Five Below Stays Above the Teen Retail Curve

By Markets Fool.com


Image: Five Below.

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For shoppers, nothing beats a bargain, and that's particularly true for cash-strapped teenagers who don't have a lot of money to spend. Discount retailer Five Below has tapped the demand for affordable teen-targeted merchandise and turned it into a thriving business, and coming into Wednesday afternoon's fiscal-first-quarter report Five Below investors hoped that the company would ride its positive momentum from the previous quarter into its new fiscal year. Five Below was indeed able to post impressive results, finding growth opportunities even where better-known luxury retailers have struggled. Let's take a closer look at how Five Below did and what it says for the future of the teen retailer.

Five Below is looking up
Five Below once again rode its wave of expansion to big gains in sales, with revenue climbing 22% to $153.7 million, topping the 20% growth that most of those following the stock had expected to see. Net income rose 19% to $4.3 million after adjusting for certain transactions related to the company's founders, sending adjusted earnings per share up a penny to $0.08 per share, defying expectations for flat performance from last year's fiscal first quarter.

Looking more closely at Five Below's results, though, there were some causes for concern. The biggest worry has to come from the retailer's trend in comparable-store sales. During the quarter, Five Below posted growth in comps of just 1.7%, barely half the tepid pace from the fourth quarter of fiscal 2014. Gross margins also slipped slightly from year-ago levels, although operating margins climbed by more than half a percentage point to 4.6% as the company managed to hold down its overhead costs.

Still, Five Below accelerated its opening of new store locations in the first quarter, with 19 new stores bringing the company's overall count up to 385 as of the end of the quarter. That's up by 19% from last year, and Five Below continues to look to future store openings as a growth driver for the future.

CEO Joel Anderson was pleased about the company's performance, highlighting its first stores in Alabama and Kentucky and looking at ways to reach out to its customers more effectively. "We continued to invigorate our assortments with even more newness," Anderson said, "and are optimizing our marketing to better reach and engage our customers, including our new TV commercial."

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Where Five Below is going
Further store growth is the name of the game for Five Below's strategic plan. Anderson still expects to open 70 stores in 2015, debuting in six previously untapped states this year. Further into the future, Five Below will look to open even more stores in 2016, with hopes for 85 openings next year.

Five Below's guidance for the current quarter and the full 2015 fiscal year were also somewhat encouraging. For the fiscal second quarter, Five Below expects sales of $182 million to $185 million, with comparable-store sales growth climbing to 4% to 5%. That's a slightly faster growth pace than most of those following the stock expect, and earnings guidance for $0.12 to $0.13 per share was similarly at the upper end of what investors were looking to see. Full-year guidance for revenue of $820 million to $828 million and earnings of $1.03 to $1.06 per share are also close to but slightly higher than consensus expectations.

Five Below investors were once again pleased with the report, sending the stock up almost 7% in the first hour of after-hours trading following the announcement. If Five Below can truly boost its comparable-store sales back up to healthier levels and accelerate the pace of its store openings, then it could provide an unparalleled combination of positive influence on sales and earnings that could vault the stock substantially higher over the long run.

The article Five Below Stays Above the Teen Retail Curve originally appeared on Fool.com.

Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple and Five Below. The Motley Fool owns shares of Apple. The Motley Fool is short Five Below. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.