Five Below Earnings: 4 Things Investors Should Look For

Discount variety chain Five Below (NASDAQ: FIVE) has cemented its position as a market darling, outpacing the competition and easily fending off any potential encroachment by

Shares of the retailer to the tween and teen set are up 52% (while the S&P 500 index is flat) so far in 2018. That advance has been fueled by consistent strong quarterly earnings growth and rising same-store sales, even as the company greatly expands the number of stores it operates. But it largely came early in the year, and the stock trades now at about the same price as it did back in June.

With no saturation point in sight, however, and as the Christmas shopping season hits its peak, let's take a look at what investors should keep an eye out for when Five Below reports earnings on Wednesday, Dec. 5. The big question: Can Five Below resume its pattern of growth?

Same-store sales

Five Below has an enviable record of 11 consecutive years of positive comparable sales growth, one that it could add to this year. It started out 2018 expecting comps to rise just 1% to 2% from the year-ago period, but last quarter it bumped that outlook up to 3% to 4%, showing that its business has improved all year long and is getting better.

While that forecast is down from the 6.5% gain Five Below achieved in 2017, last year the retailer was still benefiting from the popularity of the fidget spinner, a highly desired toy that hasn't seen a replacement this year. That's not unexpected, since blowout fads aren't an every-year occurrence -- it was Silly Bandz in the early 2010s before fidget spinners -- and points to the stock's upside potential when the next fad inevitably does hit.

Store-count growth

Five Below ended the second quarter with 692 stores, 42 more than it started 2018 with, in 33 states. When it held its earnings conference call with analysts on Sept. 4, it had already opened 17 more with a plan to open 50 locations in the third quarter. It wants to open 125 for the full year.

That torrid pace of store openings runs against the tide seen across much of the rest of retail, but is in line with Five Below's belief that the chain can support some 2,500 locations in all. Because existing stores aren't being affected by the new stores, the retailer appears to be getting great value from them, but investors should continue to watch the pace of openings and any possible impact on comps.

Toys R Us bankruptcy impact

Many retailers see the loss of "the world's biggest toy store" as an opportunity, and Five Below is no different. CEO Joel Anderson noted last quarter that Toys R Us' demise had led to "the emergence of a toy trend in our stores," one that should grow in the third quarter and through the holiday shopping season and beyond.

There is a chance for Five Below to become a permanent destination for customers looking for toys, and for reasons beyond simply capitalizing on a rival's death. The discount chain is making room for more inventory, and Anderson says the shift will come from its licensed merchandise, which hasn't sold as well lately.

This will be mostly a fourth-quarter play, but the setup is coming in Q3, and next week Five Below will outline where it is heading.

Average ticket and transactions

Comparable-store sales increased in the second quarter of 2018 because customers were buying more during each trip to the store, even as there were actually fewer transactions made; that was largely due to tough comparisons because of the prior year's fidget-spinner craze. Comps in the second quarter of 2017 had soared 9.3%, so being able to continue to show growth from such a strong year-earlier period was a noteworthy achievement.

The company is going up against another strong performance as comps were up 8.5% last year, so the size of the impact average ticket and transactions have will give an indication of the overall direction Five Below is heading.

Watching all the moving parts

There is a lot going on at Five Below, and almost all of it is good. Healthy comps and store growth, and the increased productivity the retailer continues to squeeze out of each location are an impressive feat even with elevated levels of consumer confidence.

The summer months can prove to be slow for the company, particularly with toys, but they're the time when the business prepares for the wave to come in the fourth quarter. Five Below is facing difficult year-over-year comparisons, and another beat will confirm the strength of its model.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.