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Why Five Below Stock Is Rising despite Poor Q1 Results

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Five Below (NASDAQ:FIVE) posted worse-than-expected first-quarter results after the financial markets closed on June 9. Despite the weak results, the stock has risen by 13.2% as of 10:53 AM ET today. Investors were pleased to know that the company experienced positive sales trends in reopened stores.

Five Below has reopened about 90% of its stores. The company’s comparable sales have grown about 8% quarter-to-date in the fiscal second quarter.

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COVID-19 hurt Five Below’s Q1 sales

Five Below’s first-quarter net sales fell by 44.9% YoY (year-over-year) to $200.9 million. The sales lagged analysts’ estimate of $230.35 million. Temporary store closures starting on March 20 caused a significant drop in the top line. The comparable sales, including e-commerce sales, fell 51.8% in the first quarter.

Five Below’s e-commerce sales grew over four times YoY in the first quarter. However, the e-commerce business accounts for a small proportion of the company’s overall sales. As a result, strong e-commerce sales didn’t offset the overall loss of sales from stores. In response to the need for online shopping amid the pandemic, the company enhanced its e-commerce channel.

Five Below disclosed that the growth rate in e-commerce sales has moderated since its stores reopened. The company expects e-commerce penetration in the low single-digit range of the overall sales for fiscal 2020.

The company took several steps to reduce expenses, including cutting down marketing spend and temporarily reducing management compensation. However, lower sales led to a loss per share of $0.91 compared to an EPS of $0.46 in the first quarter of fiscal 2019. The loss in the first quarter was wider than Wall Street’s expectation of loss per share of $0.33.

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Analysts raise the target price

Several analysts raised their target price for Five Below stock after the company’s update about reopened stores.

  • JPMorgan Chase raised the target price to $123 from $103.
  • Jefferies raised the target price to $140 from $89.
  • Credit Suisse raised the target price to $116 from $93.
  • RBC raised the target price to $115 from $102.
  • Citigroup raised the target price to $130 from $95.
  • Wells Fargo raised the target price to $120 from $115.
  • Guggenheim raised the target price to $120 from $105.
  • Deutsche Bank raised the target price to $121 from $102.
  • Craig-Hallum raised the target price to $133 from $132.

Five Below will allocate more space for essential items like hand sanitizers and wipes amid the pandemic. The company also added new home essential items like kitchen and bath products. Five Below aims to attract customers with new tech items, toys, fitness items, snacks, and other attractive merchandise.

Five Below reduced its capital expenditure plans due to the current crisis. The company aims to open to 100–120 stores in fiscal 2020 compared to its previous plan to open 180 new stores. Five Below operated 920 stores at the end of the first quarter.

Five Below didn’t provide any guidance for fiscal 2020 due to continued uncertainty surrounding COVID-19. Affordability is a key factor, which could drive sales during these challenging times. Discount retailers like Five Below and Dollar General (NYSE:DG) will likely fare better compared to other retailers in this tough environment.

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