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Five Below: Q3 Earnings Drove Its Stock Higher

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Five Below (FIVE) stock rose 4.8% on Thursday. The company reported higher-than-expected earnings for the third quarter. With yesterday’s movement, the stock has risen 20.9% year-to-date.

Some analysts see more upside in the stock after the company’s third-quarter performance. On Thursday, UBS raised its target price for the stock to $125 from $124. Telsey Advisory Group revised its target price to $127 from $125. Meanwhile, RBC and J.P. Morgan increased their target prices to $144 from $143. Overall, the average target price of $143.20 for Five Below stock implies an upside potential of 16% over the next 12 months.    

In contrast, At Home Group (HOME) disappointed investors with a weak outlook following its third-quarter performance. At Home stock fell 35.9% on Thursday. The company’s sales were impacted by an unfavorable response to its Christmas merchandise and tariff-related price increases.

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Five Below’s Q3 earnings 

Five Below’s adjusted EPS of $0.18 beat analysts’ forecast of $0.17. Strong sales helped the earnings beat analysts’ expectations. However, the third-quarter adjusted EPS fell 25% YoY (year-over-year) due to lower margins.

The company’s gross margin fell by 120 basis points YoY to 31.4%. Five Below cited unmitigated tariff costs and the shift of certain merchandise costs from the second quarter to the third quarter for the lower gross margin. The company’s operating margin fell by 160 basis points YoY to 3.4%. Higher depreciation costs associated with the company’s new Southeast distribution center and the adoption of a new lease accounting standard hurt the operating margin.

Five Below’s sales growth in Q3

The specialty retailer’s sales grew 20.7% YoY to $377.44 million. Analysts expected sales of $373.62 million. Sales contribution from new stores and same-store sales growth of 2.9% helped deliver top-line growth. Five Below’s new stores have grown 20% since the third quarter of fiscal 2018. The company added 61 new stores in the third quarter. Notably, the company operated 894 stores at the end of the third quarter.

Increased basket size and more transactions drove same-store sales growth. A strong back-to-school season and attractive merchandise, including gaming and movie-related items, also boosted sales.

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Revised outlook

Five Below increased the low end of its fiscal 2019 guidance range following its third-quarter performance. The company expects its fiscal 2019 sales to rise by 20.4%–21.3% to $1.877 billion–$1.892 billion. Previously, Five Below expected sales between $1.872 billion and $1.892 billion.

However, the company expects same-store sales growth of about 2.5% compared to its previous outlook of about 3% growth. Five Below expects fiscal 2019 EPS of $3.11–$3.19. Earlier, the company expected the EPS to be $3.08–$3.19.

Five Below’s remodeled stores, new stores, Ten Below initiative, and investment in Nerd Street Gamers will likely lead to improved results. The company achieved its target of opening 150 new stores in fiscal 2019. Five Below is also on track to remodel 50 stores in fiscal 2019. The company plans to remodel about 300 stores over the upcoming years.

Five Below is testing merchandise in the price points above $5 to $10 in 25 stores under the Ten Below sections. The company also added Ten Below gift shops in all of its stores to attract customers during the holiday season. Five Below continues to offer products for its key customer demography of tweens and teens. The company has an enhanced assortment of products in the $1–$5 toys and games category, including Frozen 2 offerings.

Despite the strategic initiatives mentioned above, uncertainty related to tariffs and the US-China trade war might put pressure on the company’s margins.

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