Five Below Stays a Cut Above

As a retailer, Five Below (NASDAQ: FIVE) has had to deal with many of the same issues that have plagued its retail peers, including rising competition from e-commerce specialists and the challenges of maintaining an extensive brick-and-mortar store network. Yet because of its special focus on the tween and teen market, Five Below has had the opportunity to cater to an important demographic and give them the products and brands that are important to them.

Coming into Wednesday's fiscal fourth-quarter financial report, Five Below shareholders wanted to see the impressive growth trajectory that the retailer has established in past periods continue into the holiday season. Five Below's results were better than many had expected, with guidance for the coming year only slightly weighing down investors' interpretation of the retailer's results. Let's look more closely at Five Below to see how to interpret its latest numbers.

A strong year for Five Below

Five Below's fiscal fourth-quarter results were solid. Revenue of $504.8 million was up 30% from year-ago levels and was just a bit stronger than what most of those following the stock had expected to see. Net income climbed 35% to $67.4 million, and after making allowances for some accounting changes, adjusted earnings of $1.18 per share were slightly higher than the consensus forecast among investors of $1.16 per share.

Fundamentally, Five Below's performance was quite good. The fiscal fourth quarter had an extra week in it compared to the prior year's quarter, but even taking that impact out, sales were higher by 26% from the previous period. Comparable sales were higher by 5.9%, decelerating slightly from comps growth earlier in the year but still sustaining good momentum during the key season. Operating income was higher by 31%, outpacing sales growth and helping to boost operating margin slightly from year-earlier levels to reach a new record of 12.3%.

The growth in Five Below's network of store locations took a pause for the quarter. The 625 Five Below stores that were open at the end of the fiscal year were exactly the same number as had been open at the end of the fiscal third quarter. Nevertheless, the retailer still boasted store count growth of nearly 20% in the past year. It makes sense that opening stores in the winter months in the middle of the holiday season would be a difficult distraction from making the most of the key selling period for Five Below.

CEO Joel Anderson was ecstatic. "We are extremely pleased with our strong fourth-quarter results," Anderson said, "which capped an incredible year for Five Below, delivering outperformance on both the top and bottom line." The CEO pointed to the company's efforts to "reinforce the universal appeal of Five Below," as well as the fundamental strength of its overall business model.

Can Five Below finish the year strong?

Five Below has every expectation that it will continue to do well in the coming year. In Anderson's words, "We are excited to begin 2018 with momentum and are in a position of strength to execute against our key strategic priorities." The CEO foresees using a portion of the benefits the company expects to reap from recent tax law changes to speed up its planned investments in labor, technology, and infrastructure.

The rest of the tax reform windfall, however, will likely go to shareholders. Five Below announced a stock repurchase program that will cover up to $100 million in share buybacks over the next three years.

Over the long term, Five Below hopes to keep growing sharply. Eventually, the retailer wants to have 2,500 stores in its network, and it sees itself boosting revenue and net income at a 20% annual pace between now and 2020.

Five Below's guidance, however, wasn't quite as strong as investors would have liked. For the fiscal first quarter, revenue projections of $290 million to $294 million, a 3% to 4% rise in comps, and earnings of $0.31 to $0.34 per share look a lot better than what investors had expected. Yet full-year guidance was a bit less enthusiastic, as revenue of $1.495 billion to $1.51 billion would be on the low side of the consensus forecast, and earnings of $2.36 to $2.42 per share would be relatively close to what investors were already expecting.

Five Below shareholders didn't respond all that strongly to the news, and the stock was higher by just a fraction of a percent in after-hours trading following the announcement. For now, it looks like Five Below is on a steady track toward solid growth, and if it can generate some positive surprises, that could be enough to inspire longtime investors to have renewed confidence in the long-term prospects for the business.

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