Five Below Keeps Riding the Discount-Retail Growth Train

Source: Five Below.

Teen retail is a difficult business, and many well-established companies have struggled to master the fickle nature of young consumers' fashion sense. Yet one time-honored rule appears to hold true: teens and preteens don't always have a huge amount of money, and so they like to shop where they can get bargains. For Five Below , that's good news, as the discount retailer's focus on teens makes it uniquely sensitive to the wallet-power of young shoppers. Coming into Wednesday afternoon's fiscal fourth-quarter report, Five Below investors were nervous about the company's ability to keep growing at its rapid pace. But Five Below's results were encouraging, pointing to the success of the discount model for the chain's target demographic. Let's look more closely at Five Below to see how it fared during the holiday season.

Five Below moves above expectationsFive Below managed to top the ambitious goals that investors had set for it. Revenue jumped 24% to $263.8 million, just barely exceeding the $262.2 million consensus figure among those following the stock. Five Below's growth came mostly from new stores, but comparable-store sales climbed at a 3.2% pace compared to the year-ago quarter. Adjusted earnings rose even faster, climbing 30% to $0.61 per share and beating estimates by a penny.

Looking more closely at Five Below's results, you can see the efforts the company has made to take maximum advantage of its sales growth. Gross margins climbed six-tenths of a percentage point to 40.3%, and the company also managed to restrain growth in overhead costs to 22%, boosting operating margins by more than a full percentage point to climb above the 20% mark.

Source: Five Below.

Interestingly, the pace of Five Below's store-count growth slowed dramatically in the fourth quarter, with the company opening just a single new store. Nevertheless, the current count of 366 stores is 20% higher than it was at the end of the previous fiscal year, reflecting the importance of expansion to Five Below's overall success.

CEO Joel Anderson said a lot about the company's results. Anderson particularly noted Five Below's expansion effort, saying that it is seeing "strong productivity out of our new stores as our brand, our merchandise offering, and our price points continue to resonate with customers in both new and existing markets alike."

Can Five Below stay ahead of the pack? Looking forward, Anderson has high hopes for Five Below. The CEO said that the company would open 70 new stores and look for comps growth of about 3%, resulting in net income growth of 25% by 2016.

Source: Five Below.

Interestingly, though, Five Below's guidance was slightly weaker than most investors were expecting to see. Sales of $150 million to $152 million for the first quarter would represent a growth rate of more than 20%, but it's still below the $154 million consensus figure among investors, and the range of $0.06 to $0.07 per share in adjusted earnings would be $0.01 or $0.02 per share less than anticipated. Similarly, full-year sales guidance for $816 million to $824 million would fall 1% to 2% short of expectations, with earnings of $1.02 to $1.05 per share also representing a slower growth rate than shareholders want to see.

Nevertheless, Five Below investors responded favorably to the report, pushing the stock up almost 3% in the first 45 minutes of after-hours trading following the announcement. Given the company's track record of finding ways to meet or exceed expectations in the past, many might see Five Below as simply being too conservative with its guidance. Nevertheless, investors should keep a close eye on Five Below's results throughout the coming months to see if it can find ways to surpass its own goals. Five Below's best chance to produce a convincing rebound in its stock price is to prove it can sustain or even accelerate the pace of its growth throughout the 2015 year.

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

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