Five Below Posts Solid Results, Sees Better Times Ahead

By Dan Caplinger Markets Fool.com

Even though the broader retail industry has gone through tough times lately, one area that's shown few signs of letting up is the teen discount retail segment. In that space, Five Below (NASDAQ: FIVE) has a very strong presence, and it's managed to produce impressive results in the past, even when peers serving other retail-market niches have struggled.

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Coming into Thursday's fiscal first-quarter financial report, Five Below shareholders wanted to see that positive momentum continue, with strong revenue growth and good bottom-line results. Five Below delivered on those wishes, and it also boosted its guidance for the full year. Let's look more closely at Five Below to see how it did and what's ahead for the teen retailer going forward.

Image source: Five Below.

Five Below stays in its growth spurt

Five Below's fiscal first-quarter results continued the positive trends that we've seen previously. Sales climbed 21%, to $232.9 million, accelerating from recent quarters and doing better than the 19% consensus forecast among those watching the stock for sales growth. Net income rose by more than 23%, to $8.4 million, and that worked out to $0.15 per share, topping investor expectations by $0.01.

Looking more closely at the report, some of Five Below's other metrics started to look better, as well. Comparable sales were up by 2.6%, accelerating from roughly breakeven levels six months ago and a 1% rise last quarter. Operating income rose by 19%, reflecting a bit of cost pressure, but still allowing the company to pass through most of its revenue gains down to the bottom line. Gross margin rose by about half a percentage point to top the 31% mark.

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Expansion plans got a big jump-start at Five Below, with the retailer opening 31 new stores during the quarter. That was a big bounce from the slow winter months, and it brought Five Below's total store count up to 550, with locations in 32 different states.

CEO Joel Anderson was happy with the performance. "We are very pleased to start 2017 with strong first-quarter results," Anderson said, and the CEO saw the results as "reinforcing the strength and consistency of Five Below as a leading high-growth value retailer."

What's ahead for Five Below?

In particular, Five Below opened its first store in California in late April, and it's already seeing some positive results stemming from that store. The teen retailer hopes to keep growing its presence in new markets while still building on its success in its established areas.

Five Below's future guidance was quite a bit better than most investors were expecting to see. For the second quarter, Five Below is calling for revenue of $273 million to $280 million, with 27 new stores expected and a 5% to 8% rise in comparable sales. Guidance calls for earnings of $0.24 to $0.27 per share. Compared to investor projections of $265 million in sales and $0.22 per share in earnings, the guidance was quite positive.

The company once again lifted its projections for the full 2017 fiscal year. After the change, Five Below expects sales of $1.227 billion to $1.242 billion, and that's up about $12 million to $17 million from its previous guidance. Five Below thinks that 100 new stores will help bolster growth, and expected comps growth of 3% to 4% is consistent with its previous call for low-single-digit percentage gains. An earnings upgrade to between $1.59 and $1.64 per share represents about a $0.03 to $0.04 per-share rise from previous guidance.

Interestingly, Five Below shareholders seemed to take the results in stride, and the stock barely budged in after-hours trading following the announcement. Given how well Five Below has fared in the recent past, it seems that long-term investors fully expect the performance that the teen retailer has traditionally put in. Given that the stock currently trades near all-time highs, some shareholders might simply be looking for even better outlooks for the fundamental business before committing fully to Five Below for the long run.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.