first two quarters of fiscal 2019. It beat analysts’ sales estimates in the first quarter but missed in the second quarter. Recently, JP Morgan added Five Below to its focus list. As per CNBC, JP Morgan analyst Matthew Boss believes that the recent pullback in the stock offers a buying opportunity.

Five Below primarily targets pre-teens and teens customers with attractive merchandise priced at $5 or below. Under the 10 Below! concept, it has been testing certain products at prices ranges above $5 and up to $10. Products include video games, Nerf toys, and spa items like neck and foot massagers.

Five Below’s strong Q2 earnings

In the second quarter, Five Below’s EPS grew 13.3% YoY (year-over-year) to $0.51, ahead of analysts’ expectation of $0.50. Also, higher sales drove earnings growth. However, a lower operating margin had an adverse impact on Five Below’s earnings. The company’s operating margin shrunk 10 basis points YoY to 8.6%. Also, higher expenses to support new-store growth and the adoption of a new lease accounting standard impacted the operating margin.

Five Below’s second-quarter sales grew 20% to $417.4 million against analysts’ estimate of $421.1 million. Same-store sales growth of 1.4% and contribution from new stores drove the sales growth. However, unfavorable weather impacted sales to some extent.

Expectations from Q3

Five Below expects third-quarter sales between $369 million and $374 million. Also, the company expects same-store sales growth in the range of 2% to 3%. Analysts expect Five Below’s sales to rise by 19.4% to $373.5 billion. Sales from new stores are expected to boost the company’s top-line in the third quarter. The retailer opened 44 new stores in 21 states in the second quarter as part of its plan to open 150 stores in fiscal 2019. The company’s sales could also benefit from its focus on e-commerce channels, marketing efforts, and enhanced merchandise offerings.

Five Below expects its third-quarter EPS in the range of $0.14 to $0.17 compared to $0.24 in the third quarter of fiscal 2018. Also, analysts expect EPS to decline 29.2% YoY to $0.17.

Stock movement ahead of the holiday season

Five Below stock has risen 20.9% year-to-date. Meanwhile, the stock of discount store chain Dollar Tree (DLTR) has risen 1.3% while Dollar General stock surged by an impressive 45.6% so far this year. Concerns over the impact of tariffs amid the US-China trade war pulled down Five Below stock to a certain extent. The company is negotiating with vendors and increasing prices on certain products to mitigate the impact of tariffs.

Dollar Tree stock fell 15.2% on November 26 as the company reported dismal Q3 earnings. Also, Dollar Tree indicated that its fourth-quarter performance would be hit by tariffs.

Currently, Five Below stock has a “buy” recommendation from 17 out of 22 analysts while five analysts have a “hold” recommendation. The average price target of $142.84 implies a 15% upside in Five Below stock over the next 12 months. Based on the guidance issued in August, Five Below anticipates fiscal 2019 sales in the range of $1.872 billion to $1.892 billion. It forecast a 3% rise in same-store sales and EPS in the range of $3.08 to $3.19. Analysts will look keenly at the company’s update to fiscal 2019 guidance and the outlook for the fourth quarter, which includes holiday sales.

Currently, analysts expect a 21.8% and 21.2% rise in the company’s fourth-quarter and fiscal 2019 sales, respectively. Meanwhile, they predict a 27.0% and 18.4% EPS growth in the fourth quarter and fiscal 2019, respectively.